Morgan Chittum Report. What do Elon Musk, a company with a market value of $3.5 trillion, and the act of "chasing cats" have in common?

Corporate governance experts and portfolio managers told me that these are some of the issues that SpaceX and Tesla will face in the upcoming potential merger. Musk himself supported the deal during the financial report conference call on Tuesday evening, calling it “very valuable.”

Earlier this week, SpaceX delivered quarterly results that far exceeded expectations and achieved its first profit since going public. However, Musk – who also serves as the CEO of SpaceX and Tesla – brought another piece of information for Wall Street to digest: the independent directors of both companies have established a special committee to study the possibility of merging the two firms. Based on their market values on Wednesday, this transaction would create a giant enterprise worth approximately $3.5 trillion, making it the largest corporate merger in history.

However, whether this can happen depends not only on Musk's decision. His huge shares in SpaceX and Tesla make him what he calls "a party with a conflict of interest," which is why he cannot be part of any committee that evaluates the transaction. Musk said, "It's like a strange kabuki performance; two groups are talking, and I can't participate in the conversation." He also stated, "This is definitely one of those situations where I feel like I'm dancing tap dance in a minefield."

Another obstacle is the shareholder voting required to approve the merger. Musk controls approximately 85% of the voting rights in SpaceX, while in Tesla it is around 20%. Musk stated that to move the transaction forward on the car manufacturer's side, support from the majority of all outstanding shares is needed—not just a majority of the shares present at the vote—describing this threshold as “quite high.” Shares that are not voted on will also have the same effect as opposing the merger. Luke Rahbari of Rational Equity Armor Fund compared this process to “herding cats” and added that “it will take some time and money.”

A finance professor at the Ross School of Business at the University of Michigan, Nejat Seyhun, believes that persuading the shareholders of Tesla also depends on the valuation and whether a premium is offered. “If there is no premium, there might be some resistance; but if there is a 20%, 30%, or 40% premium, I don’t think there will be any problem,” he told Fortune. Tesla announced its quarterly financial results later on Wednesday, with both revenue and earnings per share exceeding expectations. However, due to some weakness in its core automotive business, revenue decreased compared to the same period last year.

Both Rahbari and Seyhun anticipate that this merger will ultimately take place, and believe that it will benefit both companies. The potential reward is greater efficiency. Merging SpaceX and Tesla could allow them to share engineers, technology, and R&D budgets, eliminating duplicate expenditures, especially as both companies continue to advance in the field of artificial intelligence. Rahbari said, "These boundaries have become a bit blurred." He was referring to the technology and data that are shared between the two parties. One example is that Tesla has already been using SpaceX's Starlink at some of its supercharging stations. Rahbari believes that this type of cooperation is "beneficial for both companies."

However, Musk reminded investors not to take the merger as a foregone conclusion. “Some people think that the merger of SpaceX and Tesla is a sure thing, but I think that’s an exaggeration,” he told analysts during the earnings call.

Currently, investors seem to be optimistic about the prospects of the merger. On Wednesday, the stock price of SpaceX rose by nearly 8%, achieving its best single-day performance since August; Tesla rose by 3.4%.

See you tomorrow,

Morgan Chittum

X: @morgan_chittum

Email: morgan.chittum @ fortune.com

You can submit transaction leads related to Term Sheet here.

Joey Abrams is responsible for organizing the transaction section of today's communication.

Venture Capital

• San Francisco-based research company Flapping Airplanes has developed a model that saves more data and computing power, raising $1 billion in funding. Index Ventures and Lux Capital led the investment, with Sequoia Capital, GV, and Kleiner Perkins also participating.
• Law firm headquartered in New York and Stockholm, Sweden, AI, software developer Legora, completed a $550 million Series E financing round. Atreides Management led the investment, with Baron Capital, Capital Group, Fidelity Management, and Research Company also participating.
• Sodium-ion energy storage system developer Peak Energy, headquartered in Berlingham, California, has completed a $108 million Series B financing round. General Motors Ventures led the investment, with Infinite Capital, Eclipse, Xora Innovation, and LG Technology Ventures also participating in the round.
• San Francisco-based software code build and testing infrastructure provider Blacksmith has completed a $66 million Series C financing round. Sequoia Capital led the round, with existing investors Peak XV Partners, GV, and Y Combinator also participating.
• San Francisco-based AI, a developer of measurement and civil engineering software, has completed a $34 million Series A financing round. First Round Capital and Bessemer Venture Partners led the investment, with Prudence and existing investor Quiet Capital also participating.
• San Francisco-based power electronics developer for solar panel performance optimization, Optivolt, has completed a $32 million Series A financing round. VXI Capital led the investment, with RA Capital, Valo Ventures, and Atlas Innovate also participating.
• B2B, a platform-based embedded financial infrastructure provider headquartered in San Francisco, has completed a $21.9 million Series A financing round. LGVP led the investment, with WEX Venture Capital, Group11, Great North Ventures, Night Capital and existing investors also participating.
• Chicago-based microbial product manufacturer IMIO has completed a $12 million financing round. These products are designed to improve soil health and crop performance. Sofinnova Partners led the investment, with Cultivate Next, Starshot Capital, Grow Together Salinas, Earth Foundry, and Serra Ventures also participating in the funding.
• Photon Bridge, a developer of optical interconnection laser sources based at the AI data center in Eindhoven, Netherlands, has completed a financing round of 10 million euros (11.2 million US dollars). Amadeus APEX Technology Fund and 360 Capital led the investment, with existing investors Innovation Industries, Faber, and Brabant Development Agency also participating.
• Solid-state cooling technology developer Pascal, headquartered in Watertown, Massachusetts, has completed a $8.5 million financing round. Sazze Partners and LB Investment led the investment, with KDB Sil participating in the token issuance, and Valley also contributing to the round.
• AI, a software developer based in London that focuses on consumer goods procurement, purchasing, and supply chain operations, has completed a $7.5 million financing round. The round was led by Chalfen Ventures, with participation from Index Ventures, Anthemis, Entrepreneurs First, In This Together, and Ventures Together.

Private Equity

• Aeromax Group (a portfolio company under Chimney Rock Equity Partners) has acquired Loutech, a company based in Chino, California, that produces precision machined parts for both commercial and military aviation markets. The terms of the transaction have not been disclosed.
• Granite Creek Capital Partners and Columbia Basin Partners have acquired Matheson Industrial, a company based in Pasco, Washington, that provides industrial coating and surface treatment services. The terms of the transaction were not disclosed.
• Renovus Capital Partners has acquired a majority stake in Aspire Home Health Care. Aspire is headquartered in Morton Grove, Illinois, and provides orthopedic and traditional home care services, including professional nursing and rehabilitation therapy. The terms of the transaction have not been disclosed.
• Shrieve Chemical Company (a portfolio company under Gemspring Capital) has acquired Research Solutions Group, a company based in Pelham, Alabama, that is engaged in the distribution, formulation, and recycling of industrial solvents and specialty chemicals. The terms of the transaction have not been disclosed.

Funds and Master Funds

• San Francisco-based private equity firm FFL Partners raised over $1.35 billion for its sixth fund. This fund will target healthcare and technology-enabled service companies, with individual equity investments ranging from $50 million to $200 million each.
• New York-based venture capital firm Inspired Capital has raised $450 million for its fourth fund. This fund will target pre-seed and seed round as well as Series A investments in various industries, covering areas such as AI infrastructure, healthcare, defense, fintech, robotics, and consumer products.