Elon Musk just had his own Liberation Day

With all the focus on Donald Trump’s “Liberation Day” and his tariffs on everything and everyone, the other great liberation in America hasn’t garnered the attention it deserves: Elon Musk and his co-shareholders in X have also been liberated – or liberated themselves.

Last Friday, in a post on the social media platform, Musk announced that another of his companies, his artificial intelligence start-up, xAI, had acquired X in an all-stock transaction.

The deal, he said, valued xAI at $US80 billion ($127 billion) and X at $US33 billion, excluding its $US12 billion of debt. That would appear to value the combination’s equity at $US113 billion and its enterprise value (equity plus debt) at about $US125 billion.

’Cause I’m free to do what I want any old time: Elon Musk has just liberated himself from his X paper losses.Credit: AP

X (formerly known as Twitter) was acquired by Musk – who contributed about $US26 billion in equity while co-investors put up about $US7 billion – in October 2022, but has struggled ever since, with advertisers fleeing a platform that Musk opened up to a flood of, let’s say, “non-woke” speech.

Revenue plummeted from about $US4.5 billion at the point of acquisition to $US2.7 billion last year.

While Musk did slash the number of X’s workers by about 80 per cent and almost doubled earnings before interest, tax, depreciation and amortisation last year relative to Twitter’s pre-acquisition levels, that barely covered the interest costs on the acquisition debt that he had loaded into the business.

How does a company that one of the world’s biggest investors values at less than $US10 billion come to be valued at $US33 billion today?

The business is still struggling.

The Wall Street Journal reported last month that internally, Musk described the company’s finances as problematic.

“Our user growth is stagnant, revenue is unimpressive, and we’re barely breaking even,” he is reported to have written in an email to X employees.

This month, The New York Times, citing another internal X email, said that as of March 3, X had generated $US91 million of advertisements so far this year against a target for the March quarter of $US153 million.

In December, funds management giant Fidelity, which has a small stake in X, valued its holding at almost 72 per cent less than what it paid for it. On that basis, the $US33.5 billion of equity in Musk’s purchase of Twitter would be worth less than $US10 billion before factoring in any acquisition premium.

So, how does a company that one of the world’s biggest investors values at less than $US10 billion come to be valued at $US33 billion today?

There’s an element of symbiosis to the xAI/X deal. Musk has said in the past that he would give X a 25 per cent stake in xAI as payment for the access to X’s vast user database that xAI has been using to train the learning model for its Grok chatbot. There is therefore a strong link between X’s value and that of xAI’s (assuming Musk did hand over the 25 per cent stake).

xAI was launched by Musk in 2023 and has cashed in on what was, until recently, a boom in AI stocks.

In late December, it raised $US6 billion at a company valuation of between $US40 billion and $US50 billion and, as recently as last month, it was looking to tap investors for another $US10 billion in a fundraising that valued it at $US75 billion. Now, apparently, it is valued at $US80 billion.

That’s a huge uplift and one that has been against the AI sector’s trend, with Nvidia – the 21st-century equivalent of a supplier of picks and shovels during the gold rush – losing more than 21 per cent of its value over the same period that xAI’s value was apparently rising by more than half. The “Magnificent Seven” mega tech stocks, which also rode the AI boom, have fallen 20 per cent since late December.

There was a lot of activity around xAI and X last month, just before the merger’s announcement.

X itself also raised new funds last month, reportedly raising $US900 million or so at an eyebrow-raising enterprise-level valuation of … just over $US44 billion. Musk is said to have contributed to that raising.

It was convenient that, just before the merger was agreed – presumably while it was still being finalised – xAI’s valuation had lifted to $US80 billion and X’s had risen to $US44 billion (including the debt).

Where, only weeks ago, [Musk and X’s minority shareholders] were sitting on paper losses of more than $US20 billion, they have got out ... at roughly their purchase prices.

X’s 25 per cent of xAI had gone from being worth $US10 billion or $US12 billion three months earlier to $US20 billion, and its own fund-raising helped validate an equity value of about $US33 billion.

There’s a circularity to those numbers and dealings that, apart from being curious, makes the transaction – and the valuation of X – work.

Both xAI and X are, of course, private companies controlled by Musk, so it could be argued that he’s just shuffling bits of his empire around.

It also should be said that, leaving the numbers aside, the combination of artificial intelligence companies and social media, with their troves of user data and vast user databases, makes sense. Indeed, Facebook’s parent company, Meta Platforms, is pursuing a similar strategy.

It is conceivable that the combination will create value that could never be realised by a standalone X and recover, within xAI, the unrealised losses that flowed from the absurd premium Musk paid for Twitter and the way he has since managed it.

In any event, X’s minority shareholders, most of whom are friends and backers of Musk, are hardly going to complain about the deal. They, and Musk, have been bailed out by xAI, regardless of what that convenient fundraising last month might have signalled.

Where, only weeks ago, they were sitting on paper losses of more than $US20 billion, they have got out, albeit in a paper swap, at roughly their purchase prices.

There is a big overlap between the shareholders in X and xAI (beyond Musk) but there may be some investors exposed only to xAI. If anyone were disgruntled by the deal, it’d be those investors, having had their interest diluted to acquire a business, at an inflated value, that is struggling and breaking even at best.

Musk is, however, riding high within the Trump administration, which has given him power and advantaged his businesses, and he’s also made huge amounts of money for his loyal supporters over the years. Unless xAI’s next valuation comes in markedly lower than $US113 billion, complaints are unlikely.

One of the unusual aspects of the deal is that there was only one external investment bank adviser, Morgan Stanley, helping both sides of the transaction.

Morgan Stanley acted for Musk when he acquired Twitter and led the banking group that funded that deal and, until recently, when some of the lenders sold some of their debt at 97c in the dollar, was trapped within the debt structure.

In more normal circumstances, when banks sell their debt at a discount, it implies the equity has no value.

But with Musk, his companies and dealings are never conventional.

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