Musk's "Century Merger": A One-sided Blood Transfusion for xAI

``` Musk Merges SpaceX with AI Startup xAI, Claims to Build "Space Data Centers." However, this vision will take at least two to three years to realize, and for the just three-year-old xAI, the most urgent need right now is just one thing: cash. The deal was registered in Nevada on February 2. SpaceX valued xAI at $250 billion and itself at $1.5 trillion. According to sources, SpaceX CFO Bret Johnsen promised in a Monday investor call with about 100 investors that this deal will not delay SpaceX's planned IPO this summer or fall. The company is seeking to raise $50 billion at a valuation of up to $1.5 trillion. According to The Information, xAI burned about $9.5 billion in cash in the first nine months of 2025, with only about $210 million in revenue over the same period, far behind OpenAI and Anthropic. The company just completed a $20 billion funding round in January, and Tesla disclosed a $2 billion investment in xAI last week. By contrast, SpaceX generated $1 to $2 billion in free cash flow last year. Some SpaceX investors’ immediate reaction to the deal was not upbeat. Telecom company EchoStar, holding a large stake in SpaceX, has seen its share price fall nearly 5% since news of the deal talks emerged last Thursday. Michael Sobel, co-founder of private equity firm Scenic Management, said, "SpaceX shareholders believe the story the company tells after the merger needs more explanation." A $1 Billion-Per-Month Cash Burn Black Hole xAI’s finances highlight the cash burn speed of AI development. In the first nine months of 2025, the company burned cash at a rate of over $1 billion per month, mostly for purchasing high-end chips and building powerful data centers to run and train AI models. Revenue over the same period was only about $210 million, far behind competitors. In January, xAI completed a $20 billion financing round at a valuation of about $230 billion. By comparison, OpenAI was valued at $500 billion in October last year and is reportedly seeking to raise its valuation to about $750 billion in the next funding round. Anthropic signed an intent-to-raise financing round at a $350 billion valuation this month. Last week, Tesla revealed it sold $430 million worth of Megapack large backup batteries to xAI in 2025, accounting for about 3.4% of its annual energy business revenue. These batteries power xAI’s data infrastructure built around Memphis, Tennessee. Tesla also said it invested $2 billion in xAI as part of xAI's latest funding round. SpaceX IPO Ambitions Complicated SpaceX, founded nearly 25 years ago, only began generating substantial cash flow last year. The company told investors it realized $1 to $2 billion in free cash flow last year, thanks to rapid growth in the Starlink satellite internet business. Revenue grew to about $16 billion, with EBITDA of about $8 billion. In recent weeks, large fund managers and investment bankers have flown to Hawthorne, California, to meet with SpaceX executives and have been impressed by the company’s dominance in rocket launches and Starlink’s industry-leading position. Johnsen told investors the company has already negotiated with major investors for most of the $50 billion to be raised in the IPO. But acquiring xAI may complicate the story. xAI not only burns money at $1 billion per month, it has also recently faced AI development issues. According to sources, Musk has been frustrated in recent weeks by delays in the new Grok AI model, an issue not unlike those faced by other AI companies. Tim Farrar, president of satellite and telecommunications industry research firm TMF Associates, said: "People are pouring tens of billions into AI companies now, but in six or 12 months, they may change their minds. You can get the money now, but that may not always be the case." "Space Data Center" Faces Intense Skepticism In the blog post announcing Monday’s deal, Musk said the main reason for merging SpaceX and xAI is to more efficiently build "space data centers." He estimated that "within 2 to 3 years, the lowest-cost way to generate AI compute will be in space." The potential of space data centers faces intense skepticism. But, according to sources, after two successful Starship launches last fall, Musk became more determined about the possibility of launching orbital data centers. Starship is SpaceX's largest rocket ever. Ian Cinnamon, CEO of satellite manufacturer Apex, said: "A year ago, nobody was even talking about this." He sees this potential business line as a way for SpaceX to fund sending more large rockets to space, just as Starlink satellites fueled investment in SpaceX’s smaller Falcon 9 rockets. Brett Winton of Ark Invest said the xAI merger and space data center plan increase the risk of making Starship fully reusable. Although both stages of Starship are designed for reusability, SpaceX has so far only demonstrated reusability on the rocket’s first stage (the booster). "Given the launch volume they need, they really need to make the full Starship reusable," he said. Last week, SpaceX submitted ambitious plans to the FCC to launch up to 1 million satellites into space—a number far exceeding the current count—as part of a large-scale orbital data center. But the deal adds to SpaceX’s already crowded to-do list, and Starship still needs to fulfill its multibillion-dollar NASA lunar landing contract by 2028. Rapid Moves in a Loosened Regulatory Climate Besides a friendly capital market, Musk has also benefited from a highly favorable regulatory environment. The Trump administration is rolling back environmental, antitrust, and other regulations. Monday’s blog post did not mention any regulatory approval requirements, and Musk implied the deal was done in the very first sentence of the statement. Especially important for Musk, his business partner, former SpaceX investor, and customer Jared Isaacman recently became NASA administrator. Isaacman supports speeding up the expansion of NASA’s contracts with SpaceX. At the FCC, Chairman Brendan Carr has been an active supporter of SpaceX Starlink. The tech M&A landscape has also changed dramatically. The FTC is now led by Trump appointee Andrew Ferguson, rather than Lina Khan, who was known for blocking big tech deals during her time under Biden. In the AI field, Musk’s old friend David Sacks serves as the White House crypto and AI czar, pushing the federal government to limit regulation on AI labs. In December last year, President Trump signed an executive order creating a single regulatory framework for AI, weakening the power of blue states such as California and New York to implement their own rules. The order stated: "To win, American AI companies must innovate freely without cumbersome regulation." While Musk has three more years of the second Trump administration's term, he may have only a short window of unified Republican control, as the midterm elections will take place in nine months, and the president’s approval ratings are declining. Musk's Related-Party Deal Map Musk moves quickly and may have the support of a group of loyal investors who have long supported his strategy of resource-mixing and corporate mergers. In 2016, Tesla acquired SolarCity for $2.6 billion, rescuing it from impending liquidity crisis. Before the merger, Musk was the main investor and chairman of this solar business, which was founded by his cousins. During the leveraged buyout of Twitter (later X) in 2022, Musk sold billions in Tesla stock to finance the deal. He also drew dozens of employees, and even some executives, from SpaceX, Tesla, and tunnel company The Boring Co., to help him take over and overhaul the platform. At Tesla, Musk has conducted multiple related-party transactions with SpaceX and more recently xAI. For example, Tesla sold SpaceX car parts and solar equipment, and the automaker also relied on SpaceX to develop special alloys for the Cybertruck. According to Bloomberg, in July 2025, SpaceX also invested $2 billion into xAI. Farrar said the biggest Musk fans and institutional investors are willing to support these complex networks of deals, or the "Musk economy," partly because they understand the symbolism of keeping his entire portfolio strong. "The whole thing relies on confidence in him," Farrar said. "If any part of his empire collapses or goes bankrupt, the whole thing would be weakened." Risk Warning and Disclaimer The market has risks, and investments should be made cautiously. This article does not constitute personal investment advice and has not taken into account individual users’ special investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article fit their specific circumstances. Investing accordingly is at your own risk. ```