Last thing on Friday, Elon Musk announced he was merging Twitter with his AI startup, XAi! [Twitter, archive]
This is AI bubble economics and vapor capital shenanigans.
Musk says how xAI “acquired” Twitter in an “all-stock transaction.” So Musk is just moving accounting entries from one pocket to the other. But what problem does this solve?
Musk’s big problem is that Twitter is a mature company. It’s a business that does a thing and it has customers. Its buzzy startup days are way behind it. Even when Twitter was publicly traded, it was only just about breaking even.
Musk bought Twitter — not by choice, he shot his mouth off and was forced to follow through on the deal — and tanked it, sending the advertisers screaming as basic site functions broke. You’re not going to do any magical money tricks with this thing.
xAI, though! This is a pure play AI startup — it just sets on fire money from investors who should know better. Its valuation is entirely imaginary. If you’re a vapor capitalist buying a lottery ticket, that’s very exciting!
xAI has an imaginary valuation of $75 billion, probably. Maybe $80 billion. Maybe it’s $100 billion now. [Bloomberg, archive]
The valuation is determined by the rigorous accounting process of the vapor investors making up a number they like the sound of. It’s all meme stocks priced on the idea of Elon Musk the visionary genius.
Musk runs all his companies like one big company, so Twitter and xAI shared data, resources, and staff already.
Musk’s richest-man-in-the-world wealth is mostly Tesla stock, and a lot of Tesla’s hype train is AI bubble talk too. Expect xAI and Tesla to share your data with each other pretty freely. [Semafor]
Twitter is private, but its valuation on the books has been going down. Imagine having to admit a loss! Topping up Twitter with magical bubble money was apparently suggested by an investor in both Twitter and xAI, Saudi Arabian Prince Alwaleed bin Talal. [Reuters]
Musk didn’t ask any other Twitter investors. But they’re likely to be fine with the deal for the same reason — less risk of having to write down a loss. And they’re Musk true believers anyway. [Axios, 2024]
The other major stakeholder in the deal is Twitter’s creditors. Musk borrowed so much money to buy Twitter that even the interest payments were crippling. The banks were selling off Twitter’s debt at a discount, just so they could get this loser off their books. [WSJ, 2024, archive]
But xAI actually has a pile of cash — if from the vapor capitalists — so the debt might ever get paid off.
The creditors were getting especially noisy and disgruntled in the past few months. I wonder how close we came to the banks calling in the debt and giving us the Morgan Stanley era of Twitter. I can see fear of losing Twitter making Musk go for this move.
(Morgan Stanley did get the job of brokering the financial details of the Twitter–xAI merger.) [Bloomberg, archive]
The other thing this merger brings to mind is the biggest deal of the dot-com bubble — when hot Internet stock AOL used its bubble-inflated stock price to buy out old-media company Time Warner in January 2000.
This corporate marriage had zero synergy and went to hell immediately. The AOL side slowly went broke, Time Warner spun AOL back out again in 2009, and Time Warner itself promptly fragmented into multiple separate media companies. [NYT, 2010, archive]
But all those companies had actual businesses. Twitter is the shell of a social chat space. xAI is vapor capitalist candy.
Here’s a prediction: if the AI bubble doesn’t fall over soon, then other vapor-funded AI companies will get into this sort of thing big time. They’ll go out and buy real companies with fake money, desperately trying to make themselves profitable before the vapor capital disappears.
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