By Michael Kramer
Yesterday's proposed acquisition of SolarCity (SCTY) by Tesla (NASDAQ:TSLA) was certainly shocking. The question that is on every investor's mind is WHY? Perhaps there is something much bigger going on than just a vertically integrated energy company. The biggest issues have always been what Tesla was; it is clear now they are a modern energy company.
So what is TSLA's play here if they are an energy company? Do they believe that everyone is suddenly going to be switching over to solar power in their homes or offices? Does the storage battery unit solve the age old problem of where do you get your power when it rains? If Tesla is now an energy company, then perhaps we should start thinking about who would be affected. After all, look at how much Tesla has disrupted the auto industry. Five years ago, there were not many, if any, car companies looking to make electric vehicles, now they all want to make them.
My bet is that when the likes of General Electric (NYSE:GE), Honeywell (NYSE:HON) or PSE&G (NYSE:PEG) woke up this morning, they said "uh-oh". After all, it seems like the auto sector is no longer in Elon Musk's crosshairs, it is the traditional power and industrial companies. Could this be far-fetched? Well, yes and no.
General Electric has clearly immersed itself into the power business, with the massive purchase of Alstom's power unit a few years back. Recently, there have been talks about GE buying Areva-Gamesa JV Adwen, a wind energy company.
The idea of Tesla causing disruption for these old industrial giants; they trying to invade this new age energy space doesn't seem all that far-fetched now, does it? Honeywell, for example, has an energy solutions unit. Could a Tesla battery along with solar technology fit into HON portfolio?
How does a company like a GE or Honeywell quickly continue to move up the new energy ladder? Buy Tesla?
Clearly, this is all just speculation. The attempt here is put some pieces together as to the possibility that could be the future of Tesla. There still needs to be a shareholder vote to approve the deal. This in itself can be extremely complicated. Then, of course, there are concerns surrounding cash flow and cash burn. The risk list could go on and on.
The idea of Tesla coming in and disrupting the old industrial space is certainly an enormous and real possibility. After all, like it or not, look at what they have done to the auto industry in five short years. Imagine what they could to the old industrials.
Disclosure: I am/we are long TSLA, GE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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