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Tesla Acquires Maxwell Technologies: Buyout, Bailout or...?

My plan today was to write an article about Tesla's Q4 2018 earnings, conference call and the departure of long-time CFO Deepak Ahuja. However, this morning Tesla announced they were acquiring Maxwell Technologies ($MXWL) for $218 million in stock, a 55% premium to its closing price on February 1, 2019, and thus, my plans changed. Why did they make this acquisition? More importantly, why did Tesla pay a 55% premium for a company on the brink of bankruptcy?


Why Buy Maxwell?

The stated purpose of this acquisition was to enhance Tesla's charging capabilities and battery technology. Wait, I thought Tesla was already years ahead of the competition in battery/charging technology. Well, according to this article from Fortune, "Maxwell has been developing patented dry electrode technologies that can be used to create ultracapacitors that store large amounts of electrical charge without losing energy."

So, buying this company for $218 million seems like a steal for Tesla, right? This should immediately help with Supercharging times, right?

Its Not Quite That Simple

If you take a look at Maxwell's most recent quarterly SEC filing (Q3 2018 Form 10-Q) and read all the way to page 44 (of 49, by the way) you will see this pesky little detail: "Namely, the development of dry battery electrode technology requires a substantial amount of capital. Moreover, to meet potential growth in demand for our products, particularly for our ultracapacitor products, we will need significant resources for customized production equipment."

Source: Maxwell Technologies Q3 2018 Form 10-Q, p. 44

Apparently, Tesla is paying $218 million just for the opportunity to spend "a substantial amount of capital" to develop the technology. Additionally, the ultracapacitor products at the heart of this deal will require significant resources for customized production equipment. MORE capex is just what Tesla needs right now, right? As if tooling for Model Y production, building the China factory, developing the Tesla Semi, expanding service capabilities, developing the solar roof and the Roadster 2 weren't enough already. By the way, Tesla's Q4 2018 capital expenditure was less than their depreciation charge. This implies that the company is not spending nearly as much as they would need to complete all of these projects, or even maintain their current facilities. Are they going to spend the necessary money to develop these products? Or maybe a better question would be: can they even afford to develop these products? Without a massive capital raise, I don't think they can. This appears to be a $218 million headline at the direct expense of Tesla's shareholders, whose shares are diluted by this transaction.

It's Still Not That Simple

With the above complications in mind, let's take a look at the deal itself. Maxwell's stock closed at $3.07 on February 1, 2019. Today, Tesla agreed to buy them out for $4.75 per share, a 55% premium to the previous close. I found this to be very odd, considering page 10 of Maxwell's most recent 10-Q featured a liquidity and going concern line, which essentially means that the company is on the brink of bankruptcy. It states the following: "The Company has incurred significant operating losses for several years and expects to continue to incur losses and negative cash flows from operations for

at least the next 12 months following the issuance of these financial statements." and goes on to say "Existing cash resources are not expected to be sufficient to fund forecasted future negative cash flows from operations and obligations as they become due through one year following the issuance of these financial statements, without additional funding."

You can read the entire statement below:

Source: Maxwell Technologies Q3 2018 Form 10-Q, p. 10

So, why would Tesla pay such a large premium for a company on the brink of bankruptcy, whose products are in need of significant capital expenditures to develop? Interestingly enough, Tesla may have some incentive to make Maxwell's shareholders happy.

"This Place Called Shanghai"

It just so happens that on April 11, 2017, China's State Development & Investment Corporation (SDIC) bought a 19.9% stake in Maxwell Technologies for $40.59 million.

Chinese SDIC Acquires Minority Stake in Maxwell Technologies (Source: Bloomberg)

This investment valued the company at $203.96 million just under two years ago. At Friday's closing price of $3.07 per share, the company's equity was worth $141.22 million. This equates to a -24.35% IRR for the Chinese SDIC, had the buyout happened at market value. Of course, it is not in Elon's best interest to have the Chinese Government unhappy with him, as he is relying on "this place called Shanghai" to build a new factory and generate revenue for Tesla in 2019. As Elon said in last Wednesday's conference call: "And we're very appreciative of the Chinese government allowing us to do this... I'd just say like an order of appreciation for the Chinese government in allowing us to do that."

It appears that, in addition to voicing his appreciation on the conference call, he may have shown his appreciation in the form of a bailout for China's state-sponsored investment fund - who, thanks to the 55% premium paid by Tesla, was able to make a 3.71% IRR on their Maxwell investment.

I cannot prove the premium paid by Tesla was a result of pressure from the Chinese government, but all three parties involved have a history of shady/illegal business practices. Did I mention that Maxwell was charged with accounting fraud by the SEC? Oh, and it just so happens that Maxwell was the Chinese SDIC's only U.S. investment:

Chinese SDIC M&A List (Source: Bloomberg)

In summary, Tesla paid a huge premium for a struggling company on the verge of bankruptcy. The technology they acquired in the deal is going to require significant capex to develop and produce and it just so happens that 20% of the company was owned by the Chinese Government. They announced this deal the Monday after CFO Deepak Ahuja announced his departure in the final 4 minutes of the Q4 2018 earnings call, which raises more questions that I won't get to today. Was this deal part of a kickback to the Chinese Government in the form of a buyout? Possibly, as a more direct bribe would require cash that Tesla desperately needs in order to pay back the $920 million convertible debt issue that matures on March 1st (just over 3 weeks from now). Ultimately, I cannot say whether this was just a bad M&A deal or something more sinister. I do, however, find it extremely "sus" as our friend Elon would say.

Disclosure: I am short the stock of Tesla ($TSLA) and this is not investment advice, I am not an investment adviser and no financial decisions should be made on the basis of this article. See my full disclaimer in the "about" section.

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