The X - xAI Merger

After reports that Shadow President Elon Musk would be stepping back from his Special Government Employee role in the federal government, he has been kind of quiet. While the US DOGE Service that the administration of cult leader, convicted felon, and failed President Donald Trump insists that Musk does not lead, despite all evidence to the contrary, continues its rampage through the federal government, Musk has not recently been in the spotlight. He has popped up only to criticize Peter Navarro, Trump's senior counselor for trade and manufacturing. That does not mean that Musk has not kept busy. For instance, he recently concluded a multibillion dollar merger involving his artificial intelligence company, xAI. At the same time, Musk also completed a merger of another of his companies, X, his social media network that was previously known as Twitter. As you may have divined, Musk's two companies merged with each other. This involved a multistep process that provides an interesting window into how it is possible to create wealth out of thin air. The merger also raises questions about Musk's future plans and whether they might involve the highly sensitive government data to which DOGE has had access.

Let's start with some numbers. When Musk began showing interest in what was then called Twitter, its value was in the region of $22 billion or so. Because Musk views himself as somewhat of a comedian and has a particular attachment to weed jokes, he decided to offer $54.20 per share — 420, ha ha — coming out to $44 billion. Musk soon realized that funny or not, paying twice the price for a company didn't make a lot of sense, and he tried to back out of the deal. However, he eventually found that he was stuck with it. After Musk completed his Twitter acquisition, changing the name to X, its value began to drop precipitously. In January of this year, Fidelity — who had helped take Twitter private when Musk bought it — estimated that it had an equity value of around $10 billion. Moreover, X was losing money rapidly. It is in times like this that it pays to have rich friends, a penchant for deception, and a complete lack of shame.

According to Forbes, a group of investors including Sequoia Capital and Andreessen Horowitz had expressed interest in investing in xAI this past February. Instead, in March, those companies, along with 8VC, Fidelity, 1789 Capital, Goanna Capital, and Bossa Invest, put their money into X. The interesting part of this investment is that it was made with X being valued at $44 billion, or Musk's original purchase price. How did a company recently valued at $10 billion suddenly become worth $44 billion? I can only speculate about how that happened, but I am fairly certain that it was not because X had somehow become worth that amount. Rather, this appears to have been an orchestrated maneuver to artificially inflate the value of X and a backdoor way of investing in xAI. By increasing X's value, Musk and his original X investors would be made whole, at least on paper. In April, when Musk announced the merger of his two companies, those investors were compensated with xAI shares. Musk could say that his Twitter investors had not lost money.

Musk used the merger to further inflate the X and xAI balloons. The merger valued X at $45 billion with $12 billion of debt, which xAI also acquired. xAI, which in May 2024 was valued at $24 billion, was now valued at $80 billion. The combined company, called xAI Holdings, was valued at $113 billion. It seems fairly certain that those who invested in X at highly inflated prices in March knew exactly what would happen in April. Forbes quotes one of the investors as saying that the investors were "well aware that X and xAI would merge at some point". These investors essentially bailed out Musk from X, rescuing his ego if nothing else, on the way to becoming xAI investors. But why were they so eager to invest in xAI? That is not clear and is where this post must turn to speculation.

The most likely answer to why investors would be interested in xAI is Musk's role in the government. As DOGE staffers have raged through the federal government, firing people willy-nilly, cutting funding, and shuttering entire agencies, they have fixated on accessing and collecting government data. This includes the most sensitive data in the government's hands, such as social security records and tax information. xAI may have two interests in this data. The most obvious would be using it to train AI models. There is no evidence confirming that DOGE or xAI have taken this step, but there are some tantalizing clues. The Washington Post reported that DOGE had uploaded sensitive data from the Department of Education to Microsoft's Azure cloud computing service, from where they had fed it to an AI system. Azure is able to work with several AI systems, and the particular system in this case was not identified. Given the close connection between DOGE and Musk, the possibility that Musk's tools may have been involved is reasonable. If xAI were able to train its models with government data, it would give an exponential advantage to the company, placing it far ahead of its AI rivals.

The second interest xAI might have in government data is in providing tools or services to manage it. DOGE representatives and Musk have been very vocal about their intentions to widely use AI within the government, hoping that it can replace many of the workers who have been dismissed and improve efficiency. Musk has long benefitted from government money. Government subsidies helped keep Tesla alive, and SpaceX survives primarily on government contracts. If xAI were to find a gold mine supplying the government with goods and services, that would simply follow a pattern very familiar to Musk. Moreover, Musk has not been shy about gaining new government contracts at a time when he and DOGE are busily cutting funding to almost everyone else. SpaceX recently was awarded a $5.9 billion deal, making it the Pentagon's leading launch provider. SpaceX also won additional money when the launch of a GPS satellite was reassigned from United Launch Alliance to SpaceX. Recently, there was an attempt by SpaceX's Starlink service to take over a FAA contract from Verizon. There was also a mysterious potential purchase of armored Teslas by the Department of State. Therefore, the idea that xAI might have the inside track to supply the government with AI tools and services is not far-fetched.

Musk overpaid for Twitter but saved his ego by exploiting the interest of investors in xAI to artificially boost the renamed social media network's value before merging it with xAI. The interest of those investors in xAI is not clear, but likely due to Musk's association with Trump and the government. Using Musk's personal connections as well as DOGE's infiltration of the government, xAI is likely seeking to either use government data for itself or to establish a future role for its tools and services within the government. Either or both of these possibilities would create significant value for xAI and justify the recent investment. It is interesting that Musk, who routinely complains about government officials profiting from their positions, is so blatantly using his own role in government to boost the values of his own companies.