Why Tesla Had to Lay Off 3,000 SolarCity Employees

By Evan Niu, CFAMarketsFool.com

CEO Elon Musk called it "a dirty word": synergies.

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Tesla's (NASDAQ: TSLA) acquisition of sister company SolarCity last year was an incredibly contentious and polarizing deal. Some saw it as a bailout, while others bought into Musk's vision of a vertically integrated sustainable energy company. Independent of which side of the fence you're on, Tesla did commit itself to realizing $150 million in direct cost synergies within the first full year after closing. Those cost synergies were largely comprised of "sales and marketing efficiencies" as well as general corporate and overhead savings.

But "efficiencies" almost always translates into layoffs when it comes to mergers and synergies, which is why Tesla had to lay off 3,000 SolarCity employees last year.

Image source: Tesla.

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Sales and marketing expectedly took the biggest hit

Both Tesla and SolarCity filed their respective 10-Ks yesterday, and total headcount saw a 20% reduction to 12,243 employees. That represents a little over 3,000 employees that were let go, with sales and marketing receiving the most cuts.

Data source: SEC filings.

Last year marks the first time that SolarCity's total headcount posted an annual decline. Some of this was already known, although the degree of which was previously unclear. The company had a high-profile exit from Nevada following an unfavorable regulatory ruling regarding net metering, which severely impacted the economic viability of solar systems within the state.

In August 2016, SolarCity also disclosed that it would be working on reducing operating expenses "to match the Company's reduced guidance" on installations, as SolarCity began shifting its focus away from growth and emphasizing a more sustainable cost structure. At the time, SolarCity said it would incur $3 million to $5 million in restructuring charges, while co-founder brothers Lyndon and Peter Rive both dropped their annual salaries down to $1.

The other half of the equation

It's important to distinguish between cost synergies and revenue synergies. While the $150 million in cost synergies that Tesla is targeting is important, revenue synergies are just as -- if not more -- important since Tesla hopes to transform the way that people purchase solar systems. Instead of labor-intensive channels like door-to-door sales or retail lead generation, Tesla hopes to create a one-stop shop where customers can purchase a fully integrated system that includes an electric vehicle, solar system, and battery storage -- a transaction that could easily be $70,000 or more.

It remains unclear if this vision will resonate with consumers or if it will prove to be cost-effective, but it certainly has the potential. Much like with electric cars, solar sales have a steep educational curve, which is partially why the existing distribution methods are so labor-intensive. Revamping sales channels combined with needing to generate cost synergies is a recipe for layoffs.

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Evan Niu, CFA owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.