By Lauren Thomas, Alexander Saeedy and Peter Rudegeair

A crowd of investors gathered at Morgan Stanley's New York office to hear X's sales pitch, eager to get a piece of debt that Wall Street had once shunned. Cellphones were a no-go at the January event and the audience was told to stay seated until X Chief Executive Linda Yaccarino and others had left the room after brief remarks -- and without taking audience questions.

Banks had planned to sell $3 billion in bonds at 95 cents per dollar, but ended up selling more than $10 billion at even higher prices. It was a testament to X's ability to bring advertisers back to the platform, helped in no small part by owner Elon Musk's proximity to President Trump.

Also underpinning the debt sale was the possibility that X would one day merge with a hotter, ascendant company, Musk's xAI. In private meetings with Wall Street, X executives said there was a good chance that the social-media platform might eventually merge with Musk's artificial-intelligence company, which makes the Grok chatbot.

The billionaire has said he never lost money for investors, but for a long time it looked like he was going to with X. After Musk bought it in 2022, advertisers fled over content-moderation concerns and its loans soured as revenue fell. A month after he took over, Musk said the company -- formerly known as Twitter -- was on the verge of bankruptcy.

Then, late last month, Musk posted on X that he was merging the company with xAI in a deal that valued the newly combined company at more than $100 billion. Folding X into a larger company competing in a global race to develop sophisticated generative AI tools could open the door to raising money at a valuation considered impossible just a few years ago.

The merger caps a string of events -- some strategic, others fortuitous -- that helped Musk announce a deal before Trump's tariffs effectively closed the market for deals.

It also moves Musk closer to his longtime goal of turning X into an "everything app," where people can share news, pay their bills and entertain themselves. The combined company is initially focused on more tightly embedding xAI's chatbot, Grok, into X -- making it more central to the app experience, similar to how Google integrated AI features atop search, a person familiar with the matter said.

A spokesman for X declined to comment and a spokesman for xAI didn't respond to requests for comment.

Rocky start

Musk borrowed $13 billion to complete his 2022 take-private of Twitter and the loans quickly went bad when advertisers paused their spending. He tried to persuade concerned brands to return, at one point offering steep discounts and threatening advertisers that they would lose verification if they didn't spend enough.

The company's revenue fell to $3 billion in 2023 from about $4.6 billion the previous year, according to people familiar with the matter. And by early 2023, asset manager Fidelity valued the company at roughly a third of what Musk paid for it.

X got a boost from xAI, the startup that Musk founded in the spring of 2023 to compete with OpenAI, a firm he left after a power struggle. X received a 25% stake in the new company as compensation for supplying it with the chips and other crucial hardware needed to build AI models.

Those shares quickly became one of the most valuable assets on X's balance sheet as the startup's valuation rocketed.

Then, last year, Musk grew closer to Donald Trump, taking on a prominent role in his campaign. That proximity to Trump helped persuade some advertisers to return.

While X's revenue dropped again in 2024 to about $2.6 billion, it ticked up in the final quarter of the year, according to people familiar with the matter. The company aggressively cut costs.

Musk and his advisers had long thought about bringing X and xAI together, but after the election those plans accelerated, according to people familiar with the matter. To do that, they knew they would have to successfully execute several transactions, in the right order -- and get a little lucky.

With Musk ascendant after the election, X took a new approach to ginning up new ad spending. In December, a lawyer from X called a lawyer at advertising conglomerate Interpublic Group, hinting that its recently announced $13 billion deal to merge with rival Omnicom Group could face trouble from the Trump administration, given Musk's powerful role, The Wall Street Journal previously reported. IPG signed a new annual deal with X for potential client spending.

Other advertisers started to raise their spending, including Amazon.com in January.

The narrative around X's fortunes was changing rapidly and Musk saw an opportunity to sell billions of dollars of X debt that were once unappealing. Those loans had sat on banks' balance sheets for more than two years and some had marked them at close to 60 cents on the dollar.

Making a comeback

Investors including Pimco and Citadel agreed to buy $5.5 billion in loans at 97 cents on the dollar, far more than the $3 billion banks had planned to sell. They sold a further $4.7 billion at 100 cents on the dollar.

By then, X and xAI were increasingly intertwined. X held a 10% stake in xAI (diluted from 25% by capital raises), and the AI company pays hundreds of millions of dollars to the social-media company to train its models off X's data, according to a person familiar with the matter. It had been crucial to helping X pay its bills.

The idea of bringing the two together made ever more sense, according to people close to the deal. X's growing cash flows from returning advertisers meant that xAI could use that money to help fund much-needed investments in data centers, people familiar with the matter said.

The groundwork had also been laid internally. Musk had appointed a number of employees as dual employees of X and xAI, including two engineering executives who he announced in January.

Then, in early March, X raised roughly $900 million from new and existing investors at a valuation just above its initial takeover price. The raise had reset the value of the company, putting it more in line with where it sat when Musk took Twitter private.

Just before the merger was announced, Musk spoke at a summit organized by JPMorgan's global technology banking chair, Madhu Namburi, in Big Sky, Mont., reflecting on the early days after he acquired Twitter.

He boasted to a crowd that included Ivanka Trump, former Alphabet CEO Larry Page, OpenAI CEO Sam Altman and Trump crypto czar David Sacks that X's valuation was higher than when he bought it and that the company was much more profitable.

He compared the tough cuts he had to make to his current work in the Department of Government Efficiency, according to the people in attendance.

Musk announced the merger with a post on X on March 28, saying it valued xAI at $80 billion and X at $33 billion excluding debt. "This is just the beginning," he wrote.

Write to Lauren Thomas at lauren.thomas@wsj.com, Alexander Saeedy at alexander.saeedy@wsj.com and Peter Rudegeair at peter.rudegeair@wsj.com

(END) Dow Jones Newswires

April 08, 2025 21:54 ET (01:54 GMT)

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