SpaceX bankers bend over backwards to bag IPO role

Last week the New York Times reported that Elon Musk has required the investment banks, lawyers, auditors, and other advisers working on a SpaceX IPO to subscribe to Grok, the chatbot offered by its xAI venture.

Some banks, according to the report, have agreed to spend "tens of millions of dollars" and begun integrating the software into their systems. According to the NYT:

The banks' purchases of Grok subscriptions were not merely goodwill gestures, according to three people with knowledge of the arrangements. Mr. Musk insisted that they purchase the chatbot services. He has also asked the banks to advertise on X, his social media site, which is also owned by SpaceX, but was less adamant about that request, according to two of those people.

. . . Mr. Musk's agreement with banks is a big score for SpaceX, which merged with xAI in February and whose Grok is a distant fourth in the artificial intelligence race behind OpenAI's ChatGPT, Claude and Google's Gemini.

Even by the supine standards of Wall Street courtship, this is a notable development, even if not entirely new.

Investment banking has long involved a degree of mutual back-scratching that rarely makes it into prospectuses or financial media. In the fin-de-siècle dotcom era, for example, some software companies treated banks pitching for the IPO as "dog-fooding" customers, telling underwriters to sign licensing agreements if they wanted to be considered for the mandate. (This paled in comparison to some of the inducements reportedly tendered by banks at the time, but that's a whole 'nother story.)

Nor has the practice been confined to technology. Banks are large, reliable customers of all kinds of things, and it's not unknown for a range of old-world services businesses to insinuate to their investment bankers that a procurement relationship might need to precede any advisory one.

Many corporates believe, not irrationally, that if a bank wants access to its trophy, fee-paying assignments, it should show "commitment". And that commitment has to extend beyond advisory or distribution capability -- which many issuers regard as largely interchangeable among the big banks.

Private equity often makes similar points. I can recall a firm once complaining to me that our bank had taken a hard line in negotiating a software license renewal with one of its portfolio companies at precisely the moment we were pitching for an entirely separate mandate. The connection was as unstated as it was unmistakable. (I couldn't, and didn't, do anything about it.)

A more familiar version of the same dynamic shows up in financing. While banks are not supposed to "tie" lending explicitly to investment banking mandates, the reverse is common practice. Companies routinely expect prospective advisers and underwriters to commit capital -- eg bridge loans, trade finance, revolving credit facilities -- before awarding M&A or capital markets business. This is one of those things that is widely understood but rarely spelled out publicly.

What makes the situation described by the NYT different is not the request, but its apparent follow-through.

In most large financial institutions, procurement decisions take place nowhere near the investment banking division. The people responsible for IT system or supplier contracts do not report to the bankers, have no incentive to indulge them, and must live with the consequences long after the deal team has moved on. Their KPIs revolve around cost control and operational stability, not revenue origination.

Moreover, senior bankers are often reluctant to push too hard anyway. Requests to "support" a client by purchasing its products occupy a grey area. If something goes wrong -- for example, an underperforming vendor or a compliance problem -- those who applied the pressure risk taking the blame. The path of least resistance is usually to avoid forcing the issue, even if that occasionally means losing out to a rival that happens to use the product already.

This is why the reported success of Musk's approach stands out. If banks really are committing tens of millions of dollars to Grok subscriptions to secure roles in a SpaceX IPO, it suggests a degree of influence that goes well beyond the usual give-and-take. Moving large, bureaucratic banks with multiple layers of procurement protocols to subscribe to a product that is not yet a market leader is not easy.

The incentive, of course, is the deal itself. The SpaceX offering is slated to be the largest IPO in history, a once-in-a-lifetime blockbuster whose fees, profile and franchise value for the winning banks are literally incalculable. In that context, behaviour that might otherwise be resisted starts to look like a pragmatic but uncomfortable concession.

It also says something about the broader character of this IPO. The offering is so big -- and so many people stand to make so much money -- that it is prompting extraordinary accommodations across the market. Changes to Nasdaq-100 index rules, widely understood to be designed to accelerate the entry of superjumbo candidates like SpaceX, Anthropic and OpenAI, are part of the same pattern. A company with sufficient clout can begin to reshape the mechanics of the market around it.

None of this proves anything improper. Clients have long dangled the prospect of a large, juicy mandate to wangle concessions from its advisers, and most of what is described will be familiar to anyone who has spent time in the capital markets. What is rarer is seeing it work so visibly, at such scale, overcoming institutional frictions that would normally slow or stop it.

This may not be the last time the world's richest person finds that the largest and powerful institutions prove more malleable than expected.