Elon Musk used a common two-step merger process in SpaceX’s purchase of xAI (X.AI) that had the dual benefit of avoiding the repayment of billions of dollars in debt while giving shareholders a tax advantage, Reuters reported, citing people familiar with the transaction. The deal also protects SpaceX from any legal liability from xAI.
The deal, announced on Monday, creates a $1.25 trillion company with plans to go public later this year to help finance Musk’s ambitions to put data centers in space.
Instead of combining the two companies into one and fully integrating operations, Musk decided to retain xAI, which runs social media platform X and created the Grok chatbot, as a wholly owned subsidiary of SpaceX, said the people, who asked not to be named because the details of the deal have not been publicly released.
The approach, known in corporate M&A as a triangular merger, is a commonly used structure in public-company transactions designed to be tax-efficient and limit legal exposure, M&A attorneys say.
As a subsidiary, xAI’s debt, legal liabilities, and contracts remain separate from the corporate parent, allowing xAI to run its operations independently while helping to insulate SpaceX from any investigations and litigation X may face.
Said Gary Simon, a corporate attorney at law firm Hughes Hubbard & Reed told Reuters: “In an acquisition where the target ends up as a subsidiary of the buyer, no prior liabilities of the target necessarily become liabilities of the parent.” He added that “corporate insulation of stockholders from liability is a key reason” to acquire the new business through a subsidiary.
Last week, Tesla (TSLA) said it will invest about $2B in the Grok chatbot maker, xAI (X.AI). Musk had said during Tesla’s earnings call that “We just had like a lot of investors ask us to do this as there’s a lot of investors or Tesla shareholders say like, we should invest in xAI.”