BREAKINGVIEWS-The Week in Breakingviews: Shooting for the moon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Peter Thal Larsen

LONDON, Feb 8 (Reuters Breakingviews) - Welcome back! It’s been the busiest news week in recent memory. The biggest M&A deal in history was announced on Monday, but quickly got lost in the noise of the Epstein files, crashing crypto, software stock jitters and artificial intelligence spending. Some thoughts on Elon Musk’s space-bot merger below. Let us know what we missed. Was this newsletter forwarded to you? Sign up here to receive it in your inbox every weekend.

OPENING LINE

“The United States’ transformation into the world’s biggest oil producer has been dramatic. It is also mostly over.”

Read more: A $47 bln deal heralds US oil boom’s middle age.

FIVE THINGS I LEARNED FROM BREAKINGVIEWS THIS WEEK

1. The price of gold is as volatile today as during the economic crises of 2008 and 2020.

2. Eli Lilly’s LLY.N obesity medication accounts for 70% of new U.S. prescriptions.

3. Insurers’ holdings of collateralised loan obligations rose from $13 billion in 2009 to $277 billion in 2024.

4. Chinese carmaker BYD 002594.SZ makes four times as much profit on vehicles sold overseas.

5. Three-quarters of the 2.3 million viewers who joined Paramount+ to watch the 2024 Super Bowl cancelled within eight months.

MERGER OF SEQUELS

America Online’s takeover of Time Warner has gone down in history as the pinnacle of corporate folly. In January 2000, though, it felt seismic. I remember staring at my screen as the headlines flashed up, trying to grasp the implications of a dial-up internet operator absorbing the venerable producer of movies, music and magazines. A few months after AOL’s Steve Case and Time Warner’s Gerald Levin shared an awkward on-stage hug, the dotcom bubble started to deflate, and the deal flopped. In terms of size, though, the $183 billion transaction was unsurpassed – until this week.

For sheer hyperbole the merger of SpaceX and xAI, announced on Monday, puts the excesses of 26 years ago in the shade. While AOL and Time Warner talked of a “historic moment”, Elon Musk described the combination of the rocket maker with the social media and chatbot venture as “scaling to make a sentient sun to understand the Universe and extend the light of consciousness to the stars.” By valuing xAI at $250 billion, he vaulted to the top of the all-time M&A rankings.

Yet for all the rhetorical and financial superlatives there are several reasons this merger is not as consequential. To start, the sums are less impressive, in relative terms, than a quarter century ago. When AOL and Time Warner got together, the companies in the S&P 500 Index had a combined market value of around $12 trillion. Today, the members of the benchmark add up to almost $60 trillion. Indeed, the surprise is that it’s taken this long to set a new M&A record.

Second, SpaceX and xAI are private companies, and Musk controls them both. What really matters is the relative valuation of the two enterprises, not the dollar price that one puts on the other. The transaction values SpaceX at $1 trillion and xAI at $250 billion, a person familiar with the matter told Reuters. In theory Musk could have doubled those figures, or halved them, and still left investors with the same share of the combined group.

The third factor is that the motivation for the merger looks defensive. For all the talk of shooting artificial intelligence data centres into orbit, Musk is hitching a profitable rocket and satellite group to a money-burning chatbot venture. Last weekend I wrote about investors trying to identify AI stragglers. This deal will enable xAI to keep funding itself as part of a larger and presumably more stable entity. Folding the deepfake-producing Grok chatbot into the operator of the Starlink satellite communications service might also make European governments think more carefully about fining or banning Musk’s social media network.

Despite being 26 years apart, the two record-breaking takeovers could have one important feature in common: as markers of peak corporate hubris. Musk may hope that futuristic visions can propel the combined group to greater financial heights when it lists on the stock market. It’s a trick he has repeatedly pulled off at Tesla TSLA.O, the electric carmaker whose $1.5 trillion market capitalisation now rests largely on the entrepreneur’s promise of delivering vast numbers of robots at some point in the future. But as Robert Cyran points out, terrestrial precedent suggests a less glorious future for ambitious corporate mergers. Just ask AOL and Time Warner.

CHART OF THE WEEK

Investment banking in Asia is the ultimate jam-tomorrow business. Western dealmakers in Singapore, Tokyo and Hong Kong like to sketch out a long-term future where their industry eventually becomes as concentrated and well-compensated as it is on Wall Street. Yet some key metrics are heading in the wrong direction. Take the fees banks charge for equity capital market transactions. As Una Galani points out, these have halved as a proportion of total proceeds over the past 25 years. The pot of gold remains far away.

THE WEEK IN PODCASTS

When Japanese voters head to the polls on Sunday, the key question will be whether they back Prime Minister Sanae Takaichi’s proposed economic reforms. Yet the election could also help decide whether domestic investors bring their vast overseas savings back home. Hudson Lockett and Jon Sindreu joined Aimee Donnellan and Una Galani on the Viewsroom to debate what happens next.

If you’ve been following the trade tensions between the United States and China, you will doubtless have heard the term rare earths. But what makes these elements so special, how did the People’s Republic come to dominate their supply, and what can other countries do to loosen the chokehold? Those are some of the questions I discussed on The Big View with Melissa Sanderson, a director at American Rare Earths ARR.AX.

PARTING SHOT

Every company that attracts a large online audience eventually ends up selling advertising. What was true for search engines, social media networks and streaming services will soon also be true for AI chatbots. OpenAI boss Sam Altman describes ads as a necessary “internet tax”, while rival AI upstart Anthropic is, ironically, screening television spots that mock the ChatGPT developer’s plans to include commercials. Yet as Karen Kwok spells out, OpenAI faces a long wait before ads become a meaningful source of income.

Want to receive The Week in Breakingviews in your inbox every Saturday? Sign up for the newsletter here.

Follow Peter Thal Larsen on Bluesky and LinkedIn.

(Editing by Liam Proud; Production by Oliver Taslic)

((For previous columns by the author, Reuters customers can click on LARSEN/peter.thal.larsen@thomsonreuters.com))