Tesla shares fell down over 13 percent to $189.99 in extended trading - amounting to a loss in value of about $4.3 billion. SolarCity's shares jumped about 18 percent to $25.02.
Musk, who is the chairman of SolarCity and CEO of Tesla, described the deal as a "no brainer" in a call with reporters. He added that the company could sell customers an electric car, a home battery and a solar system all at once.
"Instead of making three trips to a house to put in a car charger and solar panels and battery pack, you can integrate that into a single visit," Musk told reporters. "It's an obvious thing to do."
"Ideally you want to see Tesla focus on Tesla - building Teslas and expanding the cars," said Ivan Feinseth, an analyst at Tigress Financial Partners. "Maybe the feeling is that this takes away focus, and it could financially strain Tesla, which is going to continually need a lot of cash."
SolarCity has about $6.24 billion in liabilities, including debt but the company is market leader in US when it comes to residential rooftop solar systems. It is learned that the company keeps on posting quarterly losses and the stock has fallen nearly 60 percent so far this year.
According to Musk, Tesla was unaware that how many of its customers have solar panels, but guessed that most of them were likely interested in solar. The company is planning to sell the solar systems under the premium Tesla brand.