Musk Merges xAI with SpaceX, Creates £1trn Colossus

Elon Musk has orchestrated a monumental merger, combining his rocket and satellite enterprise, SpaceX, with his relatively new AI venture, xAI. This £1.25 trillion deal creates what's now considered the most valuable privately held company globally, integrating SpaceX’s launch capabilities and Starlink internet with xAI’s artificial intelligence and the social media platform X.

Musk frames this consolidation as essential for ambitious projects, including orbital data centres, lunar factories, and Martian colonisation. While supporters hail it as a stroke of genius, critics view it as a shrewd financial manoeuvre designed to bolster xAI, which reportedly burns through a staggering £1 billion monthly.

A Controversial Valuation

The merger involves SpaceX acquiring xAI for £250 billion, matching the valuation from a recent funding round for the two-year-old AI start-up. Shares in xAI will convert into SpaceX stock at a seven-to-one ratio, pricing the combined entity's stock at £527. This move also saw Musk unilaterally increase SpaceX’s private valuation to £1 trillion, attributing the rise to Starlink’s growing revenue.

Shareholders were largely caught off guard by the swiftness of the deal. Many struggled to decipher the details during hurried, poorly audible calls with SpaceX and xAI executives. One investor noted, "None of the valuations are based on any rational multiple. They’re all trading off Elon." This sentiment underscores a common criticism that Musk’s ventures are often valued more on his personal brand than on traditional financial metrics. For context, you can read about how AI can't pass 'Humanity's Last Exam' and how human intuition still plays a significant role in valuations.

The Vertical Integration Strategy

Sol Bier, founder of Factorial Funds and an investor in both companies, praised the merger as "a testament to great engineering," highlighting the vertical integration of space, data centres, and solar power. Bier argues that while these were once discrete businesses, they are now on a "collision course," with AI's primary bottleneck being energy, a problem Musk aims to solve by controlling the entire stack.

This strategic play aligns with Musk's long-term vision, where resources and infrastructure are controlled end-to-end. The goal, according to Musk's lieutenants, is to launch an initial public offering (IPO) for the combined entity in June. This IPO, potentially raising £50 billion, would be the largest in history, surpassing Saudi Aramco’s 2019 flotation. The ambitious timeline, some suggest, is less about planetary alignment and more about beating rivals like OpenAI and Anthropic to public markets, as bankers worry the market might not sustain multiple large AI IPOs simultaneously. We've seen similar competitive pressures in the AI space, such as when Google launches TranslateGemma, challenges ChatGPT.

Implications for Investors and the Future

While the merger offers a potential windfall for xAI shareholders, it dilutes existing SpaceX investors through the issuance of new shares. However, given Musk's controlling stake in both private companies, there's little recourse for dissenting shareholders. This isn't unfamiliar territory for Musk, who previously pushed through the controversial acquisition of SolarCity by Tesla.

The financial health of xAI, with its relatively low revenue and projected £10 billion expenditure for chips and data centres in 2025, contrasts sharply with SpaceX’s £16 billion annual revenue, driven by its launch monopoly and Starlink subscriptions. SpaceX is even seeking permission to launch a million satellites for an "orbital data centre system," a massive leap from its current 9,400.

This bold move reflects Musk’s expansive, even "otherworldly," ambitions, peppered with sci-fi references like the Kardashev scale. He states the merger's purpose is "scaling to make a sentient sun to understand the Universe and extend the light of consciousness to the stars!" This vision, however, comes with significant risks, as highlighted by repeated controversies surrounding xAI's chatbot, Grok, which has produced antisemitic content and explicit images. These incidents draw attention to the broader challenges of AI safety and ethical deployment, issues that even industry leaders grapple with.

Do you believe this merger is a stroke of genius or a precarious gamble? Share your thoughts in the comments below.