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Tesla-Maxwell Merger: The Strange Details

Updated: Feb 8, 2019

There are many strange details surrounding Tesla's ($TSLA US) acquisition of Maxwell Technologies ($MXWL US) but one particular contingency stands out to me: The "Parent Company Floor Price Provision."

The Floor Price Provision Explained

First, let me make this clear: it is not uncommon for a stock-based transaction to have a floor price, commonly referred to as a fixed-dollar value collar. This is due to the volatility in stock prices around M&A deals. Essentially, the floor price provision states that if the acquiring company's stock falls below a specified value, for a specified period of time before the deal closes, the conversion ratio at which the seller's shares are converted into the acquiring company's shares becomes locked at a specified value. This fixed ratio protects the acquiring company from increased dilution due to a decline in their share price. However, a fixed-dollar value collar typically has a ceiling as well - this protects the seller from receiving a smaller fraction of the acquiring company's shares in the case of a dramatic increase in the stock price before the deal closes. The price floor and ceiling collectively make up the "collar."


What Makes This Deal Unique?

In this case, there is only a price floor where the conversation ratio locks. This means that, while Tesla is protected on the downside, Maxwell has no upside protection. The Form 425 Merger Agreement filed by Maxwell earlier this week states that:

1. The Parent Company (Tesla) Floor Price is $245.90

2. If the Parent Company's Trading Price is greater than the Floor Price, the conversion ratio will be $4.75 divided by the Parent Company's Trading Price.

3. If the Parent Company's Trading Price is equal to or less than the Floor Price, the conversion ratio will be locked at 0.0193.

This means that Maxwell bears all of the risk related to a significant increase or decline in Tesla's share price. There is no way for them to receive more than the equivalent of $4.75 per share, but they could receive far less than that.

Price Floor Provision | Source: $MXWL Form 425 Merger Agreement

The Math

The following table shows how the value of Maxwell's deal would be impacted by a decline in Tesla's share price below the "Floor Price":

It is easy to see how quickly the 55% premium announced on Monday (02/04/2019) could disappear for Maxwell's shareholders. If $TSLA were to fall to ~$160 per share, the premium would be wiped out entirely. Below that, Maxwell shareholders will take a haircut, which could be quite significant.


On the other hand, if Tesla's stock were to surge before the deal closes, Maxwell's shareholders would also suffer the consequences, as there is no price "cap" to complete the collar. The following table shows how this scenario would hurt Maxwell's shareholders, and help Tesla at the same time:

With the $MXWL share price (the numerator in the conversion rate calculation) locked at $4.75, the conversion rate shrinks as $TSLA's share price increases (the denominator in the conversion rate calculation).


Conclusion

So, the obvious question becomes: Why would Maxwell's management team agree to this deal? Well, the innocent (and most likely answer) is that their financial situation is so dire (see my previous article about this deal) that they jumped at the opportunity to sell at a 55% premium, despite having to bear all of the risk related to Tesla's stock price volatility. This is a company on the verge of bankruptcy, with products in need of significant capital to develop. My guess is that this deal was their only way out. However, even with Maxwell bearing much of the risk, I still don't understand Tesla's motivation to make this acquisition. They already need an incredible amount of capital (which they do not have) to develop all of the magical products in their pipeline, not to mention the China factory, etc. Although I cannot prove it (yet), I still believe there may be an ulterior motive behind this deal for Tesla. However, I can only prove that Maxwell's shareholders are taking on enormous risk with this deal, for very limited upside. So that's where I will have to leave this story, for now.

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