Elon Musk structured SpaceX’s acquisition of xAI using a widely used two-step merger approach that delivered multiple financial, tax and legal advantages, according to people familiar with the deal. The structure allowed the transaction to avoid triggering billions of dollars in debt repayments, offered tax deferral benefits to shareholders, and shielded SpaceX from potential legal exposure linked to xAI’s operations.
The deal, announced on Monday, resulted in a combined valuation of approximately $1.25 trillion and supports Musk’s longer-term goal of taking the company public later this year to help fund ambitious projects, including space-based data centers.
Rather than fully merging the two businesses, Musk opted to keep xAI as a wholly owned subsidiary of SpaceX, the sources said. xAI operates the social media platform X and developed the Grok chatbot. This structure allows xAI to continue operating independently while remaining under SpaceX’s ownership umbrella.
The transaction follows a model known in mergers and acquisitions as a triangular merger. Lawyers say this approach is commonly used in large public-company deals because it is tax-efficient and limits legal risk.
By keeping xAI as a subsidiary, its debt obligations, contracts and legal liabilities remain separate from SpaceX. This separation helps insulate SpaceX from regulatory probes and lawsuits involving X. European authorities are currently investigating allegations that Grok-generated content included sexualized deepfake images involving real individuals.
X said last month it had implemented safeguards to prevent Grok from editing images of real people in revealing clothing and reiterated its commitment to maintaining platform safety.
“In an acquisition where the target becomes a subsidiary, the parent company does not automatically inherit prior liabilities,” said Gary Simon, a corporate attorney at Hughes Hubbard & Reed. “Limiting shareholder liability is a key reason companies use this structure.”
SpaceX and xAI declined to comment.
Tax-free structure avoids debt repayment
From a financial standpoint, the merger was also structured as a tax-free reorganization. This allows xAI shareholders to defer taxes on the SpaceX shares they received until those shares are sold. xAI was valued at $250 billion, with each share converting into 0.1433 shares of SpaceX, according to earlier reporting.
The deal was executed through two intermediary entities established in Nevada. This multi-step approach prevented the acquisition from triggering change-of-control clauses in xAI’s debt agreements, avoiding the need to immediately repay bondholders.
xAI inherited roughly $12 billion in debt when it acquired X in 2025 and has taken on at least another $5 billion since. While SpaceX may have qualified as a “permitted holder” under some debt agreements, the structure ensured that no refinancing was required while interest rates remain elevated.
“The permitted holder definition includes Musk and his affiliates,” said Matt Woodruff, senior analyst at CreditSights. “That likely means SpaceX would not trigger a change-of-control event.”
Bond markets responded positively. xAI’s five-year bonds, issued last summer with a 12.5% yield, rose from 107 cents on the dollar before the deal to more than 113 cents afterward.
The all-stock transaction, completed this week, values SpaceX at $1 trillion and xAI at $250 billion, making it the largest merger ever recorded, according to LSEG data.
IPO timeline remains intact
The acquisition is not expected to materially delay SpaceX’s long-anticipated initial public offering. Sources said SpaceX CFO Bret Johnsen did not reference the deal during meetings last month with Wall Street banks at the company’s headquarters in California.
Banks reviewing SpaceX’s latest financials have estimated the company could raise more than $50 billion at a valuation exceeding $1.5 trillion. Executives were reportedly briefed on plans for what could become the largest IPO in history, potentially timed around Musk’s birthday in late June.
While major acquisitions ahead of an IPO can sometimes create regulatory or accounting hurdles, securities lawyers say the deal may avoid those risks if xAI does not exceed the Securities and Exchange Commission’s 20% “significant subsidiary” threshold.
“If it doesn’t meet that test, SpaceX likely would not need to include xAI’s financials in its IPO filings,” Simon said.
Investor concerns and long-term confidence
Some investors remain cautious about the added complexity of combining aerospace, satellite broadband, defense contracts, artificial intelligence and social media under one corporate structure.
“How do you value a company with no real comparable peers?” asked Justus Parmar, CEO of Fortuna Investments, which holds SpaceX equity, describing the group as a conglomerate.
Still, Parmar said many investors are willing to overlook those concerns because of Musk himself.
“People are willing to buy into his vision,” he said. “His execution track record is world-class, and that alone creates confidence in the company’s vertical integration strategy.”
