Although the deal is surprising, it is not without trace: since xAI was founded in 2023, the two companies have maintained close cooperation, including data licensing and product distribution of xAI’s chatbot Grok. Not only do the two companies share numerous investors, some employees even share office space in Palo Alto, California.
Musk said that the transaction values xAI at US$80 billion, a significant jump from its valuation of approximately US$50 billion when it was raised in November last year. X’s equity in this transaction is valued at US$33 billion, which is basically the same valuation as its most recently completed financing round and close to Musk’s price when it goes private in 2022 (including US$12 billion in debt).
Musk's decision to merge the two companies is good news for X investors. These investors have endured more than two years of uncertainty as advertisers and users have fled the social platform since Musk took over. The company has struggled to expand its advertising business and generate meaningful revenue from subscriptions. During this period, Fidelity reduced the value of its X equity holdings by a cumulative 60%-70%. The merger with xAI means that X investors now hold shares in an early-stage artificial intelligence startup that the market generally believes has higher growth potential.
"xAI and the future of X are intertwined," Musk tweeted when the X platform announced the deal. "Today, we officially launch the comprehensive integration of data, models, computing resources, distribution channels and talent reserves. By combining xAI's advanced artificial intelligence capabilities with X's huge user base, huge potential will be unleashed."
However, this deal has also raised many questions, the most basic of which is: Is this deal really necessary? Here are the most pressing unanswered questions about the merger.
What is the motivation for trading?
Musk and other X/xAI shareholders praised the merger in posts this week, detailing ways in which both parties would benefit. The main focus is on xAI’s exclusive data set obtained through X. This would give xAI full control of these data sets and mean the company could refuse to license the data to any other AI competitor. At the same time, X could help xAI distribute its Grok chatbot and other products to millions of consumers.
The problem with this logic, however, is that these purported benefits existed before the two companies merged. xAI has been using the social platform data to train Grok for more than a year, and Musk has been promoting Grok to users through X and selling advanced versions of the product to users through X’s premium subscription service. Given that Musk controls both companies, there seems to be no reason to worry that these benefits will suddenly be threatened, or that X will suddenly start working with xAI competitors.
The true valuation of X and xAI?
Musk said the deal values X at $33 billion, excluding $12 billion in debt. He also said that xAI is valued at $80 billion. This was a deal in which Musk used one of his private companies to acquire another private company, and both companies were represented by the same bank (Morgan Stanley). This unique arrangement means that Musk can theoretically set any valuation he wants for X and xAI, as long as no investors object.
It's no coincidence that xAI acquired X for the same amount that Musk paid to acquire X in October 2022, meaning that X's investors effectively just transferred their shares from one company to another. What’s also interesting is that, according to people familiar with the matter, xAI’s latest valuation before the deal was about $50 billion, but now the company’s valuation has soared to $80 billion without new financing. Presumably, Musk appears to be artificially inflating xAI’s valuation for acquisition purposes.
Who will be responsible for operating XAI Holdings?
X CEO Linda Yaccarino, one of the biggest backers of the deal, released a statement last week declaring the future of both companies "incredibly bright." However, it is unclear whether she will continue to lead the company after the merger is completed.
Musk has not announced anything about the structure of XAI Holdings or who will run the new entity, although Musk himself appears to be the most likely choice. Jacarino may stay on and continue to lead X as a business unit under the new company, but mergers are often complex and may require significant role changes. We'll have to wait and see how Musk more closely integrates X and xAI's operations to better understand how it will be managed.
How will this deal change X's social networking offerings?
It's unclear whether the acquisition will have an impact on the X platform (if it does, that's in part because the two companies have been deeply intertwined for a long time). For example, Grok is already available on X, and users can pay extra for premium features for the AI chatbot. Over time, Grok may be further integrated into the X platform, including features such as image editing tools or voice assistants. However, considering Musk’s planning direction for the two businesses (xAI and X platform), further integration is expected.
Will other social networks be acquired?
AI companies are always hungry for any proprietary data sets they can use to train their AI systems and look for ways to differentiate their chatbots from their competitors. Reddit, for example, licenses much of its user content to Google and makes hundreds of millions of dollars a year from AI licensing.
Bloomberg Intelligence analyst Mandeep Singh said other artificial intelligence companies, such as OpenAI, Anthropic and PerplexityAI, may consider acquiring other social networks to ensure that they have unique data sets. Perplexity had proposed merging with TikTok's US business as a solution to ensure the continued operation of ByteDance's services in the US.
"We believe smaller social media platforms will aggressively pursue alliances with large language model providers as xAI's premium $80 billion valuation exceeds the combined market cap of Snap, Pinterest and Reddit," Singer wrote.