Details Emerge Of $400 Million Error In SolarCity Corp (NASDAQ:SCTY) Valuation

Details Emerge Of $400 Million Error In SolarCity Corp (NASDAQ:SCTY) Valuation

An error occurred in determining what SolarCity Corp (NASDAQ:SCTY) should sell itself for to sibling Tesla Motors Inc (NASDAQ:TSLA). Details have emerged that Lazard Ltd (NYSE:LAZ), the investment bank that SolarCity retained to advise it on its sale to Tesla, was responsible for the error.

The mistake that Lazard made ended up discounting a whopping $400 million from the valuation of SolarCity. However, the discovery of the error is not going to change the agreement that Tesla and SolarCity have already signed. However, it is a reminder that even leading investment banks are not immune to making valuation mistakes in high-profile transactions. Sometimes such valuation oversights lead to class action lawsuits that can result in millions of dollars in settlement.

Tesla is acquiring the struggling solar firm for $2.6 billion.

Double-counting debt

The source of the error in the SolarCity valuation stemmed from double-counting the company’s anticipated indebtedness by its financial adviser Lazard. It was only after SolarCity and Tesla had signed their merger agreement that Lazard realized that it provided the wrong valuation of the solar company.

Correct analysis would have valued SolarCity in the range of $18.75 to $37.75 per share. But Lazard quoted a valuation of $14.75 to $34 per share, thus denying SolarCity shareholders some $400 million in the process.

However, Tesla agreed to acquire SolarCity for $25.37 per share with compensation being in the form of stock.

High-profile miscalculations

Investment banks do make valuation mistakes. Back in 2014, Goldman Sachs Group Inc (NYSE:GS) made a miscalculation in its valuation analysis that saw Tibco Software sell for less than it should have if things were done correctly. Tibco Software was sold to Vista Equity for $4.14 billion, though its shareholders should have fetched $4.24 billion in the deal, which means that they lost $100 million in the process. The oversight was caused by a wrong caption of Tibco Software’s fully diluted shares and it triggered a class action lawsuit that was settled by paying $30 million to the disgruntled shareholders.