Elon Musk sells X to his AI startup xAI

San Francisco: Elon Musk said Friday that he had sold X, his social media company, to xAI, his artificial intelligence startup, in an unusual arrangement that shows the financial manoeuvring inside the business empire of the world’s richest man.

The all-stock deal valued xAI at $80 billion and X at $33 billion, Musk said. X’s price was down from the $44 billion that Musk paid for the social media company in 2022, but higher than the $12 billion valuation that some of X’s investors have recently assigned it. The last valuation of xAI, at a December fundraising round, was about $40 billion.

Both companies are privately held and already share significant resources, such as engineers. A chatbot called Grok, made by xAI, is trained on data posted by X users and is available on X. Last month, bankers for X told investors that some of the social media company’s revenue came from xAI.

Musk wrote in his post that “xAI and X’s futures are intertwined.”

“Today,” he said, “we officially take the step to combine the data, models, compute, distribution and talent.” He added, “The combined company will deliver smarter, more meaningful experiences to billions of people while staying true to our core mission of seeking truth and advancing knowledge.”

The deal shows how Musk can play with different parts of his business empire. In this case, he folded a company that had been losing value, X, into one that had been gaining value, xAI. Musk previously made a similar maneuver in 2016, when he used stock of his electric car company Tesla to buy SolarCity, a clean energy company where he was the largest shareholder and his cousin, Lyndon Rive, was CEO.

While Tesla is a publicly traded company that must disclose its finances and other information to shareholders, most of Musk’s companies are privately held and are more opaque. Those include rocket manufacturer SpaceX, tunneling startup The Boring Co. and brain interface company Neuralink. Musk often moves resources and employees between his companies, defying traditional business norms and operating his various companies as one big Musk enterprise.

Linda Yaccarino, X’s CEO, wrote on X of the deal, “The future could not be brighter.” X declined to comment.

Other executives who control multiple companies have capitalized on that position by creating cross-pollinating empires, experts said. For years, Eddie Lampert, the hedge fund billionaire, used the valuable real estate he owned to prop up Sears, his struggling retail enterprise.

But even with that precedent, Musk’s version stands out, said Andrew Verstein, a professor at UCLA School of Law.

“The Elon version really does seem to say: I have a company — maybe not bankrupt — just not my crown jewel,” said Verstein. “I will buy it in a way that makes it look like a success using one of my other companies.”

X and xAI have been on different trajectories. X is much more widely known, and Musk has used it as a battering ram to advance his political views, campaigning on the platform for President Donald Trump and whipping support for his governmental cost-cutting effort, known as the Department of Government Efficiency.

But X’s financial outlook has declined since Musk bought the company. Most of the social media site’s revenue comes from advertising, but brands have been wary to spend on X, as Musk has courted controversy and thrown out the company’s content moderation rules in favor of a more anything-goes atmosphere.

X’s valuation plummeted to $12 billion in December, according to Fidelity, one of the investors that participated in Musk’s acquisition.

While some advertisers have recently returned to X, hoping to curry favor as Musk became a close adviser to Trump, the company has yet to regain financial stability. In January, Musk told employees that revenue was “unimpressive” and the company was “barely breaking even.”

This month, X continued to struggle to hit its revenue targets, according to an internal email seen by The New York Times. As of March 3, X had served $91 million of ads this year, the message said, well below its first-quarter target of $153 million.

“The time to sprint to the finish line is now,” the email said, urging salespeople to pick up the pace.

In contrast, xAI has grown rapidly. The AI startup raised $6 billion from investors in December, valuing it at $35 billion to $40 billion, up from $24 billion in May 2024.

The company has also put down roots in Memphis, Tennessee, where Musk has built what he says will be the world’s largest supercomputer.

Musk started xAI in 2023 to compete with OpenAI, the AI lab that he co-founded and that makes ChatGPT. Musk left OpenAI in 2018 and has since sued the company and offered to acquire it, arguing that only he can responsibly create AI that would not destroy humanity.

(The New York Times sued OpenAI and its partner, Microsoft, in December 2023 for copyright infringement of news content related to AI systems. OpenAI and Microsoft have denied the claims.)

Last month, X’s bankers sold off much of the company’s debt, a task that they had viewed as nearly impossible before Trump’s inauguration. Investors who bought the debt were told that X’s revenue had improved, in part because xAI was paying X to license its data, essentially funneling funds from one of Musk’s companies to the other.

Given the symbiotic relationship between X and xAI, investors in the companies may welcome the transaction, said Eric Talley, a professor at Columbia Law School.

“The cook was possibly in a position to play fast and loose, stealing ingredients from one and giving them to the other and vice versa,” Talley said. “You didn’t know whether you were on the giving end or the receiving end of that.”

The deal, in some ways, solves that problem. “Now that everything is together in the same pot, it’s all just being stirred together,” Talley said.

But the satisfaction of investors will depend on how many shares in the new company X investors get in exchange for their stakes.

“If it turns out the terms of exchange are such that they really stacked the deck in favor of one versus the other, you probably feel like you got the shaft,” Talley said.

The news of Friday’s deal was celebrated inside X.

“This is an extremely exciting step for all of us,” Yaccarino wrote in an email to employees that was seen by the Times.