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Toyota and Tesla Merger
- 1. The Merger of TOYOTA and TESLA Team Synergos Ben Wachtel Bing Chuang Brad Czajkowski Fiona McAvoy Ganesh Paranthaman James Petricciani Ryan Moore
- 2. Team Synergos Agenda T •Background Information and SWOT Analysis O •Strategic Alternatives, Market Overview, Due Diligence Y •Valuation E •Real Options & Deal Design S •Organization, Integration & Ancillary Issues L •Communication Pan & Summary of Actions A •Back Up Analysis
- 3. Team Synergos Background Information Toyota Tesla Founded in 2003 by Martin Founded in 1935 by Kiichiro Toyoda Eberhard & Elon Musk Headquartered in Toyota City, Japan Headquartered in Palo Alto, CA 322,000 Employees 1,000 Employees 1972, US Manufacturing 18 Dealerships World Wide 1995, Creation of Toyota Hybrid Designs Electronic Vehicles and Technology Components
- 4. Team Synergos Tesla SWOT STRENGTHS WEAKNESSES Electric Vehicle (EV) technology × High cost of battery technology Environmentally friendly × High cost of ownership Modern look, sleek design × Questions about battery disposal Loyal fan base × Limited availability OPPORTUNITIES THREATS Expand sales locations × Competitors entering EV market New models with low cost × Other disruptive technologies First mover advantage × Gasoline-Electric Hybrids Economies of scale × Global economy slowdown
- 5. Team Synergos Toyota SWOT STRENGTHS WEAKNESSES #1 hybrid car company × Competitor look-a-likes Brand loyalty × Recent Recalls Strong Reputation × No Electric Vehicle models Excellent Quality × Increasing gas prices Large selection of models OPPORTUNITIES THREATS Environmental awareness × Competitors in new EV market Low priced vehicles × Hybrid technology loses steam Expanding sales and manufacturing × Pushback against gasoline vehicles locations × Declining global economy Research and Development
- 6. Team Synergos Tesla’s Strategy Develop Line of Electric Vehicles Pursue new tech Future through R&D Cash Flows Create Shift in Auto Industry
- 7. Team Synergos Toyota’s Strategy 10% Hybrid by 2015 Every Model Sustainable Hybrid Auto R&D Option by 2020 Future Cash Flows
- 8. Team Synergos Tesla/Toyota Compatibility Shared Strategy Environmental Sustainability Creating affordable alternative energy vehicles Tesla offers Toyota E.V. Technology Future benefits from Tesla’s R&D
- 9. Team Synergos Strategic Alternatives Global Auto Market Share (Units) 2.0% 0.1% Internal Growth (“Make”): - 40.1% CAGR in EV Market over next 10 years Hybrid - 2020E sales still only 0.25% total auto market Electric - Tesla must shift from niche sales to high Internal volume manufacturing / distribution 97.9% Combustion - Competition as EV market grows 2010 275 x 5.5% 1.8% Estimated Tesla Sales Growth Units Sold (thousands) 200 150 100 50 92.7% 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2020E Source: Morgan Stanley; Deutsche Bank Source: J.D. Power & Associates
- 10. Team Synergos Strategic Alternatives (Cont.) Minority Investment - Tesla negative FCF until 2013-2014 - Large capital expenses mass production - Additional capital would allow Tesla to expand more rapidly - Investment from auto giants would create beneficial relationships Strategic Alliance / Partnership - Tesla lacks experience in large scale manufacturing - High capital equipment costs - Weak supply chain / distribution channels - Sales team niche market focus - Tesla’s core technology is its electric drivetrain - Recent partnerships with Toyota (Rav4) and Daimler (Mercedes A- class) illustrate interest in Tesla technology - Alternatively focus exclusively on drivetrain
- 11. Team Synergos Market Opportunity Growth-Share Matrix: Major Firms in Auto Industry Tesla: 2 Year Growth (CAGR) “Problem Child” 50% High growth yet extremely low market 40% share Requires significant Ford investment to grow the 30% Real Growth Rate EV business to a GM competitive level Long term investment; Honda higher risk 20% Tesla Toyota 10% Tata Note: Based off 2 year 0% growth rates due to Tesla’s brief sales history 3.00 2.00 1.00 - -10% Relative Market Share
- 12. Team Synergos Due Diligence Legal Issues Org, Ownership, Litigation, Regul ation Accounting & Tax Issues IT Issues Risk & Insurance Issues Limited History, Unproven Sales Environmental Issues Operations Real & Personal Property Issues Cross Border, HR, Culture Intellectual & Intangible Issues Finance Ethics
- 13. Team Synergos Liquidation Value BOOK VALUE / LIQUIDATION VALUE 2012 Total Current Assets 236,329.58 Net Property, Plant, & 168,624.56 Equipment Total Assets 418,592.14 Valued assets based on their liquidity
- 14. Team Synergos Free Cash Flow Valuation DCF Valuation Assumptions: Terminal Growth Rate: 4% Discount Rate: 9% YEAR DISCOUNTED FREE CASH FLOWS 2011 (39,907.80) (46,293.05) 2012 (43,807.06) (58,946.78) 2013 (113,867.05) (177,734.62) 2014 (77,234.11) (139,843.12) 2015 95,899.53 201,421.77 2016 92,994.79 226,572.17 2017 12,941.92 36,576.71 2018 176,279.34 577,916.82 2019 184,000.21 700,000.54 2020 64,766.55 285,713.45 168,250.32 906,083.88 Terminal Value 5,942,839.80 Valuation 6,111,090.12 Per Share $57.29
- 15. Team Synergos Synergies Supply chain access SG&A and procurement cost reduction Large international partner with access to global market Tesla’s powertrain, future R&D and design Roadster, Model S, Model X and Gen 3 Tesla brand for EV cars
- 16. Team Synergos So…How much is Tesla worth to Toyota? $24 billion Or ¥1.86 trillion
- 17. Team Synergos Synergy Valuation (in $ millions) FY 2012E FY 2013E FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E Tesla EBITDA (285.00) 33.43 57.15 95.06 69.11 96.54 165.09 224.73 284.79 Cost savings Tesla COGS + SG&A + Supply chain 46.00 63.51 108.59 126.29 153.03 213.76 247.64 337.10 427.19 Toyota future R&D development 75.00 97.50 126.75 164.78 181.25 199.38 219.32 241.25 265.37 RAV4 powertrain savings 2.95 5.60 4.70 7.35 11.25 22.60 34.20 41.40 62.75 TOTAL (161.05) 200.03 297.19 393.48 414.65 532.28 666.24 844.47 1,040.10 Terminal Growth rate 4% Discount Rate 9% DCF (147.75) 168.36 229.48 278.75 269.49 317.38 364.46 423.81 478.89 Terminal Value 21,634.01 NPV 2,382.87 Valuation 24,016.88 Note! Tesla earnings assumed to be tax free until 2016 Terminal growth rate calculated by adding 1% to Toyota average growth rate
- 18. Team Synergos Alternative Valuation Method Sales growth Revenue per vehicle 140,000 70,000 120,000 60,000 100,000 50,000 Unit Volume Revenue per unit ($) 80,000 40,000 60,000 30,000 40,000 20,000 20,000 0 10,000 FY 2012E FY 2009 FY 2014E FY 2013E FY 2016E FY 2010 FY 2015E FY 2011 FY 2018E FY 2020E FY 2017E FY 2019E - Year Roadster Model S Model X Gen 3 Powertrain Year
- 19. Team Synergos Operating Model Service & Leasing Warranty R&D Direct Sales
- 20. Team Synergos Tesla Organization Department Employees Manufacturing 213 Powertrain R&D 212 Sales & Marketing 121 Vehicle Design & Engineering 170 Service 79 General & Admin 104
- 21. Team Synergos Facilities Location Primary Use Lease / Own Manufacturing of Model S Fremont, CA Own and future vehicles Admin, Engineering services and Palo Alto, CA Lease manufacturing services (Powertrain) Vehicle engineering and Hawthorne, CA Lease design services Admin, Sales, Service and Maidenhead, UK Lease Marketing 17 Retail stores around Sales & Service Lease the world
- 22. Team Synergos Key Integration Issues Retaining Key Employees Expertise in low power vehicle design with high voltage power source Expertise in lightweight materials Expertise in battery, electric motor, gearbox technologies Keeping NUMMI for California Tax Incentives
- 23. Team Synergos Real Options Growth Options Exit or Abandonment Options Timing Options Switching Options Liquidity Options
- 24. Team Synergos Deal Design Element Design Form of Payment Stock Shareholder Vote Majority Approval Financing None Control Toyota Reorganization Structure Remove Sales and Admin, keep R&D Tax Consideration NUMMI depreciation Risk Management Blackstar (Daimler) & other disruptions Subsidiary HQ Palo Alto, CA, USA Management Toyota manages all aspects outside of Tesla E.V. R&D Tesla Brand Kept and Continued
- 25. Team Synergos Term Sheet Consideration Exchange Ratio 4.35 TM shares: 1 Tesla share Side Payments Executive Stock Options & Key Talent Retention Costs Board, Management, Executives Company Name Toyota President and CEO Akio Toyoda Board 2 out of 10 seats Reporting Structure R&D under Denso Global under Toyota Group Subsidiary Name Tesla
- 26. Team Synergos Communications • Good communication internally and externally can help to make the deal proceed more smoothly • Board of Directors • Employees • Stock Holders and Market • Important to keep information contained until later stages of deal • Non-disclosure Agreements • Code names in documents • Franklin (Tesla) • Fuji (Toyota) • Information leaks can lead to complications due to competition in the market
- 27. Team Synergos Comm: Board of Directors Good fit technologically and financially Toyota has larger research budgets Economies of scale Less pressure on Tesla products Tesla technology is a valuable asset to Toyota in the EV car race All current joint venture contracts with Tesla will be honored by Toyota
- 28. Team Synergos Comm: Employees NUMMI will not be closing Tesla brand will continue Jobs will be preserved but there will be few layoffs in Sales & General Administration Continue plans to produce the Model S
- 29. Team Synergos Comm: External Tesla will continue to operate as a brand under Toyota similar to Lexus & Scion The Model S production will continue as planned and on schedule Tesla will integrate its technology into future Toyota products like it already has with the Toyota Rav 4. Tesla headquarters and auto plant will not be closed All current joint venture contracts between Tesla and third party companies will be honored by Toyota
- 30. Team Synergos The End: Drive Home Happy
Editor's Notes
- Tesla was founded in 2003 by a group of Silicon Valley engineers hoping to introduce the electric vehicle and show the “awesomeness” of itTesla hope to expand the 18 stores. Tesla not only designs the vehicles and components, the company also does its own marketing and sales2 models offered- Roadster and Model S- both can be purchased online, in stores, or over the phone1935- Kiichiro Toyoda created the first prototype for a passenger carEmployees design, manufacture, and sell the Toyota brandIn 1957, Toyota came to the US and was established as a business10% of US Toyota sales are hybrid and 75% of all American hybrid sales belongs to Toyota
- Both companies are using their research and development to create vehicles that cause less damage to the environment than the current options on the market in the industryBoth Toyota and Tesla are working to create alternative energy vehicles that are affordable to the average consumer and that still have a stylish appeal
- Minority Investment Tesla 2011 FCF is estimated at -$360M, relying on ~$100M Rav4 contract (demand based) and ability to draw down on $500M DoE loan as sources of capitalLarge expenses required to ramp up development / productionAdditional capital would allow Tesla to hire & expand rapidly as demand for Model S is anticipated to be well above plant capacity.Investment from other auto giants would create relationships that would benefit both companiesStrategic Alliance / PartnershipTesla lacks experience in large scale manufacturingHigh capital costs with validating equipment & preparing for mass productionNo long-term relationships with suppliers / distributorsSales team only familiar with prior niche market Tesla RoadsterTesla’s core technology is their electric drivetrain Recent partnerships with Toyota (Rav4) and Daimler (Mercedes A-class) illustrate interest from the larger auto industry in teaming with TeslaTesla could alternatively focus its business exclusively on the drivetrain and forego risks / competition from large scale auto production
- Due Diligence:Legal IssuesCorporate OrganizationIs Tesla organized as a business and do the officers of Tesla have the power to consummate a transaction with Toyota? – Yes, Since July 2010 Toyota owns roughly “2,941,176 shares of […] common stock […] in a private placement and received cash proceeds of $50.0 million.”Ownership of Assets and exposure to associated liabilitiesOther major share holders as of June 2011: “Concurrent with this offering, we also sold 1,416,000 shares of our common stock to Elon Musk, our Chief Executive Officer and cofounder, and 637,475 shares of our common stock to BlackstarInvestco LLC, an affiliate of Daimler AG (Daimler) and received total cash proceeds of $59.1 million in the private placements.” This must be considered as the basis for determining ownership of assets as the proper documentation to illustrate ownership is otherwise not provided.Litigation, actual and potential“From time to time, we are subject to various legal proceedings that arise from the normal course of business activities. In addition, from time to time, third parties may assert intellectual property infringement claims against us in the form of letters and other forms of communication. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our results of operations, prospects, cash flows, financial position and brand.” – Tesla’s official opinion. It appears that Tesla is currently involved in a variety of lawsuits including, but not potentially limited to other than due to lack of total information, a lawsuit with BBC’s television show “Tog Gear,” regarding a less than positive review of the roadster in an episode of “Top Gear,” a lawsuit with Fisker Automotive for theft of trade secrets and designs, a lawsuit Magna, a components and systems supplier who is claiming that Tesla allegedly breached contract in 2008, and a lawsuit by former chief executive and co-founder, Martin Eberhand for libel, slander and breach of contract in 2009 (a settlement was reached).RegulationAs of September 30, 2011, and according to Tesla’s most recent 10-Q report, filed on November 14, 2011, Tesla’s “chief executive officer and chief financial officer concluded that, as of such date, [Telsa’s] disclosure controls and procedures were effective at the reasonable assurance level.” Regarding government regulation of the industry itself, evidence suggests that regulation is a blessing to the E.V. market. Most regulation is for the progression of mass production of E.V.’s and will help to stimulate growth in the future with forecasts of sales for Hybrid and E.V.’s rising from 2.5% to 6.3% of the total market by 2015. This also means that Tesla cannot avoid competition with other E.V. manufacturers due to “the shaping of the industry by government regulations such as Federal Corporate Average Fuel Economy (CAFE) standard and emissions requirements, the California Low Emission Vehicle Program [CLEVP], and its zero emissions vehicle standard, and other state and regional fuel standards.” Additionally, on a positive note, the CLEVP heavily favors the use of purely electric vehicles and this policy is in the process of being adopted or has already been adopted by 12 states.Accounting IssuesInternal Audit Committee appears to be legitimate in its actions and to have taken the required steps to complete a conservative assessment of the financial statements of Tesla Motor Co.Tesla is very open with their finances and admits to possible financial struggles stemming from the stop in production of the Roadster and the loss of the associated revenue stream. Tesla even admits to high levels of debt, totaling over $460 million dollars.Tesla’s finances appear to be portrayed without maleficence and without exposure to fraud.Trends of financial statements show that Tesla is not generating positive profits over many quarters. This is up for debate as to whether it is a sign of a poorly run company with management issues (inventory management/sales goals failures/bad debt) to be addressed or a company with a product that is in the early stages of development that requires time for a paradigm change in the market for successful future earnings. Tax IssuesTax issues are not of concern in the short term considering the fact that Tesla Motors Inc. is and has been operating at a loss since its IPO. Taxes are minimal. In the long term, assuming that Tesla becomes profitable, paying taxes may be an impediment to paying accrued and principal debt.Information TechnologySince August, 2011, IT at Tesla Motors has been headed by Ravi Simhambhatla formerly of Virgin America Airlines. While at Virgin, Ravi was awarded for his efforts and accomplishments including the development of Virgin America’s data centers, storage subsystems, core application infrastructure and integration, and the architecture of its award-winning, user-friendly Web site. Going forward, it is apparent that Tesla’s IT is in competent hands. Compatability issues regarding integration of existing Telsa IT and existing Toyota IT is not of major concern as Tesla is in the novice stages of developing its new framework under Simhambhatla. Looking at the systems capacity that Toyota has developed over the course of its corporate history, it is apparent that with unison of the two companies as a Newco Toyota’s existing IT infrastructure will accommodate the future increase in Tesla’s customer base. This is evidenced by the fact that Toyota is developing IT designed to help the success of its own strategic direction. In the case of Newco, the two previously separate entities would be now aligned and this alignment would be supported by the combination of the two IT departments. Additionally, the two IT structures will compliment each other and will be easily integrated as they both are created from cogitation focused in the area of efficiency, renewal, readiness and adaptability.Risk and Insurance IssuesMany issues around risk exist:Limited operating history makes the evaluation of Tesla’s business and future difficult and causes concern for investors i.e. Toyota; The majority of revenues have been derived from the sales of the Roadster which will no longer be in production in the near future; quarterly revenue’s and losses can fluctuate wildly to near positive or significantly negative.Tesla is significantly dependent on its ability to sell and generate revenue in the near term from the sale of its Roadster and in the long term from the sale of its Model S and without the acceptance from the general public of the new technology offered by Tesla there future ability to remain solvent is questionable.Tesla suspects that it will sustain a large amount of losses prior to the launch of the Model S due to the drop in sales of its Roadster. Additionally, the Toyota RAV4 EV program and a letter of interest from Daimler regarding an electric powertrain Mercedes are not yet fully developed or ready to be start production.The production model for the non-powertrain portion of the Model S is unproven, evolving and different to the powertrain portion of the production model for the Roadster; this highlights many concerns about Tesla’s ability to make the leap from Roadster to Model S taking in to account issues such as safety regulations, design adaptability to conform to customer demands, manufacturing facility reconfiguration, avoiding significant delays in production and supply chain, securing funding to build a plant in Fremont, maintaining quality control as the majority of manufacturing switches from outsourced to in house. Tesla has no experience to date of high volume manufacturing of its electric vehicles. Even if Tesla proves to be successful in this regard they will also face issues with keeping costs down and supplier contract fulfillment. This can be seen as a positive because Toyota will have long established relationships with many of the necessary materials suppliers for Tesla’s needs considering the success of its hybrid, the Prius. Tesla is exposed to possible significant delays in the design, manufacturing and launch of its Model S and the facility in Fremont to be used in its manufacture. Other issues include general barriers to entry within the auto industry including capital requirements, investment costs of designing and manufacturing, long lead time from concept to market, need for specialized design and development expertise, regulatory requirements, establishing a brand name and image and the need to establish sales and service locations.Tesla will experience continued losses and significant increases in costs and expenses for the foreseeable future. Relatedly, if Tesla is incapable of controlling operating expenditures operating results and prospects will suffer.Increases in costs to Tesla, shortages of raw materials and disruption of supply of lithium-ion cells could harm business.Tesla’s future growth is dependent on the consumer’s willingness to adopt electric vehicles. This is governed by popular perception of electric vehicles and whether or not they are safe, quality, have equal range to that of a fossil fuel vehicle, decline in battery storage and charge, concern over the electric grid, improvements in the fuel economy of the internal combustion engine, volatility in the price of oil, perceptions about the actual cost of alternative fuel.Due to Tesla’s young corporate age and unproven success they are highly susceptible to negative publicity regarding the company and or their products. (Top Gear)Tesla is dependent on its ability to draw down on its loan facility from the USDoE. Tesla is only able to draw down if it meets certain milestones relating to the design and development of the Model S. If this is the case Tesla will not be able to conduct business.Operation of the vehicle itself is different from that of an internal combustion engine and will require some adjusting to by consumers. Evaluation of Tesla’s operations is difficult as their business model, distribution and other aspects are not congruent to other automobile manufactures thus making comparison between businesses challenging.Reservations of the Model S are fully refundable and if for any of the reasons outlined earlier cancellations in orders are experienced; the decline in revenues could be harmful to Tesla’s financial condition.Changes in E.V. regulation guidelines made by the federal government can severely hamper Tesla’s ability to succeed or, conversely, help Tesla’s ability to succeed. All of the above mentioned issues also apply to Tesla’s Model X, a crossover E.V. poised to be available by the fourth quarter of 2013.General risk exposure to competition within the E.V. marketplace.High volatility of demand, may lead to lower sales or to higher sales of Tesla’s vehicles resulting in lower or higher sales and will undoubtedly affect Tesla’s operating results.Purchases of substitute items of a more attractive price will affect Tesla’s high-end luxury sales during difficult economic times.Tesla is currently dependent on Lotus to supply the initial portion of their Roadster. If Lotus fails to uphold their end of the contract Tesla will be left in a vulnerable position that could affect revenues and operations. ISSUES REGARDING THE INSURANCE ACTIVITIES WERE NOT ADDRESSED DUE TO LACK OF SOURCES FOR SUCH INFORMATION.Environmental IssuesTesla is at very low risk to exposure from environmental liabilities. As a leader in E.V. development and production Tesla is at the forefront of complying with all laws and regulations that have been put forth by the federal government and the state of California. Prior to the acquisition and modernization of the SUMMI plant, Tesla might have been exposed to some hold over environmental issues stemming from prior poor waste management policies and their subsequent cleanup but all possible issues of this nature have been resolved. Tesla’s vehicles are among the lowest emission vehicles in the world, generating zero emissions as a direct result of operation and only marginal emissions as a result of the source of electrical energy, either being Coal, Natural Gas, or Nuclear energy. Market Presence and Sales IssuesAs Tesla prepared for its IPO, and in the light of negative earnings and many other problematic aspects of its operations, Tesla’s greatest strength was its brand. This may have been tainted when customers of the Roadster were unsuspectingly charged with fees. (10)Currently, Tesla’s main marketing avenue is word of mouth and for the most part this has been successful enough. Total sales are not in the high numbers but the company has had sales totaling over 2000 Roadsters. Competition, which comes from large and already successful car manufacturers like Toyota (Prius), Chevy (Volt) and Nissan (Leaf), poses a serious threat as these companies are in a far better financial position to plan and implement full fledged marketing campaigns. It is Tesla’s campaign to rely on the celebrities and unique owners of Silicon Valley to perpetuate the automobile itself. CEO, Elon Musk, describes the Roadster as “a product with high sexual appeal that in a sense helps save the world.” (11) It is this difference in marketing styles that sets Tesla apart from its competitors and creates its own niche and brand equity.Strength of market presence increasing with the release of right-hand-side-drive Roadster. (9) Outlook for a future performance centered on customer base, units sold, revenues and collections are subject to Tesla’s risk issues. If the Model S is successful the outlook is positive.OperationsStrength of operations as a judgment of asset efficiency is not high at all. At this point, Tesla would do well under Toyota as Toyota operates in a highly efficient manner. The same could be said for cost as well. Tesla appears strong in the areas of flexibility, quality, condition of property and especially innovation. It is in these areas that Toyota is strong as well though.Opportunities for improvement for Tesla are in asset efficiency and cost. It is due to the low manufacturing numbers that Tesla is not experiencing economies of scale in its manufacturing or on the sales side.Tesla recently purchased the former NUMMI plant in Fremont, CA and by doing so put themselves in a position vulnerable to the influence of union labor in the future. Immediately after purchasing the NUMMI plant Tesla was approached by the UAW Union regarding the hiring back of laid off union workers. (14) If Tesla had located their plant in a right to work state such as North Carolina they could have avoided the influence of labor unions on their cost structure. The purchase of the NUMMI plant was probably done to avoid the cost of building a plant from the ground up. (13) Considering the upside of using union labor one must acknowledge that there is the positive of using union labor previously employed at the NUMMI plant. This labor force will be able to produce Model S’s for Tesla at the rate that is required for Tesla’s longer-term goals of roughly 20,000 vehicles per year. There is also the issue of if a renegotiation of the labor contract were to take place, how much of Tesla’s revenues might have to be diverted from R&D and thus cause detriment to Tesla’s goal of a low cost E.V. (12)Compatibility issues with Toyota should not be of concern if the NUMMI plant employees trained under Toyota operating processes are used. The only issue that may arise here is with capital spending as this has been a necessary problem for Tesla in the past.Outlook for future performance will depend on the adequate training of plant workers in the new processes of E.V. manufacturing. Real and Personal Property IssuesIn the event that Toyota Motor Co USA purchases Tesla Motors the major assets it would be acquiring would be Tesla manufacturing plant, formerly NUMMI, Tesla’s corporate headquarters, several boutique dealerships, charging stations, patent rights, etc. The condition of the properties for the most part are excellent as they are relatively new or have been well kept. The former NUMMI plant was only recently shut down in 2010 and then reopened when Tesla purchased a segment of it from Toyota. Toyota purchasing Tesla and keeping the manufacturing plant does not make sense at this point. It seems more financially logical for this not to happen unless Toyota can’t integrate Tesla’s manufacturing to its own.In the event of integration, dealership locations, which are spread across the US and in many international locations, will undoubtedly overlap with existing Toyota dealership territories. It will have to be determined as to whether or not it is most financially beneficial to keep certain Tesla dealerships and to close others and sell the Tesla brand out of Toyota dealerships. Tesla’s headquarters, in Palo Alto, CA, is subject to closure in the event that Toyota purchases Tesla. This will depend on the future autonomy of Tesla within Newco.Intellectual and Intangible AssetsAdequacy of Intellectual Property Protection: Currently, Tesla Motors Inc. has 79 patents pending or enforced. (15) This legally protects Tesla from violation or theft of intellectual property and establishes the ownership of Tesla technology to Tesla Motors Inc. Considering the competition within the E.V. market and the funding available to Tesla, it is a safe assumption that the patents Tesla holds for its products are of sound patent law.Tesla does have exposure to infringement claims by others mainly from their direct E.V. competition, Nissan, GM and Toyota. But, this does not rule out the possibility of future litigation from any number of major automobile manufacturers that enter the E.V. market in the future.Both Toyota and Tesla have patents established under the same patent law, which will make post-merger integration a smoother process than otherwise.FinanceAdequacy of Cash Management System: from an objective standpoint, Tesla has a lack of conservatism within its cash management system. Tesla experiences many quarters with negative returns. This is due to the high initial cost to compete within the E.V. market and the small sales numbers of the Roadster. Tesla acknowledges this fact though and is moving to improve cash management as the Model S goes in to production.Exposure to Covenants and Guarantees: with a $465 million loan from the DOE, Tesla is under pressures to maintain covenants. At the moment, “DOE Loan Facility documents contain customary covenants that include, among others, a requirement that the project be conducted in accordance with the business plan for such project, compliance with all requirements of the ATVM Program, and limitations on our and our subsidiaries’ ability to incur indebtedness, incur liens, make investments or loans, enter into mergers or acquisitions, dispose of assets, pay dividends or make distributions on capital stock, prepay indebtedness, pay management, advisory or similar fees to affiliates, enter into certain affiliate transactions, enter into new lines of business and enter into certain restrictive agreements.” (1)Credit Worthiness and Solvency: cash flows for the financing of the acquisition will have to come from Toyota as Tesla is not in a position to take on said costs.Tesla and Toyota both practice similar financial policies under GAAP and are both internally and externally audited. There should be little issue here.Cross-Border IssuesExposure to foreign currencies: Tesla is now operating in conjunction with Lotus for the production of their Roadsters’ frame manufacturing. It is unclear based on their financial statements as to whether they are holding foreign currencies or are paying Lotus in British pounds or if in the event that they are that they have hedge against USD inflation.Exposure to foreign laws and regulations: Tesla operates in many countries ranging from their home base of the US to China, to many European countries. It is for this reason that they are exposed to the many sets of sovereign law.Organization and Human ResourcesAdequacy of talent and leadership: Tesla employs a high caliber of execs and VP’s to fill out the roles and responsibilities it has as a corporation. Exposure to workforce problems, especially union issues: Tesla is subject to issues of this nature as was outlined earlier in the Risk portion of the Due Diligence. As a result of the purchasing of the main manufacturing facility at the NUMMI plant, Tesla was approached by representatives of the United Auto Workers Union, or UAW for short. Pressure to rehire labor that had been previously laid off has been an issue ever since. Tesla can avoid this by relocating its manufacturing to a right to work state.Key Employees to keep at all costs: Tesla’s CEO, Elon Musk, is a integral piece of the Tesla operation and should be kept on to lead the development and success of the business for as long as it takes for it to become successful. JB Straubel, Chief Technical Officer, is also integral to the success of Tesla. Straubel is responsible for the technical and engineering designs of the vehicles including the battery, motor, power electronics and high-level software sub-systems. Other key officers within the company are ArnnonGeshuri, VP of Human Resources, responsible for the architecture of Google’s staffing systems and has been highly successful in his field; John Walker, VP of North American Sales, former head of Audi sales in North America. John is responsible for the further success of Tesla’s fleet sales in NA.CultureBetween aspirations and actions: there are similarities between Tesla and Toyota in their goals, to create highly efficient cars at a low cost to the public that help the environment. This will help the melding of the two corporate cultures. But, between the buyer and the target, Toyota is obviously the dominant of the two companies, which will cause Toyota’s culture to dominate Tesla’s. This may detract from the independence of Tesla’s design team. Conversely, with Toyota as it’s new parent, Tesla will have a much larger equity pool for R&D. There will also be alignments of strategic threats and opportunities as Tesla and Toyota are both competing within the same market to some extent, the E.V. market.Tesla and Toyota both have or are aimed at having customer service cultures, product uniqueness cultures, cost orientation cultures, and preeminence cultures.EthicsThere do not appear to be any issues regarding ethics that would keep the two companies from finding a merger agreement. The goal of Tesla’s main product line, E.V.’s, is to change the auto industry. Within the current framework of Toyota’s product line, Tesla’s goal compliments one area well. In the long run, if there is a shift in the auto industry from fossil fuel usage to alternative, it will not matter to Toyota as they will already be in the best position to take advantage of it.
- Key components:Glider - Lotus -- provides glider for Roadster - self assembled in Palo AltoBattery - Panasonic, but self assembled in Palo AltoMotor - self manufactured to protect proprietary technology (Palo Alto)Power electronics - designed by Tesla, but manufacturing outsourced to TaiwanGearbox - self manufactured in Palo AltoVehicle Design and Engineering -- need to engineer entire system to be low power.- eg. HVAC needs to integrate with battery thermal management system instead of a traditional internal combustion engine- expertise in lightweight materials (design own carbon fiber body)- design low voltage electric systems such as radio, power windows, heated seats- expertise in integrating low voltage systems with high voltage power source, designing to reduce load on vehicle battery pack, thus maximizing the available range of vehicle
- Base on acquisition, the acquirer can gain cost synergies in headcount reduction in SG&A. (Recommend keeping manufacturing, powertrain R&D, Vehicle Design & Engineering, Service personnel who have expertise in Tesla’s operations).
- Possible to move Palo Alto to Fremont location if plans are to keep NUMMI plant.Do not recommend moving out of bay area due to employee retention.
- Integration Challenges & Actions Planned, Integrate Cost Estimates- Current agreement with Blackstar, a Daimler affiliate, contains certain restrictions that decrease likelihood of potential acquisitions e.g. Blackstar has right to submit a competing acquisition proposal- Elon Musk cannot transfer any shares of capital stock to any automobile OEMs, other than Daimler, without Blackstar’s consent- Need to retain expertise when integrating Tesla, core competencies in various technologies are crucial for acquirer to succeed in building future long-range EV vehicles- DOE Loan facility will default if acquisition took place.- must fulfill obligations to purchase 2400 gliders from Lotus- must manufacture in California to access Tax incentives for manufacturing equipmentSource: Tesla 10K
- Real Options: Growth Options:If forecasts for the expansion of the E.V. market are correct, investing in Tesla’s R&D is a considerable growth option for Toyota.Analysis of this investment should be done as if it were an option; it is “rational to exercise these options when the present value of uncertain expected future cash flows exceeds the exercise price.” – BrunerGrowth options are call options on the underlying business activity, the R&D or E.V.’s, and are more vulnerable the longer the life of the option, and the greater the uncertainty about the value of the underlying asset. Toyota is best positioned to act/buy Tesla now due to the fact that Tesla is equity strapped and the E.V. market has been proven and will become larger in the future (according to forecasts).Develop “Real Growth Option” Decision Tree:Two possibilities:Buy Tesla gain Don’t buy Tesla gain as determined by success of independent R&D and Prius line.Exit or Abandonment Options: Toyota has no reason to fear the trap of no exit strategy:Since Tesla has already proven its technology and since Toyota has already incorporated it in to their line with the E.V. Rav4, if the Tesla brand name fails Toyota can simply kill the line, rebrand it as something more appealing to consumers, or incorporate it in to their already existing E.V.’s and continue to reap the benefits of Tesla R&D and tech. There is always the put option of selling Tesla’s tech to whoever is willing to buy it as well. Timing Options:The right to accelerate:Toyota is in a position to accelerate their position within the E.V. industry and without the acquisition of Tesla, Toyota stands to lose that opportunity and leave it available to their competition.Switching Options:Toyota will be acquiring not only Tesla but also their manufacturing facilities. If the E.V. market turns out to be the future of the automobile industry then Toyota has the ability to switch their manufacturing more easily under the framework of Tesla. The value of the options varies directly on the volatility of gas prices. Liquidity Option: It would be disadvantageous for Toyota to wreck Tesla. If Toyota were to do this, they would essentially be selling whatever competitive advantage they gain from the purchase of Tesla, in the form of Tesla technology, to their competitors. This scenario is highly unlikely unless Toyota’s own technology proves better.
- Deal Design Payment – StockShareholder Vote – the majority shareholder, with 32.68% of shares, are financial institutions. In this situation, non-corporate shareholders to have rights to vote, but it is not clear that they can vote on the acquisition of Tesla. http://www.wikinvest.com/stock/Toyota_Motor_(TM)/Voting_RightsFinancing - noneControl – Toyota Reorg – removing sales and marketing and general admin, everyone else staysTax – depreciation on NUMMIRisk – Blackstar (Dailmer), disrupt the merger &NamesNumber of shares held(thousands of shares)Japan Trustee Services Bank, Ltd.343,704Toyota Industries Corporation215,640The Master Trust Bank of Japan, Ltd.191,724Nippon Life Insurance Company130,057State Street Bank and Trust Company110,672The Bank of New York Mellon as Depositary Bank for Depositary Receipt Holders85,866Trust & Custody Services Bank, Ltd.84,184Tokio Marine & Nichido Fire Insurance Co., Ltd.67,095Mitsui Sumitomo Insurance Co, Ltd.65,166DENSO CORPORATION58,678Financial Institutions hold 32.68% of the company, the majority.Subsidiary HQ – Palo Alto, CAManagement – Toyota does main, Tesla does E.V. R&DTesla Brand – Kept and continued
- Term SheetExchange Ratio - 66.22, 33.30 (Current prices) 1 to 4.35 (Toyota), or 4.35 Toyota shares to one Tesla share.Side Payments – Executive stock options, Talent retention costsCompany Name – Name only, Toyota and TeslaPresident and CEO – Toyota CEO (Akio Toyoda)Board Members – Two out of ten (future strength of E.V. market)Reporting Structure – research corp. structure of Toyota, act as a branch within, powertrain technology and R&D will be under Denso Global, a division of Toyota Group,. http://www.globaldenso.com/en/technology/product/powertrain/index.htmlhttp://www.toyota-global.com/company/profile/toyota_group/ Subsidiary Name – Tesla Toyota agrees to continue to honor all previous arraignments with Blackstar and other partner companies.
- In order to strengthen the likelihood for the deal between Tesla and Toyota, a solid communication strategy needs to be put in place and team must be assembled to help implement the plan. In the initial stages of the negotiations, it is important to keep any information from leaking out to employees or the public. Electric vehicle technology and fuel efficient vehicles are areas that seems to be in many company’s focus at the moment. This can be seen from the introduction of cars like the Chevy Volt and the Nissan Leaf. The high interest in this technology and the current climate in the auto market will possibly make Tesla’s acquisition very difficult if other company’s become aware of the deal. Further there may be unknown pressures that can be exercised by other Japanese auto makers which are not inherent in the American market. In order to keep the negotiations clandestine, all information will initially be restricted to employees directly involved in the deal. All employees will be forced to sign non-disclosure agreements in order to work on the deal. Tesla will be referred to as Franklin (reference to Ben Franklin and electricity) in all documents and communications and Toyota will be referred to as Fuji. One of the major issues in this case is that information about the deal may have to be divulged before employees can be informed. Since this deal is between companies from different countries, there may be a need to deal with certain disclosure issues before the deal is near final completion, or the time at which the employees will be notified.
- The main message is to convey to the upper management that this is a good fit financially and from a technological stand point. Tesla has the technology that other company’s lack and would put Toyota ahead of the competition. Toyota would be able to put its large research budget and economies of scale into helping Tesla expand at a much faster pace than currently possible. Further, there is currently pressure on Tesla to create profitable products before they are viable for market. By merging with Toyota they can integrate their technology in the product of Toyota and focus less on creating a standalone product.
- The main focus with the employees should be to communicate to them that this merger will not result in the loss of jobs. It needs to be made clear that Tesla plans to continue using its brand and that it will continues operations as normal. The purpose of the acquisition is to share information and resources with Toyota, but with the goal to continue to refine the Tesla brand and product.
- The market may need to be addressed before the employees. While it would be best to only tell the public once the employees have been informed, due to the nature and publicity behind a deal of this kind, it is likely the public will need to be informed. The message to the media is similar to that of the employees. The focus will be on the commitment to the continuation of the Tesla brand and that the benefits to both companies financially and technologically.