Dear Analyst #49: DCF spreadsheet error leads to $400M difference in Tesla acquisition

I’ve been posting quite a few episodes about spreadsheet errors as of late. The two Harvard professors and their faulty economic policies, the JPMorgan whale trader, and the EuSpRIG community who tries to catch all these errors. This is a quick story about how Tesla’s acquisition of SolarCity in 2016 was botched due to a spreadsheet error involving double-counting SolarCity’s debt. You can read more about how this “computational error” was communicated to Tesla and SolarCity in the S-4 here. Elon must’ve been a happy man after the deal.

Two friendly CEOs

It’s 2016, and Tesla is in talks to buy SolarCity, a solar panel company. The deal is complicated because of two factors:

  1. Elon is the largest shareholder in both Tesla and SolarCity
  2. Lyndon Rive, SolarCity’s CEO, is Elon’s first cousin

To make the process transparent and not make it seem like Elon was forcing the deal to happen between the two parties, SolarCity set up a special committee of outside advisors to help with the deal. One of the advisors was Lazard, the investment bank.

Lazard gets a bunch of spreadsheets from SolarCity and starts doing what the typical discounted cash flow analysis for the deal. SolarCity has to provide Lazard with some of their spreadsheets, but it turns out their spreadsheets contained one major flaw:

The spreadsheet double-counted some of SolarCity’s projected indebtedness.

As such, Lazard valued SolarCity’s equity between $14.75-$30.00 per share instead of $18.75-$37.75 per share. This resulted in SolarCity being discounted by $400M in the deal.

Source: ValueScope

Now Lazard is a big investment bank, and they said that after they discovered the “computational error,” it wouldn’t affect the terms of the deal. If you’re a shareholder in SolarCity, you would probably think that a 16% discount on the original deal terms is a big deal (the final purchase price was $2.6B).

Whose spreadsheet is it anyway?

Was Lazard responsible for detecting this double-counting error in SolarCity’s spreadsheets before building their discounted cash flow analysis? Or was SolarCity responsible for this garbage-in-garbage-out scenario?

Given that SolarCity set up this special committee of 3rd-party advisors just to make sure the deal was valued correctly and transparently, I can see the argument for Lazard being responsible for auditing SolarCity’s spreadsheets. As with many of the other spreadsheet errors mentioned previously, time constraints, laziness, and human error ultimately are responsible for these errors.

Other Podcasts & Blog Posts

In the 2nd half of the episode, I talk about some episodes and blogs from other people I found interesting:

  • ShopTalk Show #432: SWYX