Elon Musk's rocket manufacturer SpaceX has acquired his artificial intelligence start-up xAI in a deal valuing the combined entity at $1.25 trillion, as the billionaire consolidates his business empire ahead of what could become the largest initial public offering in history.

The transaction, announced on Monday, values SpaceX at $1 trillion and xAI at $250 billion, according to people familiar with the matter who spoke to Bloomberg and Reuters. The all-stock deal will see xAI investors receive 0.1433 SpaceX shares for each xAI share held, with some executives given the option to take cash at $75.46 per share instead.

SpaceX said in a statement that the acquisition would create "the most ambitious, vertically-integrated innovation engine on (and off) Earth", combining rockets, satellite internet and AI capabilities under one roof. The company is expected to price shares at roughly $527 each when it lists later this year, potentially raising up to $50 billion.

Musk justified the deal by citing energy constraints facing AI development. "My estimate is that within two to three years, the lowest cost way to generate AI compute will be in space," he wrote, arguing that solar-powered orbital data centres would enable unprecedented scale. SpaceX has requested permission to launch up to one million satellites for this purpose.

The merger unites SpaceX, which dominates commercial launches and operates the Starlink network with over 9,000 satellites, with xAI and its Grok chatbot.

Emily Zheng from Pitchbook said the merger bore the hallmarks of preparation for public markets. "Consolidating these companies ahead of an IPO allows SpaceX to present a differentiated, capital-efficient growth narrative to public investors," she told the BBC.

The transaction marks the largest merger and acquisition deal on record, surpassing Vodafone's $203 billion hostile takeover of Mannesmann in 2000. It further entangles Musk's various ventures following xAI's acquisition of social media platform X in an all-stock deal last year, and Tesla's recent $2 billion investment in xAI.

The merger could face regulatory scrutiny given SpaceX's extensive federal contracts with NASA and the Department of Defence. Some Tesla shareholders had previously objected to the xAI investment, with abstentions and votes against outnumbering those in favour.

XAI has faced controversy over Grok's image generation tool, which UK and EU regulators are investigating over concerns it enabled creation of sexualised images of children and non-consensual intimate images of women.

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