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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
It’s a sign of the times that the largest merger in corporate history — Elon Musk’s splicing together of rocketmaker SpaceX and xAI, his AI outfit — is the union of two private companies. But there are other ways, too, that the $1.25tn tie-up epitomises the way the rise of Big Tech has turned traditional corporate finance on its head. Here are some of the takeaways from Musk’s audacious big deal.
1) Everything goes with AI
Musk reckons SpaceX and xAI are a logical pairing: the former will launch data centres into space, which the latter will use to brew leading-edge AI. The logic checks out. But such thinking could be used to merge xAI with anything, because every industry, from cars and supermarkets to medicines and banking, is also betting on AI to soup up its profit. Why not fuse xAI with Tesla? Or Walmart? Following SpaceX’s blueprint, AI may now be a skeleton key that unlocks all kinds of deals in apparently unrelated industries.
2) Market capitalisations mislead
SpaceX was valued at $350bn just a year ago, and $800bn last month. Now Musk pegs it at $1tn, and the lossmaking xAI at $250bn. Yet in public markets, too, company valuations increasingly bear scant resemblance to underlying profitability. Tesla is valued at just over $1tn despite having earnings of just $3.8bn last year. For smaller companies, mergers and acquisitions would be a useful benchmark, but when market capitalisations reach into the trillions, making takeovers implausible, momentum and chutzpah rule.
3) Investing is a spectator sport
As the controlling shareholder at SpaceX, what Musk says mostly goes. But shareholders are remarkably willing to follow even leaders who don’t wield supreme power. The SpaceX boss controls Tesla, for example, without having cornered its shares or votes. Musk is not alone in wanting his own way. Innovators reckon shareholder democracy is a brake on value, and shareholders in fast-growing companies show few signs of disagreeing.
4) Tech has powerful supporters
SpaceX, assuming it goes public, will be on course to join an S&P 500 whose value is at present more than 40 per cent made up of tech stocks. The interlinkages, mutual patronages and circular investments between companies mean each has an incentive to prevent the others failing. And with the probable next chair of the US Federal Reserve hinting that he’s counting on AI to usher in an age of low inflation, it’s clear nobody important can afford for SpaceX-xAI and its cohort to come unstuck.
5) Earth is old hat
SpaceX and xAI are not the only ones trying to escape earthly limitations. Deep-sea mining — with its promise of important deposits of critical minerals — attracted the attention of US President Donald Trump earlier this year.
There is genuinely a solid case for putting data centres in space: the sun, after all, is a huge free source of power. Space Solar, a UK start-up, reckons it might be able to generate electricity in space for $30 per megawatt hour, roughly a fifth of what data centres in the US pay for power. And since regulation up there is hazy, rent non-existent and the externalities of filling space with heat-generating machinery mostly unknown, it’s the perfect playground for libertarian billionaires. Finance is going to the moon.