SpaceX takes control of triangular merger xAI: tax, financial, legal advantages all covered, IPO more stable

According to sources familiar with the matter, Elon Musk used a common two-step merger process in the acquisition of xAI by SpaceX, which has dual advantages: it avoids repaying billions of dollars in debt and provides tax benefits for shareholders. This also protects SpaceX from any legal liabilities from xAI. The deal announced on Monday created a company valued at $1.25 trillion, and plans to go public later this year to fund Musk's ambition of sending data centers into space. Sources said that Musk did not merge the two companies into one and fully integrate their operations, but instead decided to keep X, a social media platform, and develop xAI's Grok chat system and Siasun Robot&Automation as a wholly-owned subsidiary of SpaceX. M&A lawyers stated that this method, known as a "triangular merger" in corporate mergers, is a common structure in public company transactions aimed at improving tax efficiency and limiting legal risks. As a subsidiary, xAI's debt, legal liabilities, and contracts remain separate from the parent company, allowing xAI to operate independently while helping SpaceX to avoid any investigations and lawsuits that X may face. The social media platform is currently under investigation in Europe for allegedly spreading sexually explicit deepfake images of real women and children. Last month, X stated that it had taken measures to "prevent @Grok accounts on X from allowing editing of real-life images of individuals in revealing attire such as bikinis worldwide" and is "committed to making X a safe platform for everyone." Gary Simon, corporate lawyer from Hughes Hubbard & Reed, said, "In acquisitions where the target company ultimately becomes a subsidiary of the buyer, any debts of the target company prior to that do not necessarily become debts of the parent company." He added, "One key reason for acquiring new businesses through a subsidiary is to protect shareholders from legal liability through corporate isolation." Tax-Free Transaction Financially, this structure makes more sense. The merger was structured as a tax-free reorganization, allowing xAI shareholders to defer the tax time on the SpaceX shares they received in the transaction until they sell the shares. xAI was valued at $250 billion in this transaction, with each xAI share converting to 0.1433 shares of SpaceX stock. Sources said that the multi-step transaction through intermediary companies established in Nevada allowed the satellite and rocket company to acquire xAI without triggering the smaller company's debt covenants, thereby avoiding the need to repay bondholders during the merger. The total debt size of xAI during the merger is currently unknown. In 2025, the artificial intelligence company inherited $12 billion in debt when it acquired the social media platform X, and subsequently took on at least $5 billion in debt from the merger. In a traditional merger, SpaceX may also not be required to repay xAI's debt because it may qualify as a "permitted holder" under the debt contract's terms. A permitted holder acquisition does not trigger the "change in control" clause in the debt contract. No Change in Control Matt Woodruff, senior analyst at CreditSights, said, "The definition of a 'permitted holder' includes major investors and their affiliates, which clearly refers to Musk," "This likely means SpaceX is considered an affiliate, so no change in control is needed." Analysts stated that this structure ensures that the acquisition does not constitute a change in control, thus preventing the company from refinancing xAI's debt at high interest rates. "With the current structure, there is certainly no real likelihood of default being triggered," Woodruff said. Due to SpaceX's stronger financial position, the prices of these bonds have increased. xAI issued $3 billion in five-year bonds last summer with a yield of 12.5%, trading at 107% of face value before the merger. After Reuters first reported on the transaction last week, the price rose to 111, reaching 113.5 by Wednesday. According to LSEG data, this all-stock transaction was completed this week, with xAI valued at $250 billion and SpaceX at $1 trillion, making it the largest merger in history. IPO Plan Unaffected It is expected that this transaction will not significantly delay SpaceX's highly anticipated stock market debut, scheduled for later this year, and may even have no impact at all. According to sources familiar with the meetings, SpaceX CFO Brett Johnson did not mention this during his invitation to top Wall Street bankers to the company's massive headquarters campus in Hawthorne, California last month. Based on recent financial data from SpaceX, some banks estimate that the company can raise over $500 billion with a valuation of over $1.5 trillion. Sources said that Johnson and SpaceX's investor relations team briefly introduced the potentially largest IPO in the world to the bankers, possibly scheduled around Musk's 55th birthday on June 28. Three sources familiar with the meetings said that executives from major Wall Street banks attended and presented proposals on how to guide the company through the upcoming steps. Two sources who requested anonymity to discuss the private meeting said that the company informed them that some winners of the so-called "bake-off" would be selected this month. Large acquisitions prior to an IPO can sometimes trigger additional accounting and regulatory hurdles, especially if the acquired business is considered "significant" under U.S. securities rules. Significant Subsidiaries However, securities lawyers stated that if xAI falls below the Securities and Exchange Commission (SEC) threshold of 20% importance based on assets or income, this merger may avoid these obstacles, reducing the risk of delays. Simon, a lawyer from Hughes Hubbard & Reed, said, "If it fails the 'significant subsidiary' test, SpaceX typically does not need to include xAI's financial data in the IPO filings submitted to the SEC." Some investors remain cautious about any added complexity this close to an IPO. SpaceX's business already includes rocket launches, satellite broadband through Starlink, and U.S. defense contracts. The addition of a generative AI business and a social media platform (Musk has expressed interest in expanding it into the financial services sector) may increase the complexity of valuing the company. "How do you value a company like this when there are no direct competitors?" said Jurgen Pamarl, CEO of Fortuna Investments. The venture capital firm holds shares in SpaceX, and he referred to the newly merged entity as a "corporate conglomerate." However, Pamarl stated that many investors are willing to overlook these challenges because of Musk himself. "People are very willing to bet on his (Musk's) future," Pamarl said, "His execution capabilities are clearly world-class. Just based on that, it's clear that many people will support this vertically integrated group."