Musk backs Tesla-SpaceX merger to unlock S&P 500 entry
Elon Musk may have found a back door into the S&P 500. Months after SpaceX was denied fast-track entry to the benchmark index, talks are advancing towards a union with Tesla, one of the index's largest members, people familiar with the matter said. A deal could be announced as soon as next month, they said.
The prize is passive money. Inclusion would force index-tracking funds to hold the combined company regardless of its prospects. Reid Noch of TD Securities estimated the addition could generate about US$100 billion in demand for the stock from index funds. "If you have an S&P index fund or ETF in your 401(k) or your investment account, the manager of that fund is required 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 of those stocks, whether you intended to or not."
On Friday's prices, Tesla and SpaceX have a combined market value of almost US$3.5 trillion, which would make the new company the fifth largest in the S&P 500. SpaceX reached a valuation of up to US$2.6 trillion after its June initial public offering, against revenue of US$32 billion in the 12 months to September. Tesla, down 13% this year, trades at more than 180 times expected earnings, versus 18 times for the S&P 500 as a whole. Both companies are burning billions in cash and plan to spend more on ventures including robotic assistants, orbital data centres and colonies on Mars.
Musk endorsed merging the two companies last month and asked board members to evaluate the idea. It is not certain a combined Tesla-SpaceX would be admitted to the S&P 500; if not, passive funds would have to sell the shares they would likely receive. The easiest route in would be Tesla buying SpaceX, the larger of the two, though few expect that structure. SpaceX does not yet meet all S&P 500 criteria, which require a year of trading and profit over the trailing four quarters, but analyst estimates suggest it could clear that bar by the middle of next year. S&P declined to comment, citing its policy of not discussing market speculation. Tesla and SpaceX did not respond to emailed requests for comment.
"This really raises the stakes," said Campbell Harvey, a finance professor at Duke University. "This may soon be the largest company in the world, and it's hard to argue it should be left out of the world's most important index." A combined giant would deepen the index's tilt towards technology, already heavier than at the peak of the dot-com bubble. Anthropic PBC is holding its IPO and rival OpenAI is expected to follow next year. "Our large-cap indexes are inching closer to becoming, in effect, AI investment vehicles," said Brent Leadbetter, head of distribution for RAFI at TMX Group's VettaFi. "They are becoming more concentrated, and that concentration carries risk."
