The fate of Tesla Motors' $2.1 billion merger with SolarCity will be decided mostly on Wall Street, not Main Street.
With the results of voting by shareholders of both companies set to be announced Thursday afternoon, whether the merger passes or is rejected will depend largely on the votes of the big mutual funds and institutional shareholders who own the bulk of the stock in Tesla and SolarCity.
Those institutions, ranging from mutual funds and pension funds to private investment firms, control more than half of the stock in each company.
Under normal circumstances, that would give them a strong, but not commanding say in the outcome of the vote. But this isn't a typical merger vote.
Elon Musk owns 18 percent of Tesla's stock and 22 percent of SolarCity's shares. A handful of other key insiders also own significant stakes in both companies. To ease investor concerns that the merger was an insider deal, Musk and two other insiders have agreed not to vote their Tesla shares.
The result: The mutual fund companies and institutional investors who already have big stakes in both companies will have an oversized say in whether the merger passes.
For his part, Musk, who doubles as SolarCity's chairman and Tesla's CEO, said last month that he expects the deal to be approved.
"I’m pretty optimistic about where the vote is going," Musk said during a conference call two weeks ago. "The early votes so far have been overwhelmingly in favor and I’d be surprised if it wouldn’t pass.”
The merger would combine Tesla, the nation's biggest electric car company with SolarCity, the nation’s biggest rooftop solar installer. Musk has said the merger will create a renewable energy powerhouse that can provide integrated products that wouldn't be possible separately. Critics say the deal is a dubious bid to combine two money-losing companies whose sales depend on government subsidies and that rely on investors for the billions of dollars that each needs to keep operating.
Whether the merger passes will depend largely on how a handful of key investors voted.
The fund company with the biggest say is Fidelity. Its mutual funds own 13.8 percent of Tesla's shares and 11.6 percent of SolarCity's shares. Scottish investment firm Baillie Gifford & Co. owns 8.6 percent and mutual fund company T. Rowe Price owns 7.1 percent. In all, the 10 biggest institutional investors own nearly 42 percent of Tesla's stock, and all institutions combined own 61.4 percent of the shares.
Institutions also will have a powerful voice in the outcome of the SolarCity vote. Fidelity, Tesla's biggest institutional shareholder, also is the biggest institutional owner at SolarCity, with a stake of just under 11 percent. Mutual fund company Vanguard is No. 2 with a 4.4 percent stake. In all, institutions own slightly less than 57 percent of SolarCity's shares.
The role of the institutions will be especially important at Tesla, where the decision by Musk and other key insiders to recuse themselves from the balloting makes their votes even more influential.
To understand just how weighty those votes will be, it's important to see just how much Musk's recusal reshapes the Tesla vote. Here's the math:
Tesla has 149.8 million shares of its stock outstanding. But Musk owns 33.7 million shares all by himself, 18.4 percent of all Tesla's shares. Add in the more than 1 million shares owned by Jeffrey B. Straubel, Tesla's chief technology officer and a SolarCity director, and Antonio J. Gracias, who sits on both the Tesla and SolarCity boards, and the three insiders own 34.8 million shares that won't be voted.
That leaves just over 115 million shares that will be eligible to vote in the Tesla election. For the merger to pass, it will need slightly more than 56.51 million shares to be voted in favor of the deal.
This is where the role of the big institutional investors is magnified. If the five biggest institutions vote in favor of the deal, that's 51.48 million votes, or 91 percent of the votes needed for the merger to pass. If the 10-biggest institutions vote in favor of the deal, it will pass with 5 million votes to spare.
Likewise, if those funds vote against the deal, the merger is in big trouble.
While none of the big institutions have said how they are voting, some of their recent comments indicate that Tesla's efforts over the last few months to woo shareholders have paid off.
Gavin Baker, the manager of the Fidelity OTC fund, which owns 2.1 percent of Tesla's shares, has spoken favorably of Tesla and has added to its stake since the merger was announced, despite the electric vehicle maker's falling stock price.
"Our optimism remains intact," Baker wrote in a note to the fund's shareholders last month.
"We are fans, not just of Tesla products, but of the concepts underpinning the firm and potential future partnerships ahead of it," Baker said in July, after the deal had been proposed but not yet finalized.
The math is a bit more favorable for the merger in the SolarCity vote. Musk owns 21.9 percent of SolarCity's stock and he already has said he will vote his shares in favor of the merger. Add in the stock owned by other insiders and directors, and that's 34.7 percent of the stock. That means SolarCity needs just 23.4 percent of the vote from non-insiders for the merger to pass.
Baker's Fidelity OTC fund owns 8.99 percent of SolarCity's stock, and he also has made positive comments about the solar energy company. "I remain optimistic that continued decreases in the cost of solar will lead to more widespread adoption over time," he wrote in July. "I think SolarCity enjoys advantages in scale and technology relative to other residential and even utility-scale solar competitors."
If Baker votes his shares in favor of the merger, that's 44.7 percent, which means it would take an overwhelming "no" vote from the remaining shares to block the merger on the SolarCity side.
So the math says there shouldn't be too much suspense when SolarCity announces the vote results around 2 p.m. Thursday. The Tesla vote, which will be disclosed around 4 p.m., could be more of a nail-biter.