The Real Reason Elon Musk Won't Merge Tesla With SpaceX

By Markets Fool.com


What do you get when you cross a Tesla Model S with a SpaceX Falcon 9? One really bad idea. Image source: Getty Images.

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Two months ago, Tesla (NASDAQ: TSLA) CEO and SolarCity (NASDAQ: SCTY) Chairman Elon Musk announced plans to merge his two companies into a single renewable-power dream team.

After all, said Musk, both companies share "the same overarching goal of sustainable energy." With Tesla's electricity-powered cars and SolarCity's electricity-generating solar panels under one roof (oh, by the way -- SolarCity is also making roofs now), each individual will become "their own utility." [sic]

But what about Musk's third company? What about SpaceX?

Questions asked, and answered

There's a new article that's been making the rounds on the internet this week. Posted on millennial-focused website Inverse.com, it is titled "3 Reasons Why SpaceX and Tesla Won't Merge" ...

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... and then proceeds to give three wrong answers.

Taking its cue from a response Musk gave to the question of whether SpaceX might put GPS and internet satellites in orbit to improve the self-driving function on Tesla's cars (Musk called the relationship "really quite tenuous"), Inverse laid out three arguments for why a merger was not feasible. First, building and putting GPS satellites in orbit is expensive. Second, cars can't navigate well using GPS in any case, especially not in an urban environment. And third, Tesla doesn't need satellites to provide internet service -- because cell companies do that job pretty well already.

So much for the space case for merging Tesla with SpaceX.

But those are not the real reasons Musk won't merge Tesla with SpaceX. The real reason comes down to dollars and sense -- and why there's no sense in Musk doing another merger if he wants to keep raking in dollars. After all, consider the companies we're talking about here:


Image source: Tesla.

Tesla

Tesla and SolarCity shareholders voted to approve their merger earlier this month. When the deal closes later this year, it will create a single green energy company doing about $5.1 billion in business -- and losing about $1.2 billion annually (according to data from S&P Global Market Intelligence).

Analysts who follow both companies expect to see Tesla turn profitable in 2018, or perhaps 2019. But whether it can hit either target with SolarCity's projected losses factored into the mix is anybody's guess. What is certain is this: To date, lack of profitability hasn't slowed down Tesla one bit. Whenever Musk needs more money to charge up his electric car company, all he has to do is create, and sell, more shares to an eager public.

Over the past five years, Tesla has created and sold approximately 44 million new shares to fund its operations, raising about $3.8 billion in capital to keep the business running.


Image source: SpaceX.

SpaceX

SpaceX is a tech horse of a different color. While Tesla and SolarCity have historically bathed in red ink, SpaceX claims to be most definitely in the black.

Granted, so long as SpaceX remains a privately held company, it's hard for us to say exactly how profitable SpaceX is. But one thing that's certain is that if SpaceX were to absorb money-losing Tesla (and with it, money-losing SolarCity), SpaceX would instantly become a less profitable enterprise -- and probably begin racking up losses along with its sister companies.

Summing up

That's a very strong argument against merging Tesla with SpaceX: Such a move would, in one fell swoop, destroy the profits of the one profitable company that Musk owns, SpaceX. At the same time, there is no guarantee that it would turn Tesla profitable in the process.

More likely, merging Tesla with SpaceX would expose the entire Musk empire to be a net money-loser, potentially shaking investors' confidence in Musk's ability to eventually turn a profit at Tesla. And that, in turn, would hobble Tesla's ability to raise essential cash through the sale of its own shares.

Long story short, Musk will not merge Tesla with SpaceX. It wouldn't earn him any more dollars, and therefore, it would make no sense.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 301 out of more than 75,000 rated members.

The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.