Why SolarCity Corp's Shares Popped 12% Today

Image source: SolarCity.

What happened

Shares of solar installer SolarCity Corp (NASDAQ: SCTY) jumped as much as 11.6% today after an influential company gave the thumbs up to its merger with Tesla Motors (NASDAQ: TSLA).

So what

Institutional Shareholder Services, which is an influential voice among institutional investors like Fidelity, gave its blessing for shareholders to vote for the merger. And institutional investors are a key voting block, as I highlighted here, and could swing the vote either way. What investors are speculating today is that this will make the merger more likely, which has pushed SolarCity's shares closer to the price of 0.11 times Tesla's shares.

Now what

With Tesla's share trading at $189.56 as of this writing, the conversion price for SolarCity's shares is $20.85, fairly close to where shares traded at their peak today. That indicates that the market thinks the deal is very likely as investors bet on the arbitrage opportunity between shares.

What should be noted is that SolarCity investors have a lot less upside holding shares after today. If the deal goes through, the stock won't move much higher. But if it doesn't, shares could plunge well below where they're trading now, something the stock does when the merger appears less likely. As shares approach the 0.11 ratio with Tesla, it may be time to take some shares off the table.

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Travis Hoium has no position in any stocks mentioned. 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.