Musk's Potential Merger of SpaceX and xAI: Tesla's Complications

Musk's Corporate Strategy and Potential Mergers

By Chris Kirkham and Ross Kerber

Jan 30 (Reuters) - Elon Musk fans and the man himself have long mused about Musk Inc, a merger of companies owned by the world's richest man. But with SpaceX expected to go public later this year, and Tesla facing a challenging transition from human-driven EVs to robotaxis and robots, even some proponents of a sprawling Musk conglomerate want to start smaller.

Reuters reported on Thursday that SpaceX is close to a deal to buy xAI, a move that would pave the way for Musk's plans to launch data centers in space, which he calls the best place for the power-hungry machines.

Merger Simplicity of SpaceX and xAI

As two private Musk-owned entities, the path to that merger could be much smoother than a possible tie-up of SpaceX and Tesla, which some investors believe also could happen eventually.

Challenges of Merging Tesla with Other Entities

Bloomberg, citing sources familiar with the matter, reported on Thursday that SpaceX was considering a merger with Tesla, along with the alternative of a combination with xAI.

Mergers involving a company the size of Tesla would typically require shareholder approval through a vote or the tendering of shares. Sometimes these can be thorny contests, such as the ongoing battle for control of Warner Bros Discovery,  although Musk has demonstrated an ability to keep Tesla investors on board with his vision.

Investor Perspectives on Musk's Companies

The logic of such a deal rests in the soaring artificial-intelligence ambitions of both firms. Tesla has staked its future on AI-driven autonomous vehicles and humanoid robots, while SpaceX plans the orbiting data centers that might supply the immense computing power needed to drive Tesla’s AI-powered machines.

"If you're trying to build robots, and build autonomous cars, and build rockets, these things all fit together," said Arthur Laffer Jr., president of Laffer Tengler Investments, a Tesla investor. Laffer believes an eventual tie-up between Tesla and SpaceX makes sense because "every single company he owns he sees as an integrated solution."

Tesla is still in the early stages of its shift to autonomous driving and humanoid robots, a transition that has become more urgent as the company's electric vehicle sales have declined the past two years.

XAI AND SPACEX: SIMPLER

For Musk-company investors, a merger of SpaceX-xAI is simpler to understand, financially.

A SpaceX IPO launch would not necessarily be delayed by acquiring xAI, in part because xAI is much smaller, and both companies are private, as well as controlled by Musk. This month, xAI raised $20 billion in a funding round, exceeding its $15 billion target at a valuation of $230 billion. SpaceX plans to go public sometime this year with a valuation likely above $1 trillion, Reuters and other media reported.

Tesla's market capitalization is more than $1.4 trillion, after shares gained 3.3% on Friday.

"History says that ultimately, most Tesla/SpaceX investors are invested for the sole sake of betting on Elon Musk," said Andrew Rocco, stock strategist at Zacks Investment Research. "A single entity would help to further align his attention and ample resources to one company."

Merging Tesla, xAI and SpaceX would not prompt concerns about competition because the three companies operate in different sectors and Musk already effectively controls all three, said William Kovacic, a former chairman of the Federal Trade Commission. Unlike a merger between two competitors in the same space, there are plenty of opportunities for rivals to enter each company's markets, he said.

Tesla investors might be more wary of a tie-up with SpaceX due to concerns that it would be asked to overpay for SpaceX, and that the lesser level of financial scrutiny accorded private companies would make it more challenging to decide a fair price.

“Combining all or part of his (Musk's) empire into Tesla would involve a number of complexities,” said John Streur, senior managing partner at Boston Common Asset Management and a longtime follower of Tesla who does not currently own shares. That would include setting the values of the private companies. “If the valuations are extremely high it will be viewed as dilutive to Tesla shareholders," he said.

Tesla currently sports a forward price-to-earnings ratio north of 200, far greater than fast-growing technology giants like Meta Platforms, Microsoft or Alphabet, all of which have price-to-earnings ratios between 25 and 35, according to LSEG data.

Edward Best, co-chair of the capital markets practice at law firm Willkie Farr & Gallagher, said if SpaceX goes forward with an IPO and were a public company at the time of a potential merger, valuing a deal between Tesla and SpaceX would become more straightforward.

"You at least have an independent valuation," Best said. "As opposed to at a private company: Is it $700 million, a trillion, a trillion-five? How do they value the company?"

(Reporting by Ross Kerber in Boston and Chris Kirkham in Los Angeles; Additional reporting by Courtney Rozen in Washington, .Deborah Sophia in Bengaluru and Juby Babu in Mexico City; Editing by Peter Henderson, Brian Thevenot and Matthew Lewis)