A Tesla and SpaceX merger would create a conglomerate: is it a good deal?

Tesla stock rose by over 3.5% on Thursday and continued those gains in the extended hours after details of the potential merger with SpaceX emerged. TSLA hit a high of $315, up modestly from this week’s low of $296. Still, the question is whether a Tesla and SpaceX merger would be a good deal in the first place.

Elon Musk is working on a Tesla and SpaceX merger

A report by the WSJ notes that Elon Musk has requested advisors for advice on the way forward as he plans to combine Tesla and SpaceX. 

One of the strategies to make the deal possible is for Tesla to give up its Chinese business. The company may decide to sell it, spin it off into a separate firm, or at the extreme, close it. 

Separating the Chinese business would be important because SpaceX counts the US government as the biggest market. As such, the two governments would likely reject such a merger. 

A Tesla-SpaceX merger would be the biggest one ever because of their sizes. Tesla is now valued at over $1.2 trillion, while SpaceX has a market capitalization of over $1.4 trillion.

Yahoo Finance data estimates that Tesla’s revenue will be $105 billion this year, followed by $120 billion next year. SpaceX, on the other, is expected to make over $39 billion this year and $73 billion next year. 

Elon Musk has been working to consolidate his operations in the past few years. He merged X with xAI last year, creating a company in the social media and artificial intelligence industry.

After that, he merged xAI with SpaceX, creating a company with a presence in the space, social media, and artificial intelligence industries. 

Tesla and SpaceX merger would create a conglomerate

Elon Musk’s thinking in a merger is that the combined company would be a big name in the AI industry. Indeed, the two companies are already collaborating in Terafab, the semiconductor project in Texas.

The challenge of this merger, however, is that it would create a conglomerate in various industries: robotics, AI, vehicle manufacturing, space exploration, data centers, and social media. In most cases, it becomes highly difficult to value conglomerates. 

Investors are embracing companies that emerge from conglomerates more. A good example of this General Electric. Before Larry Culp became GE CEO in 2018, the company was a conglomerate in various industries, with its energy business dragging the others.

To create value, he separated the business into three: GE Aerospace, GE Vernova, and GE Healthcare. Today, these firms are valued at $368 billion, $261 billion, and $31 billion, respectively. Before the spin-off, the whole company was valued below $150 billion.

Another good example is Western Digital, which decided to spin off SanDisk into a separate publicly traded company. Today, SanDisk has become a bigger company than Western Digital in market capitalization.

A combined Tesla and SpaceX would have some cash flow problems, at least initially. While Tesla is already a profitable company, SpaceX made a nearly $5 billion loss because of its AI investments.