Tesla and SpaceX merger: can Musk defy the conglomerate discount?

Investors are usually wary of companies that try to do everything. Elon Musk has made a career out of persuading them to make an exception, so perhaps it wasn’t surprising when investors cheered the idea of a combining SpaceX and Tesla, with both stocks rising in price.

Bulls point to the obvious links between the companies. Tesla sells cars, batteries and power infrastructure to SpaceX, and is collaborating with it on Terafab, a chipmaking venture.

A merger could also cut through the bureaucratic complications of Musk’s sprawling empire, making it easier to shift capital and resources between businesses without having to secure separate board and shareholder approvals.

However, a merger would also create a potential valuation headache, and raise the question as to what exactly investors would be buying.

SpaceX has already expanded beyond rockets and satellites into artificial intelligence and social media. Add Tesla’s electric cars, energy business, self-driving technology and robotics ambitions, and the result would be a company spanning a huge range of industries.

Normally, investors are wary of such sprawling enterprises, resulting in a conglomerate discount – the tendency for a company’s market value to fall below the combined value of its constituent businesses.

Complexity makes performance harder to assess, while profitable divisions risk subsidising loss-making ventures. Investors keen to cash in on SpaceX’s lucrative satellite business, for instance, might be less keen on funding a robot army, doubting Musk’s boast that Tesla’s Optimus robot will be “10 times bigger than the next biggest product ever made”.

[ Elon Musk sets lower sales target for Tesla as it explores SpaceX mergerOpens in new window ]

Then again, should this $3.5 trillion merger eventually come to pass, perhaps the conglomerate discount will not apply. After all, financial fundamentals have never been successful at explaining the head-scratching valuations underpinning Musk’s companies. Why should a merger be any different?