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Shares of Tesla Motors fell sharply Wednesday after the company, helmed by Elon Musk, made an offer to buy SolarCity for US$2.8 billion.
Musk is the chairman and top shareholder of the struggling alternative energy provider.
Tesla made the offer Monday, in a letter to SolarCity CEO Lyndon Rive, noting that Musk and Antonio Gracias, the founder and managing partner of Valor Equity Partners, would recuse themselves from voting on the proposal at the SolarCity board meeting. Both had recused themselves from the Tesla board meeting where the deal was approved.
Rive, a cofounder of SolarCity, is a first cousin to Musk. Gracias is the lead independent director at Tesla and a director at SolarCity.
The proposed deal would value SolarCity shares at $26.50 to $28.50 per share, representing a premium of 21 percent to 30 percent.
Blending SolarCity with Tesla, which includes Tesla Energy, maker of the Powerwall and Powerpack, would allow consumers to drive clean cars and use battery packs to consume energy more efficiently, according to Tesla.
During a Wednesday morning conference call, Musk made the case for integrating the manufacturing and sales of the Powerwall and solar panels.
"These synergies are really just common sense. Obviously it's more efficient to do this as an integrated system at the sale and at the installation, and in terms of just general maintenance and managing the customer relationship," he said.
However, investors balked at the idea, as they feared SolarCity would be an unnecessary weight on Tesla's shoulders. Tesla is waging a fierce battle against several major technology firms and automakers to develop autonomous vehicles that would utilize much of the technology currently in use in its alternative-fuel vehicles.
"With the proposed acquisition of SCTY, TLSA is contemplating what we believe is a fundamental change to its business model, even as the company argues it is within TSLA's Mission," says an Oppenheimer research note downgrading Tesla shares to perform.
Tesla Motors shares fell $22.95, or 10.45 percent to $196.66 on Wednesday.
Oppenheimer analysts, led by Colin Rusch, remained bullish on the solar energy industry but argued that acquiring SolarCity would not be the best use of Tesla's capital and human resources, especially given the potential return on investment from the electricity industry compared to Tesla's potential return on its new auto platform.
SolarCity could see benefits in terms of its capital position and operational leverage -- including better engineering talent, improved brand position, and additional customer outreach, suggested Oppenheimer. However, the firm failed to see any major benefit to Tesla, other than potential leverage for its retail stores.
The deal might make sense from a long-term strategic perspective, suggested Matt DeLorenzo, managing editor at Kelley Blue Book.
Some of the investor concerns could have more to do with timing than anything else, he said.
"Tesla is in the midst of ramping up production by a factor of 10 over current levels," DeLorenzo told the E-Commerce Times. "To succeed, that effort will take a tremendous amount of cash, and I think investors are a little leery of diverting this much value to SolarCity rather than concentrating on Tesla's core business."
More than 325,000 customers have made $1,000 down payments on the Model 3 since reservations opened at the end of March, and the company can ill afford to alienate those customers with long delays in delivery, DeLorenzo noted.
The $35,000 car -- the company's most affordable vehicle to date -- is expected to begin shipping in late 2017.
Despite the resistance, Tesla's proposal has sparked some positive responses.
"With this move to take over SolarCity, Tesla will create a future robust ecosystem synonymous with what Alphabet and Google is today," predicted Frost & Sullivan analyst Vishwas Shankar.
Also, "having to manage one parent that looks into various aspects of the renewable energy-driven business will be easier than having to wear a different hat every day for Musk," Shankar told the E-Commerce Times.
It's likely that Hyperloop also will be integrated into the combined company, he suggested, at some point in the future.