The sale of xAI comes with tax, financial and legal benefits for xAI and SpaceX investors

Elon Musk used a common two-step merger process in SpaceX’s purchase of xAI that had the dual benefit of avoiding the repayment of billions of dollars in debt while giving shareholders ‍a tax advantage, according to sources

Elon Musk used a common two-step merger process in SpaceX’s purchase of xAI that had the dual benefit of avoiding the repayment of billions of dollars in debt while giving shareholders ‍a tax advantage, according to people familiar with the transaction. It also protects SpaceX from any legal liability from xAI. The deal, announced on Monday, creates a $1.25 trillion company with plans to go public later this year ​to help finance Musk’s ambitions to put data centres in space.

Instead of combining the two companies into one and fully integrating operations, Musk decided to ‌retain xAI, which runs social media platform X and created the Grok chatbot, as a wholly owned subsidiary of SpaceX, said the people, who asked not to ​be named because the details of the deal have not been publicly released.

The approach, known in corporate M&A as a triangular merger, is a commonly used structure in public-company transactions designed to be tax-efficient and limit legal exposure, M&A attorneys say. As a subsidiary, xAI’s debt, legal liabilities and contracts remain separate from the corporate parent, allowing xAI to run its operations independently while helping to insulate SpaceX from any investigations and litigation X may face. The social media platform is under investigation in Europe over accusations that Grok disseminated sexualised deep-fake images of real women and children.

X said last month it had taken steps to “prevent the [@]Grok account on X globally from allowing the editing of images of real people in revealing clothing such as bikinis” and is “committed to making X a safe platform for everyone.”

Said Gary Simon, a corporate attorney at law firm Hughes Hubbard & Reed: “In an acquisition where the target ends up as a subsidiary of the buyer, ​no prior liabilities of the target necessarily become liabilities of the parent.” He added that “corporate insulation of stockholders from liability is a key reason” to acquire the new ⁠business through a subsidiary.

SpaceX and xAI did not respond to requests for comment.