Elon Musk's Tesla Motors Inc
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Musk, who is also the chairman and principal shareholder of SolarCity, described the deal as "no brainer" in a call with reporters.
He said the acquisition of SolarCity would transform Tesla into "the world's only vertically integrated energy company offering end-to-end clean energy products to our customers," from solar panels and home storage batteries to electric vehicles.
Tesla shares plunged more than 10 percent to $195.35 in extended trading on Tuesday -- amounting to a loss in value of about $3.7 billion. SolarCity shares rose about 23 percent to $26.13.
Musk, who owns 19 percent of Tesla and 22 percent of SolarCity, said he would recuse himself from voting on the deal.
Tesla said it offered $26.50 to $28.50 per share for SolarCity, which represents a premium of about 25 percent to 35 percent to the company's Tuesday close of $21.19. That values the deal at about $2.6 billion to $2.8 billion overall.
Tesla makes premium electric vehicles that sell for about $70,000 to $150,000, as well as home battery storage units. SolarCity is the No. 1 residential solar company in the United States.
(Reporting by Subrat Patnaik in Bengaluru, Paul Lienert in Detroit and Nichola Groom in Los Angeles; Editing by Bill Rigby and Sandra Maler)