Financial Risks in Mergers and Acquisitions (M&A): A Case Study of SolarCity’s Acquisition by Tesla

Abstract

Mergers and acquisitions have morphed into a gateway for financial prosperity. However, research shows that a significant number of these deals do not pan out well thus introducing an element of risk. With Tesla geared at maintaining its position as a leader in the renewables market, its acquisition of SolarCity in 2016 is worth appraising. With quarterly data from Tesla, the study employs a mixed approach to ascertain the changes in various aspects of financial risk for the company. Results show that liquidity risk and solvency risk characterize Tesla’s post-acquisition period. This is further corroborated by insights from the profitability ratio analysis. As much as Tesla’s seems to be generating steady cash and posting high returns on its equity, the high lever is what seems to be playing a significant role. However, the silver lining in Tesla’s case is that the solvency ratios appear to be improving over time.