Elon Musk’s proposed $3.5 trillion (£2.6 trillion) merger of Tesla and SpaceX could unlock a wave of AI investment, giving the billionaire greater access to cash and borrowing power as he races to expand his tech empire.

Analysts said combining the two businesses could help Musk fund his increasingly expensive AI ambitions, bringing together Tesla’s cash reserves and SpaceX’s growing computing business under one roof.

Steven Wahrhaftig, vice president of equity research at Wedbush, told the deal would likely lead to an increase in AI spending, with the combined company expected to turn to debt markets to fund its expansion.

“The debt markets will definitely be tapped into”, he said. “Both have investment-grade ratings for its debt so wouldn’t surprise me if there was more than one debt-led funding round”.

Tesla also holds around $45bn in cash, which Wahrhaftig said would strengthen the combined group’s finances and support investment in AI infrastructure.

Musk confirmed on Wednesday that both companies had established committees of independent directors to explore a merger that would rank as the largest corporate deal in history.

Asked whether combining the businesses was a good idea, Musk said: “Yes”.

But he cautioned that no terms had been agreed and there was no guarantee a deal would go ahead.

“I do think there’s a lot of merit in combining the companies”, he told analysts following SpaceX’s third-quarter results.

Musk, who runs both businesses, said he was excluded from the discussions because of his conflicting interests.

Any deal would also require approval from shareholders representing at least half of Tesla’s outstanding shares, a threshold Musk acknowledged would be difficult to meet.

The potential merger comes at a difficult time for Tesla, whose automotive business is struggling to regain momentum.

The company reported a 43 per cent drop in quarterly net profit to $787m on Wednesday, while revenue remained broadly flat at $28bn.

Automotive revenue fell three per cent to $20.6bn, with rising costs and weaker margins putting further pressure on the business.

SpaceX, meanwhile, reported a sharp turnaround, posting a $4.4bn quarterly profit as revenue surged 161 per cent to $14.6bn.

Its rapidly expanding AI computing division overtook Starlink as its largest source of revenue, bringing in $7.6bn during the quarter.

A $3.5 trillion AI giant?

A merger would bring Tesla’s electric vehicles, robotics and battery tech under the same roof as SpaceX’s rockets and growing AI infrastructure business.

The companies are already collaborating on Terafab, Musk’s ambitious chip manufacturing project, while SpaceX has increasingly moved beyond rockets into providing computing power to AI developers.

“A potential SpaceX-Tesla merger could strengthen the combined company’s ability to fund AI capital needs by adding cash-flow diversity, scale and a broader pool of debt and equity capital”, he said.

He added that a combined valuation of around $3.5 trillion would provide substantial financial backing for projects requiring tens or even hundreds of billions of dollars in additional funding.

Wahrhaftig said the merger would also allow Musk to combine the companies’ data, technology and energy operations to support their AI ambitions.

But he cautioned the billionaire would still need to balance investment against the risk of burning through cash.

“Musk knows that he can’t just spend into an abyss and accelerate the cash burn without worrying investors”, he told City AM.

Octavio Garcia, senior analyst at Forrester, said the companies were increasingly overlapping in AI, robotics, manufacturing and energy, although combining them would not automatically make them more valuable.

“The second, and perhaps more important, dimension is control”, Garcia told City AM.

“Musk has considerably greater voting control at SpaceX than at Tesla. Combining the businesses could consolidate more of his industrial and technology vision under one corporate structure”.

However, the merger would also bring greater complexity and regulatory scrutiny, while raising questions for Tesla shareholders about the risks of owning a much larger business.

Wahrhaftig said a deal was more likely than not, although regulatory hurdles could delay its completion.

Musk has already consolidated several of his companies, with SpaceX acquiring his AI startup xAI and social media platform X before its stock market debut earlier this year.