Elon Musk Tesla

Future Mergers Between Tesla And Legacy Automakers?

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Tesla CEO Elon Musk stated that he is open to discuss possible mergers between Tesla and legacy automakers. Musk made the comments while accepting the Axel Springer Award in Germany yesterday.

Axel Springer SE’s CEO and interviewer Mathias Döpfner inquired if Musk would consider buying out a legacy automaker. Musk gave the following response:

“We are definitely not going to launch a hostile takeover, but if somebody said it would be a good idea to merge with Tesla, we certainly would have this conversation”.

Musk did not disclose any ongoing discussion about any merger or acquisition of another automotive company. While Tesla has engaged in many acquisitions in recent years, all of them are related to manufacturing and software technology.

Does Tesla Have Partnerships in Place With Other Automakers?

Tesla did establish partnerships with other automotive companies in the past. Both Toyota and Daimler used to be large investors in the all-electric automaker. 

Back in 2010, Daimler acquired an equity stake of nearly 9% of Tesla, which was then worth $50 million. Toyota invested the same amount during the same year, and both companies jointly developed the RAV4 EV, until the model was discontinued in 2014. Additionally, Tesla used to produce electric powertrains for both companies.

In 2014, Daimler sold its stake in the California-based company, and Toyota followed suit in 2017. Since then, Tesla did not have any kind of concrete partnership with other automakers, other than selling regulatory credits.

Regulatory credits are environmental emissions programs that give out credits to automakers that produce and sell electric vehicles. These programs mandate that a certain percentage of each manufacturer’s yearly sales must consist of zero-emissions vehicles. Since Tesla produces all-electric EVs, the company earns way more credits than needed to meet minimum regulatory requirements. 

The automaker thus sells excess credits to other automakers so they avoid penalties by regulators. During 2020, Tesla earned $354 million, $428 million and $331 million in Q1, Q2 and Q3 respectively, from the sale of regulatory credits alone. 

The Possibility of Tesla Acquiring Other Companies

From a valuation standpoint, Tesla is definitely able to merge with or acquire other auto companies. 

At the time of writing this article, the company’s market cap stands at $554.295 billion, making it by far the most valuable automaker in the world. Additionally, once Tesla integrates the S&P 500 index next December, the company’s valuation is bound to increase. The second most valuable automaker is Toyota, which is valued at “just” $190.352 billion.  

But from a practical standpoint, the prospect of an acquisition happening is rather unknown. Tesla’s mission is to accelerate the transition towards electric transportation and the adoption of green technologies. Does an acquisition of a legacy automaker serve those purposes? 

For instance, let’s say that Tesla merges with Ford, which has yet to release EVs and does not have any all-electric infrastructure in place. This may cause a delay in turning production plants for ICE-specific to EV-specific. The entire operation is a costly ordeal, and has the potential to decelerate the flow of Tesla’s global supply chain.

All in all, should Tesla acquire another automaking company, it must be in line with its mission statement, and should make sense from an economic perspective.

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