Like every great fraud, this one comes wrapped in a pseudo-scientific cloak: the plausibly held belief that a company’s stock price is the best indicator of its intrinsic value—a rational predictor of its future wealth, health, and profitability. The fact that the creative calculation behind SpaceX-xAI’s $1.25 trillion valuation has gone largely unchallenged can be explained in two words: motivated irrationality.
SpaceX’s recent merger with xAI, a financial spectacle greeted with cheers from mainstream circles, is – on the surface – a sight to behold. Or rather, it’s a sight for the eyes still burning from what they saw some 25 years ago, when Wall Street perfected the dark art of corporate mergers, sending fake valuations into the stratosphere before crashing back down to earth. As Elon Musk rakes in the profits, we are left with a perennial flaw of modern capitalism: a market that is always ready to buy its own illusions.
Like every great fraud, this one comes wrapped in a pseudo-scientific cloak: the palpable belief that a company’s stock price is the best indicator of its intrinsic value—a rational predictor of its future wealth, health, and profitability. The fact that the creative calculation behind SpaceX-xAI’s $1.25 trillion valuation has gone largely unchallenged can be explained in two words: motivated irrationality.
There is little doubt about the motivation, given the millions that will benefit financiers who join this wave. As for the irrationality of the valuation, it becomes clear once we take a closer look at the similarities to the deceptive arithmetic that once drove the AOL-Time Warner and Daimler-Chrysler mergers.
But first, there’s a broader truth to be noted: More often than not, stock prices are manipulated. That’s why they’re a poor predictor of profitability—even on average—and why they’ve become the primary vehicle for transferring wealth to the top, while disguising systemic rot as market miracles. The SpaceX-xAI merger tells a good part of this story. The practice of share buybacks tells the rest.
Let’s look at the logic behind Musk’s dizzying merger—an echo of his predecessors in the late 1990s and early 2000s. To understand how this thinly disguised scam works, imagine two gadget makers: Goodwidget, an old and established firm; and AIwidget, a trendy newcomer.
Goodwidget, a 30-year-old company with annual revenues of $5 billion and 10% annual growth, has a market capitalization of $50 billion—a 10:1 price-to-earnings (P/E) ratio. AIwidget, by contrast, has been around for about a year and has generated $2 billion in revenue. However, based on inflated projections for an AI-powered future, its market capitalization is as high as $100 billion, a staggering 50:1 P/E ratio.
A rational person would consider Goodwidget to be the safest bet. But Wall Street doesn’t operate on that logic. A reasonable valuation of the combined company would simply be the sum of the two capitalizations: $150 billion. Very conservative! For Wall Street, the game is called multiplication, not addition. So, they add up the profits of the two companies ($7 billion) and multiply them by the higher P/E ratio – that of AIwidget. The new company’s capitalization rises to $350 billion. An increase of $200 billion, as if by magic. The combined company rode the tsunami of hype that had inflated the value of AIwidget shortly before the merger.
Why do bankers orchestrate these maneuvers? Because their fees and commissions depend on the final figure. The bigger it is, the bigger their profits. But why do investors turn a blind eye? Because it doesn’t matter whether they believe the false arithmetic. What matters is that they believe that others will believe it long enough.
The fact that these mergers end up falling apart—as happened with Time Warner and Chrysler—does not prove that the market “finds the truth on average.” It only proves that prices can be wrong for a very long time, until the music stops and a lot of people lose a lot of money. Then the cycle starts all over again.
Then come stock buybacks, which prop up manipulated prices between booms and busts. Legalized in 1982 after being banned by U.S. President Franklin D. Roosevelt’s reformers in 1934, buybacks are presented in the bland language of “returning value to shareholders.” The official story – that they are the same as dividends – is intellectual fraud.
Imagine a company as a pizza cut into eight pieces. A dividend is like giving each owner of a slice an extra slice of pizza; you get something tangible, but your ownership stake—the piece you own—remains the same. You pay taxes on that extra slice right away. A stock buyback, by contrast, is like buying the company and eliminating two of the eight existing slices. As a result, without adding anything new, your share now makes up one-sixth of the entire pizza. You don’t pay taxes until you decide to sell the shares, but in the meantime you can benefit from artificial increases in value—like those created by the bloated mergers and fraudulent accounting mentioned above.
Herein lies the essential difference. A rising dividend signals confidence in real future earnings. A buyback signals no such thing. It is a financial engineering trick to inflate the share price—an illusion of value that is deferred over time and built upon itself.
The New Deal reformers banned buybacks because they knew a tool of manipulation when they saw one. And that’s why the kleptocracy that rose on the coattails of Margaret Thatcher and Ronald Reagan pushed for the practice’s return. Amid the alchemy of mega-mergers, price-pumping buybacks, and the ocean of free money after the 2008 financial crisis, the idea that stock prices reflect true value has become a trick played on anyone who doesn’t share in illusions like Musk’s $1.25 trillion.
(The author is a former Minister of Finance of Greece, leader of the MeRA25 party, and professor of economics at the University of Athens.)