Tesla-SpaceX Merger: Here’s How Elon Musk’s Big Potential Payday Could Lead to an Overpay for Investors

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It is looking increasingly likely that SpaceX (SPCX) will acquire carmaker Tesla (TSLA), with even SpaceX and Tesla CEO Elon Musk not denying the possibility. While the move could make some sense for operational and business reasons, Musk’s insatiable ego is the driving factor.

But as pessimistic as I was about the rationale for the merger, I still failed to account for a key reason for Musk to merge the two firms: He stands to earn megabucks in performance bonuses from Tesla as part of the $1 trillion compensation package he signed with the carmaker last year.

For investors in Tesla and SpaceX, the ultimate question is really: Will SpaceX vastly overpay for Tesla, hurting SpaceX investors for the benefit of Tesla investors? Or will SpaceX offer a fair price for Tesla, thereby reducing the stock price of the massively inflated Tesla and benefiting SpaceX investors?

The best prediction is probably to look at Musk’s compensation package and determine the circumstances in which he benefits most.

Here’s How Elon Musk Benefits in a SpaceX-Tesla Merger

Musk benefits in the event of a takeover of Tesla, due to his 2025 CEO Performance Award Agreement with Tesla. The agreement laid out 12 different awards that Musk could earn for achieving various operational goals, such as delivering 20 million Tesla vehicles, or by market capitalization goals such as Tesla being valued at $2 trillion or $2.5 trillion, for example.

For each of the 12 levels, Musk could earn more than 35.3 million shares of Tesla, which are currently worth about $11.5 billion at a stock price of $326.

But achieving the operational goals is not necessary in the event of a change of control, such as if SpaceX acquires Tesla. In this case, all that needs to happen is for Tesla’s market cap to exceed one or more of the thresholds for Musk to achieve at least some of the shares.

At a share price of $500 – where Tesla’s market cap is about $2 trillion – each 35.3-million-share tranche is worth nearly $18 billion. So, the bigger the size of the deal, the larger his payday could become, as he earns more shares at a higher valuation.

Because Musk owns supervoting stock in SpaceX that gives him effective control of the company, he has a strong ability to decide whether SpaceX acquires Tesla and at what price. So, he has both the incentive to overpay for Tesla and the means to make a merger occur.

Given his strong voting position in SpaceX, he can even overpay for Tesla using SpaceX stock while still maintaining effective control of the newly merged firm, as a Wall Street Journal article shows. Even if SpaceX pays at the top of the compensation range for Tesla – a whopping $8.5 trillion – Musk would still hold control of the merged company, with about 56% of the vote.

At that level, he’d add more than $800 billion to his personal wealth, soaking SpaceX investors by massively overpaying for Tesla stock. Again, there’s that conflict of interest.

This level of self-dealing – It may all be too much for even the most ardent Musk fans, despite all the opportunity inside the company: rocket ships, Starlink satellites, Optimus robots, Terafab, as well as the hidden financial business inside SpaceX.

Tesla Explores Divesting Its China Business

A SpaceX-Tesla merger might require Tesla to separate its Chinese business in some form, and Tesla has been exploring that possibility, according to the Wall Street Journal. While Musk called the article “fake news,” a divestiture would prove problematic, given Tesla’s enormous valuation.

The concern here is that SpaceX is a significant defense contractor, with the federal government making up 20.9% of its 2025 sales. With SpaceX units such as top-secret satellites, the U.S. would want some separation between the company and China. At the same time, China would take a close look at a SpaceX merger if it led to a U.S. contractor controlling Tesla factories.

Tesla executives have been told to prepare for the Chinese unit to be hived off, whether that’s a spinoff, a sale, or even a closure. A sale or spinoff could prove particularly problematic because it would cause a standalone Chinese unit to be valued separately from Tesla as a whole.

A standalone valuation of the China unit will prove problematic because Tesla is so overvalued to start with. Tesla might actually be worth 80%, 90%, or maybe 95% less than today’s value, about $1.3 trillion, but Tesla enjoys a Musk premium, a price boost because Musk is at the helm.

But a strategic acquirer such as another car company will not purchase Tesla China at a price that’s 5 to 20 times higher than its actually worth, as the stock market is doing. So, a sale of the China unit at something near fair value necessarily means that the remaining non-China units are being priced by the market at an even more massive overvaluation, given their assets.

In this case, a SpaceX acquisition of Tesla near its current price implies a huge overpayment for the remaining Tesla assets. In other words, SpaceX investors get hosed, while Tesla investors enjoy a huge windfall by selling their overinflated assets – one reason Tesla is too risky to short.

A spinoff of Tesla China into a separate publicly traded company isn’t likely to solve the problem either. If the market is not willing to award the spinoff a Musk premium, it’s not going to fetch the kind of price that it’s currently doing inside Tesla today, where it’s likely 5 to 20 times overvalued. In this case, SpaceX would again vastly overpay for the remaining Tesla assets, soaking investors.

Given the huge difficulties created by Tesla’s overvaluation, the company has been exploring other ways of “firewalling” the Tesla China unit from the rest of the business.

Why SpaceX Is Likely to Acquire Tesla

Besides the personal payday for Musk, Musk may seek to combine SpaceX and Tesla for a variety of other reasons:

• Musk has a history of merging companies to paper over bad news: Tesla bought the debt-laden SolarCity in 2016, of which Musk owned 20%. The move bailed out Musk’s personal investment in the renewable energy company, which his cousins managed.

• A merger puts Musk in total control:Musk runs the whole ship at SpaceX through his supervoting stock, and a purchase of Tesla may mean that he can simply ignore investors who want to challenge his decisions or compensation, for instance.

• A SpaceX-Tesla merger stokes Musk’s ego:A merger would put the Musk-helmed company among the world’s largest companies by market capitalization.

Investors should expect to see more of Musk and his team laying the groundwork for a potential merger in the coming quarters, much as he did in the last earnings call:

Well, as you can tell from all the many collaborations on so many fronts with SpaceX, there’s more and more overlap, especially with Terafab, that’s really going to be a gigantic project. Obviously, we can’t talk about combining companies and that kind of thing on an earnings call. It’s got to be done with the appropriate process.

This kind of non-denial shows that Musk is likely to be actively pursuing a merger, and it’s only a matter of time before we get the details. As we’ve seen in Musk’s recent deals, he’s going to come out of it just fine. The real question is which investor group – SpaceX’s or Tesla’s – gets worked over harder. It looks like Musk’s money is riding on SpaceX to pay up for Tesla.

Regards,

James Royal, PhD

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