SpaceX plans to buy residences of neighbors affected by the noise from its data centers

The proposed merger between Elon Musk's companies, Tesla and SpaceX, is encountering complexities related to deal valuation, control of the combined entity, and regulatory requirements from both the United States and China. Although the combination could boost investment in artificial intelligence, the execution of the operation hinges on negotiations and shareholder approval.

Wall Street views this combination as a highly probable scenario, yet the path to an agreement involves conflicting interests. Tesla's industrial presence in China is particularly sensitive, given that SpaceX holds contracts related to American defense.

Tesla, valued at approximately $1.5 trillion (7.54 trillion Brazilian reais), may need to offer a premium for its shareholders to agree to exchange their shares for SpaceX stock. Analysts from RBC Capital Markets and JPMorgan suggest this premium could range from 20% to 35%, while other investors do not anticipate a significant premium, especially since some already hold shares in both companies.

The merger would allow for shared services and potentially increase funding opportunities for expensive projects. The companies are jointly developing the Terafab chip factory, and AI already accounts for over half of SpaceX's revenue. Expansion requires substantial investment, and the possibility of joint borrowing is seen as an advantage of this operation.

Nevertheless, not all projects underpinning the companies' valuations have reached commercial scale. Orbital data centers, robotaxis, and humanoid robots are still in the development phase and require further investment.

Currently, Musk controls about 85% of SpaceX votes through super-voting shares, compared to roughly 20% in Tesla. According to Reuters, he could concentrate around 57% of the votes in the combined company.

Another obstacle is the approval of Tesla shareholders. Musk has stated that the agreement must receive a majority of all shares, not just a majority of registered votes. In fact, uncounted shares could complicate the approval process.

There are also concerns regarding the governance of the operation, in which Musk would be involved on both sides of the negotiation. When Tesla acquired SolarCity in 2016, a Delaware court ruled that an independent committee should have been formed.

Tesla relies on China for vehicle production, while SpaceX develops military and intelligence systems for the US government. The merger could raise national security concerns in both countries, particularly regarding access to confidential data and technology. Beijing requires that data collected by Tesla's autonomous driving systems remain within China. One possible solution is to keep local operations separate, with barriers preventing information exchange with SpaceX.

China might leverage the negotiations to secure commitments regarding investments, production capacity, or access to strategic technologies. However, these demands could conflict with US restrictions concerning defense.

Among the alternatives discussed by analysts, none is definitive. The Shanghai factory accounts for over 50% of Tesla's global production, according to Yale Zhang, CEO of the consulting firm AutoForesight. The Chinese operation also generates part of the cash used to fund the manufacturer's future projects.

For Musk, the challenge will be reconciling shareholder demands with the constraints imposed by Washington and Beijing. Even if both companies share common technological goals, this does not guarantee the approval of the merger or the satisfaction of all parties' conditions.

Elon Musk stated that merging his two companies, SpaceX and Tesla, could be a 'good idea,' and announced that special committees have been formed to discuss such a merger. This statement led to an 8% rise in SpaceX shares during extended trading.

On Tuesday, SpaceX reported profits for the first time as a public company. Musk forecasts that by the end of 2027, the company's annual recurring revenue will reach between $500 billion and $1 trillion, driven by growing demand for its data center capacity amid the AI boom.

Previously, Musk had repeatedly hinted to shareholders about the possibility of merging SpaceX and Tesla, citing the increasing overlap in their fields of operation. Recently, speculation has intensified that the aerospace company might acquire the electric vehicle manufacturer. Barclays suggested last week that the deal could be announced before Tesla's annual meeting in December.

Statement on Merger Possibility

"I think it would be a good idea, but it really depends on the special committees of both companies," said Musk, making the first official confirmation that the companies are conducting formal negotiations. He noted to investors during a conference call that, as a stakeholder, he cannot participate in the discussions of the special committees. These committees consist of independent directors.

He added that the committees were formed at the request of shareholders, who must ultimately approve any deal. Musk emphasized that there is significant value in combining the companies because they operate in the field of superintelligence singularity, and collaboration could bring much benefit to superintelligence software development, chip design, Terafab, robotics, mass launches using the Starmind constellation, and connectivity.

Musk also reported that the joint venture for chip production, Terafab, should release its first test chip around May or June of next year, with production volume planned by the third quarter of 2028.

Premature Speculation Not Advised

He warned against speculating prematurely about the merger, as the committees have not yet agreed on terms and may never do so. Tesla shares rose by 1.8% during extended trading.

Musk, who is the world's richest person, owns nearly one-fifth of Tesla and slightly less than half of SpaceX. Analysts believe that a merger would give him control over the combined company. An acquaintance with the situation told Reuters that negotiations began in recent weeks and could lead to SpaceX acquiring Tesla, but he declined to give his name as he was not authorized to speak to the media. According to this source, Tesla is working with an investment bank to advise on these discussions.

SpaceX's revenue increased by 161%, reaching $14.58 billion over the three months ending September 30. AI revenue grew almost tenfold to $7.56 billion, mainly from renting out data center capacity to developers such as Anthropic, Google from Alphabet, and Reflection AI, rather than from its own models.

The third quarter was the clearest evidence that SpaceX's large investments in AI are beginning to yield returns, despite huge expenditures on computing infrastructure. Capital expenditures nearly tripled to $19.6 billion, and CFO Bret Johnsen stated that the company expects to receive $35 to $40 billion in the fourth quarter. It was also reported that SpaceX plans to allocate $40 billion to purchase Nvidia chips.

This shift transforms the company, whose financial engine was long powered by the Starlink business, and whose long-term ambitions still depend on the regular operation of Starship rockets. Currently, its core business resembles a cloud provider more than an AI laboratory.