Musk’s xAI deal offers unexpected win for X investors

Elon Musk just acquired the social network formerly known as Twitter for the second time in three years.

Musk, the world’s richest person, on March 28 used his artificial intelligence startup, xAI, to purchase his social media platform in an all-stock deal that values X at $33 billion, not including debt.

The new joint entity, which will be called XAI Holdings, has a value of more than $100 billion, again excluding debt, Bloomberg News reported.

The deal was a surprise, but not necessarily shocking: The two businesses have worked together closely since xAI’s founding in 2023, including on data licensing and product distribution for xAI’s chatbot, Grok. They also share many of the same investors, and in some cases, employees even share office space in Palo Alto, California.

The transaction valued xAI at $80 billion, Musk said — a jump from a valuation of about $50 billion in November, the last time the company raised money from investors. The $33 billion equity value of X in the deal is about the same as its valuation in a recently closed funding round, and also close to Musk’s take-private price in 2022, which also counted $12 billion in debt.

Musk’s decision to merge the businesses is a win for X investors, who have endured more than two years of uncertainty since his takeover as advertisers and users abandoned the social network. The company has struggled to grow its advertising business or generate meaningful revenue from subscriptions. For most of that time, investor Fidelity had marked down its equity stake in X between 60 per cent and 70 per cent.

The combination with xAI means X investors now own shares in a nascent artificial intelligence startup with much more perceived upside.

“XAI and X’s futures are intertwined,” Musk posted on X in announcing the transaction. “Today, we officially take the step to combine the data, models, compute, distribution and talent. This combination will unlock immense potential by blending xAI’s advanced AI capability and expertise with X’s massive reach.”

But the deal also raises a number of questions, including the most basic one: Was this deal actually necessary? Here are some of the most pressing unknowns about the new arrangement.

Why do this deal?

Posts from Musk and other X or xAI shareholders this week praised the merger, citing the ways both companies will help one another. People have mostly focused on the proprietary dataset that xAI will have via X and its billions of user posts. It also gives xAI total control over that dataset and means the company can refuse to license that data to any other artificial intelligence competitors. X, meanwhile, can help xAI distribute its Grok chatbot and other products to millions of consumers.

The problem with this logic, though, is that all these purported benefits were seemingly already in place. XAI has been using the social network’s data to train Grok for well over a year, and Musk has been pitching Grok to users on X — and selling advanced versions of the product to X users via its premium subscription. Given Musk’s role running both companies, there should have been no reason to worry any of those benefits were in jeopardy, or that X would suddenly start working with an xAI competitor.

What is the real value of X and xAI?

Musk says the deal values X at $33 billion, not including $12 billion in debt. He also said it values xAI at $80 billion. This is a deal in which Musk is buying one of his private companies with another one of his private companies, both of which were represented by the same bank, Morgan Stanley. This unique arrangement means that Musk could theoretically assign any value he wants to X and xAI, so long as none of the investors revolted.

It doesn’t seem like a coincidence that xAI purchased X for roughly the same amount Musk paid for it in October 2022, which means that X investors are simply shifting their stakes from one company to another. It’s also interesting that xAI’s most recent valuation before the deal was about $50 billion, but now the company is valued at $80 billion even though there was no new financing involved in the transaction, according to a person familiar with the arrangement. Musk, it seems, increased the value as part of the acquisition.

A spokesperson for X declined to comment on details of the deal when it was announced.

Who will run XAI Holdings?

One of the deal’s biggest cheerleaders last week was X Chief Executive Officer Linda Yaccarino, who posted, “the future could not be brighter.” It’s less clear what the merger means for her future atop the company. Musk didn’t announce any kind of corporate structure for XAI Holdings, and it’s not known who will run the new joint entity, though Musk himself seems like the most likely choice. It’s possible Yaccarino stays on to continue running X as a business unit within the new company, but mergers are often messy and can require significant role changes. We’ll have to wait and see how much more tightly Musk merges the operations of X and xAI to better understand how things will be run.

How will this change X’s social networking product?

It’s not immediately known how this acquisition will impact X, if at all, in part because the two businesses have long been deeply intertwined. Grok is already available on X, for example, and users can pay extra for premium features associated with the AI chatbot. It seems likely there will be even more Grok integration into X as time goes on, including tools like photo editing or a voice assistant. Still, this was already likely to happen given the direction Musk was headed with the two businesses.

Will other social networks get acquired now, too?

AI companies have been thirsty for any and all proprietary data sets as they train their AI systems and look for ways to differentiate their chatbots from rivals. Reddit Inc., for example, has licensed its trove of user content to Alphabet Inc.’s Google and makes hundreds of millions of dollars per year on AI licensing. It’s possible that other AI companies like OpenAI, Anthropic and Perplexity AI will look into acquiring other social networks to secure their own unique datasets, according to Bloomberg Intelligence analyst Mandeep Singh. Perplexity did propose a merger with TikTok US as a solution to keeping the ByteDance Ltd.-owned service in America.

“We believe smaller social-media players will actively seek alliances with providers of large language models, given the premium valuation for xAI at $80 billion, which is more than the combined market values of Snap, Pinterest and Reddit,” Singh wrote.