SolarCity (SCTY)


I’ve been surprised by the poor quality of the press coverage of the acquisition of SCTY proposed by Tesla (TSLA), the lead dog in the Elon Musk empire, of which SCTY is also a member.

Two points:

–it shouldn’t come as a shock, as it apparently has to some writers, that Elon Musk controls both firms.  This dual ownership presents potential conflicts of interest, although the existence of a separate quote for SCTY allows that firm to link stock-based compensation of the employees of SCTY directly with the performance of SCTY shares, rather than those of a bigger entity.  That’s not necessarily bad.  (Years ago, when Fox went public, the fact that Fox executives held options on the parent, News Corp, and not Fox, told me where the advantage would lie in parent/subsidiary negotiations.)

TSLA/SCTY’s is a common relationship, especially outside the US, with plusses and minuses that are well-documented and well-known, with, apparently, the exception of US financial writers.

–equally common is the behavior of stocks involved in an all-stock acquisition.  Most often, there’s downward pressure on both stocks as a result of the arbitrage I talked about in yesterday’s post.  Wouldn’t know that from the financial press, though.


I don’t have a strong opinion about whether the combination will be good or bad.  But at least I know what the issues are.  The sad state of reporting on TSLA/SCTY shows how far the financial press has been hollowed out.


Tesla (TSLA) is bidding for SolarCity (SCTY)

The offer is an all-stock deal, with TSLA willing to exchange 0.122 – 0.131 of its shares for each outstanding share of SCTY.  The exact figure will depend on a closer examination of SCTY’s books.  The proposal was announced after yesterday’s close.

My thoughts:

–in today’s pre-market trading, SCTY shares are up by about 14% and TSLA’s stock is down by around 12%.  This has little to do with the merits of the deal.  It’s all about arbitrage.  To the degree the market regards the acquisition as a done deal, it ceases to look at SCTY as an independent entity.  SCTY becomes instead equivalent to a deferred issue of TSLA stock.  Because the bid is at a premium to the pre-offer price of SCTY, SCTY is a relatively cheap way to own TSLA.  So arbitrageurs sell short the “expensive” form of Tesla, i.e. TSLA, and use the money they receive to buy the “cheap” form of Tesla, i.e., SCTY.  So SCTY goes up and TSLA goes down.

–my guess is that there’s no other bidder.  Elon Musk, who owns 20%- of TSLA also owns 20%+ of SCTY.  As is often the case with family-owned empires, one firm ( TSLA) is the heart of the enterprise.  Other companies are arrayed as satellites around the central hub.  Those tend to be more highly specialized, sometimes riskier–and invariably dependent on the main core for essential goods/services.  In this case, the Gigafactory being built by TSLA is going to the be the source of the batteries that SCTY will be distributing to customers.  Who else needs one of these?

–price is the main motive, I think.  SCTY is less than a tenth of the market cap of TSLA, so acquisition won’t make a radical difference in the latter’s fundamentals.  In most cases I’ve seen, the hub-satellite relation persists for decades, with third-party shareholders content with their stepchild status as an adequate tradeoff for the satellite’s narrower focus and faster earnings growth in specific circumstances.

–arguably, this is a good chance for adventurous to buy TSLA shares toward the lower end of its recent trading range.  I’m going to sit on my hands for a while, though, to try to gauge how severe selling pressure on TSLA may turn out to be.


the business of money management vs. the craft of portfolio management

Charles Ellis once famously wrote that the average portfolio manager is just that–average.  This is an observation that, however true, still grates with me.  But it really doesn’t explain what is commonly believed that it does, namely, why average performance by experienced professional investors virtually always falls short of benchmark target.

I think there’s another explanation for the latter.

It’s that money management firms assume clients prefer a warm and fuzzy working relationship with a financial adviser over strong investment performance.

In a sense it’s only natural that firms should think that way.  Most are run by the head marketer, with the head investor having the CIO (Chief Investment Officer) title and has little to do with strategy (this is the same jocks vs. nerds issue that has the traders controlling Wall Street firms, not the analysts). And the conclusion was probably also correct until about a decade ago.

In practical terms, the thinking went like this:

–why hire an extra analyst, even if that would mean a higher probability of matching our index vs. falling, say, 50 basis points below it?  Better to hire an extra marketer who can bring in more assets.  After all, we earn our fees based on a percentage of assets under management, not on outperforming, and our clients don’t care anyway.

–similarly, why cap the assets our star managers manage at a level where they’re more certain of outperforming?  If they manage 2x or 3x as much, they may be forced into buying larger-cap stocks than they’re comfortable with, and the chances of their beating their benchmark may be lessened by their lack of maneuverability.  The answer: clients won’t notice that, either.

However, clients have noticed    …and are leaving active managers in droves.

More tomorrow.



for-profit universities

The stocks of for-profit universities were incredibly hot in the midst of the market meltdown from the Internet bubble of 1998-early 2000.  That’s partly because they had almost nothing to do with Technology, Media or Telecom.  It was also because they were experiencing a period of strong revenue and profit growth.  The story was that these colleges were: accredited; cheaper than traditional schools; the online instruction they offered was more flexible than bricks-and-mortar-based teaching; students could get a degree in a relevant area while still working.  To top everything else, the for-profits made money, and were piling up income gains at an accelerating rate.

It’s been mostly all downhill since then, however.

How so?

–traditional schools have responded with job-relevant, online course/degree offerings of their own

At the same time, detractors have pointed out that the for-profits:

–are highly dependent on students taking out government loans to finance their studies

–have insufficient resources devoted to keeping their non-traditional students in school

–as a result, they have unusually high numbers of dropouts, many of whom end up defaulting on their (large) student borrowings

–have sales strategies that target members of the military and low-income students, groups with the weakest defenses against inflated sales claims.


Over the years, regulators’ attempts to rein in for-profit abuses have centered on controlling their access to government-funded student loans, based on graduation rates and repayment histories.  Recently, however, the efforts appear to have been upped several notches.

Officials have called on the federal government to remove the credentials of the Accrediting Council for Independent Colleges and Schools, the body whose seal of approval  confers legitimacy on the for-profits and which, more importantly, is the essential step in securing access to the government’s education loan program.