What next for GM and Nikola?

GM, as we all know, stands for General Motors. However, the initials may more aptly stand for Gross Misunderstanding given the testing relationship over the last few weeks with zero-emission truck manufacturer Nikola.

It is still less than a month ago that the pair announced a blockbuster deal in which GM received a 11% stake in Nikola in exchange for providing Nikola with manufacturing and engineering support, as well as sourcing parts. Nikola stock soared 41% that day. And it is today that the deal is set to be finalised.

However, since that announcement on September 8, the stock has plummeted 64% and the deal is still yet to completed. The key reason for the delay stems from a negative research report written by Hindenburg Research alleging that Nikola's CEO, Trevor Milton, misled investors as to the developed technology of the trucks. Although Nikola denies these claims, Milton stood down and left the company on September 21, citing his wishes for investors to focus on the company as opposed to him.

For Nikola investors, the next few weeks are set to be volatile, with options markets pricing in a move of around 35% upside or downside in around 3 weeks from now, depending on whether the deal goes through or not. Wall Street appears confident a deal will go through with both JP Morgan and Cowen re-iterating buy ratings of $41 and $79 respectively despite the allegations. It is trading at below $18 as of yesterday's close.

GM CEO Mary Berra has assured investors that the necessary due diligence was undertaken and that GM does indeed understand Nikola's technology. The deal would allow GM to share technology and parts with Nikola in exchange for the stock as well as other cost savings. The company had been questioned by investors whether it could adapt to the changing landscape and the Nikola deal has been perceived by many analysts as a step in the right direction.

Talks are unlikely to be resolved today and are still ongoing but GM can now likely get significantly more equity given the fraud allegations, the stock price plummeting and Milton leaving. Nikola have little bargaining power given these factors and fear that should the deal fall through, then the stock would fall even further and it would be even more devastating for future prospects. The deal can be terminated by either party if it has not closed by December 3.

It is not common for deals to be renegotiated so extensively or in response to market movements, but what we have witnessed in Nikola has been far from normal - just like 2020 itself.