Tesla and SpaceX might merge, how can advisors manage Elon Musk’s role on markets?

Elon Musk did what Elon Musk tends to do last week, sparking a furore of market activity and wave of social media posts when he said on SpaceX’s quarterly earnings call that SpaceX and Tesla were exploring a merger. Musk is both the CEO and largest shareholder of both companies, with a controlling stake in SpaceX. On the call, he said the merger would be “a good idea,” but that because of his own conflicts on the question, both companies have formed independent committees of directors to consider the prospect of a merger that would add Tesla’s roughly US$1.5 trillion in market capitalization to SpaceX’s roughly US$2 trillion. The share prices for both companies moved significantly in the wake of Musk’s comments.

The prospect of this merger raises a set of interesting questions for advisors to grapple with. The first, of course, is whether this will happen and how it might impact these two mega-cap companies, the wider technology sector, and the major index investments of which these stocks are large constituents. It also raises questions around the role of Musk himself, as a polarizing figure for ordinary people and for investors, who has legions of both ‘fans’ and ‘haters,’ How should advisors reckon with his personal role on markets and the impact his comments, speculations, and decisions can have on ordinary portfolio volatility?

“Assuming that the independent directors at each company find a way that it makes sense, he's got voting control of SpaceX and he's got something like 20 per cent of Tesla, and I would imagine the shareholders of both companies are probably happy with Elon having more influence because his track record is so strong,” says Elliot Johnson, Chief Investment Officer at Evolve ETFs. “It seems to me highly likely that the shareholders of his companies fall into one of two camps: either passive because of index exposure, or making a deliberate decision, in which case they're probably quite supportive of Elon being Elon. Because if you dislike him, you probably don't own the stock. I would say that investors should take this possibility very seriously because I’m struggling to see where the major hurdles to it are.” 

What does Musk get from the possible merger?

Johnson outlined the reasoning behind a merger given that beyond their shared CEO, a rocket company and an electric vehicle manufacturer don’t automatically seem like a single unified business. He notes, though, that both companies are heavily connected to the AI theme, with SpaceX owning XAI and Grok, and Tesla developing AI-driven humanoid robots. Beyond the interesting implications these companies and similar tech giants have for our understanding of sector categorization, Johnson sees that AI underpinning as a route to both connection between the two firms and the advantages a merger might create for them.

There is also the question of whether this merger would see SpaceX included in the S&P 500, which did not change its index rules to accommodate the company after its IPO like some others did. Tesla is a major component of the S&P 500. Johnson notes that this is still yet to be determined, and questions whether the goal is really at the core of Musk’s motivation.

Johnson adds, however, that a potential merger might give Musk voting control of the combined entities, given the scale of his voting control in SpaceX. He speculates that Tesla investors, especially those who hold it outside of passive vehicles, might be supportive of the idea given the popularity Elon commands among a certain cohort of investors.

“I don't think we've been in this position before… a time when we've had two companies that have been so significant in terms of market cap size with a common controlling entity or group,” Johnson says. “But everything Elon Musk does has a novel aspect to it. Landing rockets after flying them, making the electric car mainstream, self-driving technology, putting computer chips in people's brains. He does a lot of stuff that's novel, and that's kind of par for the course with this guy.”

Investing around Elon

As an ETF manager with a number of specialized tech ETFs, Johnson accepts that Elon Musk plays a significant role in many of the areas he is focused on. While Johnson is quick to praise Musk’s various successes, he emphasizes that the approach at Evolve ETFs is based on investment fundamentals which can help to tune out some of the noise generated by and around the world’s richest man. He believes that investors can be better served by asking themselves if they have the right exposures to “the technology that’s changing the world.”

That approach, Johnson says, should help keep portfolios from swinging dramatically on the back of rumours or speculation, of which Musk is just one source among many. Johnson doesn’t believe that investors should ignore Musk, in fact he believes that Musk’s role in the tech ecosystem today means he can’t be ignored. The trouble is, the man can also not be predicted, which necessitates an investment approach focused on the infrastructure and incentives that exist around his ideas.

“He's very significant. He is a key person in both companies. Is he required for any given launch of a rocket? No. Is he required to build the next car? No. But, could he say something or tweet something that significantly moves the stock price? Yes,” Johnson says. “I think he is that kind of public figure and CEO and significant shareholder. So I think you do have to think about that as an investor in these companies. And either you are discounting your view on the future of the company based on that, or you're more bullish because you think there's an increase that is not priced in, and you'd have to figure that out.”