According to informed sources, Elon Musk utilized a common two-step merger procedure in SpaceX's acquisition of xAI, offering dual advantages: avoiding the repayment of billions in debt while providing shareholders with tax benefits. This approach also shields SpaceX from potential legal liabilities associated with xAI. Announced on Monday, the transaction created a company valued at $1.25 trillion, with plans for a public listing later this year to fund Musk's ambition of launching data centers into space.
Sources indicate that instead of fully integrating the two companies, Musk decided to maintain xAI—which operates the social media platform X and developed the Grok chatbot—as a wholly-owned subsidiary of SpaceX. Merger attorneys noted that this method, known as a "triangular merger" in corporate acquisitions, is a commonly used structure in public company transactions designed to enhance tax efficiency and limit legal exposure.
As a subsidiary, xAI's debts, legal obligations, and contracts remain separate from the parent company, allowing xAI to operate independently while insulating SpaceX from potential investigations and lawsuits facing X. The social media platform is currently under investigation in Europe over allegations that Grok disseminated sexualized deepfake images of real women and children. Last month, X stated it had taken measures to prevent the editing of images of real individuals in revealing clothing and is committed to making X a safe platform for everyone.
Gary Simon, a corporate attorney at Hughes Hubbard & Reed, explained, "In acquisitions where the target becomes a subsidiary of the buyer, the target's prior debts do not necessarily become obligations of the parent company." He added that a key reason for acquiring a new business through a subsidiary is to protect shareholders via corporate liability isolation.
From a financial perspective, the structure is also advantageous. The merger was structured as a tax-free reorganization, permitting xAI shareholders to defer taxes on the SpaceX shares received until they are sold. xAI was valued at $250 billion in the transaction, with each xAI share converting to 0.1433 shares of SpaceX stock.
The multi-step transaction, conducted through two intermediary entities incorporated in Nevada, enabled the satellite and rocket company to acquire xAI without triggering debt covenants of the smaller company, thereby avoiding the need to repay bondholders at the time of the merger. The total debt load of xAI at the time of the merger could not be confirmed. In 2025, the AI company assumed $12 billion in debt from its acquisition of social media platform X; since then, the combined entity has taken on at least an additional $5 billion in debt.
Even under a traditional merger, SpaceX might not have been required to repay xAI's debt, as it could qualify as a "permitted holder." Acquisitions by permitted holders do not trigger "change of control" clauses in debt agreements. Matt Woodruff, senior analyst at CreditSights, stated, "The definition of 'permitted holder' includes major investors and their affiliates, which clearly refers to Musk. This likely means SpaceX is considered an affiliate, so a change of control isn't triggered."
Analysts noted that this structure entirely ensures the acquisition does not constitute a change of control, sparing the company from having to refinance xAI's debt amid elevated interest rates. Woodruff commented, "Given how it's structured, there's really no realistic possibility of triggering a default."
Following the transaction, xAI's bonds have traded higher due to SpaceX's stronger financial position. The AI firm issued $3 billion in five-year bonds last summer with a 12.5% yield, which traded at 107% of face value before the merger. After Reuters first reported the deal last week, prices rose to 111, reaching 113.5 by Wednesday.
According to LSEG data, the all-stock transaction was completed this week, valuing xAI at $250 billion and SpaceX at $1 trillion, making it the largest merger and acquisition deal in history.
The acquisition is not expected to significantly delay—or potentially not affect at all—SpaceX's highly anticipated stock market debut planned for later this year. Last month, when SpaceX CFO Bret Johnsen invited top Wall Street bankers to the company's extensive headquarters in Hawthorne, California, he did not mention the merger, according to five individuals familiar with the meeting.
Based on recent financial data, some banks estimate SpaceX could raise over $50 billion with a valuation exceeding $1.5 trillion. Johnsen and the investor relations team briefed bankers on what is expected to be the world's largest IPO, potentially timed around June 28, coinciding with Musk's 55th birthday. Executives from major Wall Street banks attended the meeting, presenting proposals on guiding the company through subsequent steps. Sources indicated that winners of the so-called "beauty contest" would be selected this month.
Large acquisitions preceding an IPO can sometimes introduce additional accounting and regulatory hurdles, particularly if the acquired business is deemed "significant" under U.S. securities rules. However, securities lawyers suggested that if xAI falls below the SEC's 20% significance threshold based on metrics like assets or revenue, the merger may avoid these obstacles, reducing the risk of delays.
Simon of Hughes Hubbard & Reed noted, "If it doesn't meet the 'significant subsidiary' test, SpaceX generally wouldn't need to include xAI's financials in its IPO filings with the SEC."
Some investors remain cautious about any complexities added so close to the IPO. SpaceX's operations already span rocket launches, satellite broadband via Starlink, and U.S. defense contracts. Incorporating a generative AI business and a social media platform—which Musk has expressed interest in expanding into financial services—could complicate the company's valuation.
"How do you value a company like this when there are no competitors?" asked Justus Parmar, CEO of Fortuna Investments, a venture capital firm holding SpaceX shares, who referred to the newly merged entity as a "conglomerate." Nevertheless, Parmar noted that many investors are willing to overlook these challenges because of Musk himself. "People are very willing to pay for his future," Parmar said. "His execution ability is clearly world-class. That alone will clearly make many people supportive of this vertically integrated conglomerate."