Just months after SpaceX was denied a swift entry into the S&P 500 Index, Elon Musk may have found a backdoor: Merging with Tesla Inc., one of the stock-market benchmark's biggest members.
Talks have been progressing toward a tie-up that would consolidate Musk's business empire into a single behemoth spanning from electric cars and AI to satellite launches and social media. A main motivation would almost certainly be unleashing potential synergies as he seeks to push into expensive and speculative ventures like robotic assistants, orbital datacenters and even colonies on Mars.
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But possible inclusion in the S&P 500 offers another significant incentive to a man whose nearly $900 billion fortune has relied heavily on salesmanship and a cult-like following among Tesla and SpaceX investors. That's because it would ensure that $16 trillion of passive index-tracking funds hold on to shares of the combined company, regardless of what happens to the outlook or the bottom line.
“If you hold an S&P index fund or ETF in your 401(k) or investment account, the manager of that fund is compelled to buy every stock in the index in proportion to its weight,” said Steve Sosnick, chief strategist at Interactive Brokers. “As a result, you own all those stocks whether you knowingly intended to or not.
Both Tesla and SpaceX have been burning through billions of dollars in cash, and plan to bleed through more to finance new ventures, even as worries about the sustainability of the AI boom drag on the stock market.
While SpaceX reported its first quarter of positive earnings last month, Tesla has faced inconsistent demand for its cars in the US and mounting competition abroad. It just discontinued the Cybertruck, which became a divisive symbol of Musk's right-wing politics as he became a key adviser to US President Donald Trump after his return to the White House.
The stocks also hover at particularly lofty levels. Even after slipping 13% this year, Tesla is trading at more than 180 times its expected earnings, compared with 18 for the overall S&P 500. Soon after its initial public offering in June, SpaceX commanded a market value of as much as $2.6 trillion, a heady level for a company that had $32 billion in revenue in the 12 months through September.
In the face of that record-setting IPO, Nasdaq changed its rules to speed the company's entrance into the Nasdaq 100 Index, which is tracked by about $800 billion in assets.
But S&P Dow Jones Indices went the opposite route, opting against changing its rules to accommodate so-called megacap IPOs like SpaceX's. A merger would open a different question of allowing the combined company to take over Tesla's S&P 500 slot or finding another company to replace it.
A spokesperson at S&P declined to comment, citing the firm's policy to not to discuss market speculation. Tesla and SpaceX did not reply to emails seeking comment.
The stakes are significant. The addition of the combined company could generate about $100 billion of demand for the stock from index funds, according to Reid Noch at TD Securities.
It could also ripple across the market more broadly by affecting the weightings of other companies in the index. Based on Friday's prices, Tesla and SpaceX have a combined stock-market value of nearly $3.5 trillion, which would make a combined firm the fifth biggest in the S&P 500.
“This one really raises the stakes,” said Campbell Harvey, finance professor at Duke University. “This could soon be the largest company in the world, and it's difficult to make the case for it to be excluded from the most important index in the world.”
Musk last month endorsed the idea of merging the two companies he runs and asked board members to consider it. People familiar with the matter said this week that a deal could be announced as soon as next month.
It's no sure thing that a Tesla-SpaceX would be added to the S&P 500, and if it isn't, passive investment funds would have to sell the shares they'd likely get in the combined company.
The easiest route in would be for Tesla to buy SpaceX, the larger of the two companies, though few expect a transaction to be structured that way.
But analysts say there's also a strong case for allowing the new company to keep Tesla's position even if the car company is the one that's acquired, because it would help the index preserve continuity and market representativeness while minimizing unnecessary turnover.
While SpaceX currently doesn't meet all the criteria for membership in the S&P 500 Index, which requires a stock to trade for at least a year and for the company to be profitable for the previous four combined quarters, it could clear that hurdle by the middle of next year, based on current analyst estimates.
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The addition of a combined behemoth to the index would increase its sensitivity to tech stocks, which already have a heavier weighting in the benchmark than they did at the height of the dot-com boom. It's poised to get two new future contenders as Claude-owner Anthropic PBC stages its initial public offering and rival OpenAI is expected to follow next year.
“Our large cap indexes are moving a little bit more down the road of becoming effectively AI investment instruments,” said Brent Leadbetter, head of RAFI distribution at TMX Group Ltd.'s VettaFi. “You're becoming more concentrated and that concentration brings risk.”
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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