General Motors’ pending partnership with electric vehicle maker Nikola Corp. could result in a dream team or a deal with the devil.

Either way, GM CEO Mary Barra is not backing down from it despite rumblings on Wall Street that perhaps GM failed at its due diligence. 

Last week, Hindenburg Research published a 67-page report accusing Nikola of being an “intricate fraud.” Nikola has disputed the claim.

Now the U.S. Securities and Exchange Commission and Department of Justice are examining the allegations against Nikola, according to media reports. The news has crushed Nikola’s stock price and cast a shadow over its pending deal with GM. But GM leaders stand by their plan and some auto industry experts give the union their blessing, too.

“The biggest risk right now is the risk of a huge PR black eye for (GM CEO) Mary Barra and the firm,” said Morningstar’s David Whiston. “Even though there isn’t much financial risk right now because the deal is initially cashless for GM, it still looks really bad optics-wise should Nikola be charged with criminal fraud or go bankrupt. But as a GM analyst, I’d rather have that risk than GM actually wastes billions of dollars buying Nikola stock.”

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Analyst Sam Abuelsamid of Guidehouse Insights in Detroit agreed, saying GM has more to win than to lose.

“It’s all potential upside. The worst case for GM is that they take a minor reputational hit if things go sideways with Nikola. They’re not putting any cash in this deal,” Abuelsamid said. “They have a customer who will potentially buy their fuel cells and batteries. In return, they get a stake in a company that potentially has an upside valuation, compared to what it’s actually done.”

The deal broker

Just nine days ago GM told the world it was taking a stake in Nikola.

“This is the first commercialization of our fuel cell technology and there were initial introductions made by Steve Girsky,” Barra told the media at the time. 

Girsky is a former GM vice chairman who is now a managing partner at VectoIQ, a New York-based investment company that helps fund startups in the auto industry. Nikola is one of those startups that Girsky’s firm injected with $700 million and oversaw its public listing, according to Bloomberg. 

Girsky insisted he vetted Nikola thoroughly before presenting a deal to GM.

“We showed up with an army of people to due diligence this thing,” Girsky said on an Aug. 2 webcast of “Autoline This Week,” in which Bloomberg participated. “I don’t doubt there are going to be twists and turns here, but I did put my reputation on the line for this deal.”

Girsky did not respond to Free Press attempts for comment.

The deal will eventually give GM $4 billion in various benefits as it commercializes its electric vehicle technology. In exchange for about $2 billion worth of Nikola stock, GM will make Nikola’s Badger pickups, which are expected to hit the market by the end of 2022.

‘A very capable team’

The 10-year agreement will save both companies substantial costs. That’s crucial for GM as it pours billions of dollars into developing an all-electric vehicle strategy.

The companies do not close on the deal until Sept. 30, giving GM a couple of weeks to change its mind. But Barra is holding firm.

“Our company has worked with a lot of different partners and we’re a very capable team that has done the appropriate diligence,” Barra said during an RBC Capital Markets virtual conference Monday. “On the strength of the deal we put together, it validates our technology, it allows us to have more people using the technology, which gives us the advantage of scale, which will help us drive costs down.”

Morningstar’s Whiston said if GM refuses to close the deal this month as planned. Nikola could litigate that, “but the agreement says either party can terminate the agreement if the deal does not close by Dec. 3.”

On Friday, shortly after the Hindenburg report broke, GM issued this statement: “We are fully confident in the value we will create by working together. We stand by the statements we made in announcing the relationship.”

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Smoke and mirrors

The Hindenburg Research report wasn’t the first time doubts were cast on Nikola.

In June, Bloomberg reported Nikola’s founder and chairman, Trevor Milton, had exaggerated abilities of the company’s debut truck, the Nikola One. The truck was never produced. In fact, Nikola has yet to make any of the heavy-duty hydrogen fuel cell trucks it is developing. 

Nikola has denied making misleading statements and has said the Hindenburg report was motivated by the firm’s desire to make money if Nikola’s stock price tumbled. 

Abuelsamid said he “wouldn’t rule out some fraudulent activity” by Nikola, but it would be no worse than what some others have done.

“So Nikola was filming a video of the truck as it was rolling down the grade; automakers do that nonsense all the time,” Abuelsamid said. “In 2007, when GM unveiled the original Volt concept car, it was driven by a golf-cart motor. You see it going around slowly in some neighborhood, there was no sound to it because it was a golf cart motor.”

The Nikola One was a concept and electric-car maker Tesla has done the same thing numerous times with some of its concept cars, Abuelsamid said. 

Likewise, Milton is a salesman pushing a company that has yet to make a vehicle.

“Trevor Milton is like most other entrepreneurs, a combination of P.T. Barnum and Preston Tucker — even Elon Musk,” said John McElroy, host of “Autoline.” He is referring to Barnum, the famous circus showman, Tucker, the auto entrepreneur famous for the Tucker 48 sedan, and Musk, the eccentric founder and CEO of Tesla.

“They promise the sun, the moon and the sky. And they’ll use smoke and mirrors to get their companies off the ground,” McElroy said.

Launching a startup is difficult and requires entrepreneurs to exude “confidence and optimism even when everyone else is wringing their hands,” McElroy said. “As long as they ultimately deliver something close to what they promised, everyone forgets about their earlier antics.”

Other loyal partners

What is significant, both McElroy and Abuelsamid said, is that none of Nikola’s other partners has abandoned it, or publicly expressed any doubts about their deals.

Prior to the deal with GM, Nikola had a deal with Germany’s Robert Bosch to use Bosch’s hydrogen-fuel-cell powertrains in trucks made by a partnership with Italian semi-truck maker Iveco SpA. CNH Industrial owns Iveco. Like GM, Bosch and CNH remain committed to working with Nikola.

“Perhaps that will change if the SEC or DOJ charge Trevor Milton with malfeasance,” McElroy said. “However, my guess is they’ll determine that Trevor exaggerated Nikola’s capabilities but did not illegally mislead investors.”

The SEC has the authority to bring civil charges, while prosecutors could bring federal criminal charges. If either of those happens, the financial risk to GM is low.

“Worst case scenario would be GM never realizes the over $4 billion in benefits they said they’d get from the deal, including the Nikola equity,” Whiston said. “Once GM is building capacity to make Nikola vehicles, should Nikola go bankrupt then GM may not see some or all of the up to $700 million in capital expenditure reimbursements it’s due under the agreement.”

Even a black eye to GM’s reputation would be quickly forgotten, given GM’s broad reputation.

“How much has Walgreens’ reputation changed after it agreed to put Theranos in its stores?” said Abuelsamid, referring to the drugstore chain’s disastrous deal with Theranos, the now-defunct Silicon Valley blood-testing company that turned out to be a fraud.

“It didn’t impact Walgreens much,” he said.

Contact Jamie L. LaReau: 313-222-2149 or [email protected]. Follow her on Twitter @jlareauan. Read more on General Motors and sign up for our autos newsletter. Become a subscriber.

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