Former President Donald Trump is on the verge of a multi-billion-dollar windfall that could be of aid to deal with his mounting legal troubles and 2024 White House bid. After much anticipation, his right-wing social media company, Truth Social, is finally going public.
It all hinged on a decisive shareholder vote that occurred Friday morning involving Digital World Acquisition Corp. (DWAC), a special purpose acquisition company (SPAC) that is seeking to merge with Trump Media & Technology Group, the parent company of Trump’s Truth Social.
The shareholders voted yes on the motion Friday morning, paving the way for Trump Media to get publicly listed on the Nasdaq Stock Exchange under the proposed ticker symbol DJT (his initials, of course).
This would hand Trump around $3-$3.5 billion instantly based on DWAC’s latest stock price and his estimated stake of 58% in the new entity.
A Meme Stock Frenzy is Fueling the Sky-High Valuation
The chance of such a huge payout comes at a tough financial time for the former president. He is up against a $454 million judgment in a civil fraud case in New York involving him and his companies. He has until Monday to make the payment, or he risks having some of his assets taken.
Trump is also dealing with rising legal expenses from the many criminal investigations surrounding him, in addition to the high costs of running his reelection campaign. While he is definitely a billionaire, he asserts that he doesn’t have the money to cover the $454 million bond. This may be accurate, as many wealthy individuals often do not keep large amounts of cash on hand, especially during periods of high inflation.
While Truth Social has struggled to gain a major following since its launch over a year ago, the meme stock frenzy fueling DWAC’s shares lately has showered the Trump media venture with a lofty multi-billion-dollar valuation that seems to be utterly disconnected from its fundamental business performance.
“It is grossly overvalued”, emphasized Jay Ritter, a finance professor at the University of Florida who was interviewed by the BBC. “It qualifies as a meme stock for which the price is divorced from fundamental value… Meme stock investors are usually buying on the basis of the greater fool theory.”
Indeed, Trump Media generated a paltry $3.4 million in revenue during the first nine months of 2023 and lost nearly $50 million during that same period. Its flagship Truth Social product has plateaued with around just 5 million monthly active users as of February, as per data from Similarweb, which is a small fraction of the user base of Elon Musk’s X.
It seems like the platform seems to be populated almost entirely with die-hard Trump supporters, which isn’t altogether surprising as he is the face of the platform. He launched it after he was banned from Twitter over the January 6th incident.
The nature of the platform and Trump’s hold over it makes it rather problematic as a social media company for a few reasons. Firstly, anyone outside of the Trump bubble is unlikely to join the platform. Even worse, it’s hard to believe that even most Trump supporters on the platform would stay after he no longer has a chance at the presidency, whether that’s in 2024 or 2028.
The Power of the ‘Trump Trade’
Digital World shareholders appear entirely undeterred by the financial reality. Most of the frenzy is being fueled by the speculative prospects of riding Trump’s persistent popularity and polarizing persona.
“This is putting your money where your mouth is for free speech, to save your country, potentially losing it all”, Chad Nedohin, a promoter and supporter of Trump’s initiatives and businesses, shared on his livestream show DWAC Live recently.
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Meanwhile, Marco Iachini, senior vice president at Vanda Securities, highlighted that DWAC has been a pure ‘Trump trade’ with individual investors piling in after the Truth Social deal was announced in October 2021 and again following Trump’s success in the Iowa caucuses in January.
“Here you’ve got ideology involved – as far as I can tell, the vast majority of DWAC investors are Trump political supporters, and they’re to some degree putting their money where their mouth is”, professor Ritter said of the fervent investor base. “My suspicion is most of them have bought the stock as a show of political support.” However, Ritter may be underestimating the power of the retail “meme stock” trader which seems to also be a major factor in DWAC’s unrealistic success.
Both Ritter and Nedohin seem to agree on what is motivating investors to pour money into a business that is just not attractive enough to justify its lofty valuation.
Trump May Face Roadblocks to Cash in on the DWAC Windfall
Once the merger goes through, Trump will own a whopping 58.1% equity stake in the combined company with his nearly 79 million shares valued at over $3.4 billion at DWAC’s current price levels.
However, the former president would face a key restriction in his ability to cash in that stake anytime soon. Trump and other insiders would be barred for at least six months from selling any of their shares due to a “lock-up” provision included to maintain leadership stability.
“No one wants to buy into a company where the largest shareholder – and really the face of the biggest product – is selling”, said Charles Whitehead, a professor at Cornell Law School.
Some legal experts believe that the lock-up terms may even prohibit Trump from using his shares as collateral to secure loans during that six-month period.
“If his shares are covered by the charter’s lock-up provisions then, absent an amendment to the charter, President Trump cannot pledge this stock. Full stop,” Whitehead added.
Amending the charter would be an irregular step that could face scrutiny from shareholders and regulators. Banks may also balk at accepting Trump’s locked-up shares as collateral, given the risks.
“If I’m a bank, I’m going to be troubled by the idea of a significant shareholder pledging his stake” Whitehead highlighted. “Any bank doing a proper credit analysis must be sensitive to the fact that this stock may very well tank if it turns out that President Trump is looking to sell down the position.”
Potential Legal Roadblocks Remain
Even after receiving shareholder approval Friday morning, Trump’s Truth Social deal faces numerous legal hurdles that could potentially disrupt or delay the merger from getting finalized.
In September, DWAC disclosed that it had received document requests from federal prosecutors examining whether discussions between the SPAC and Trump associates occurred prior to Digital World going public, which would violate securities rules around keeping such talks private.
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Regulators already reached an $18 million settlement with DWAC for making misleading statements about meetings with Trump representatives before the deal was finalized.
The merger also faces ongoing civil lawsuits from disgruntled Truth Social creators and employees alleging violations of ownership rights and legal agreements by Trump and his team. While Trump Media has dismissed the lawsuits as meritless, any financial penalties or injunctions from the cases pose risks to the merger being completed as proposed.
A Bizarre Saga that Showcases Trump’s Brand Power
Despite the obstacles, the bizarre Truth Social saga has showcased Trump’s unique ability to cultivate a fervent investor base rallying around his brand and grievances in a manner that is considered by most as disconnected from the underlying business fundamentals. If his tens of thousands of intrinsically worthless NFTs weren’t enough to convince you of Trump’s power in the financial world, this SPAC will.
“It’s an enormous transfer of value from [investors]… to Trump, which stands to be extremely lucrative for him”, said Michael Ohlrogge, a law professor at NYU who studies SPACs and non-traditional public listings.
“With Trump Media, I expect that it will collapse but whether it’s going to occur a week from now or two years from now and how rapidly… those things are really difficult to predict”, Ritter cautioned about the company’s viability once the merger mania fades.
Yet for Trump, who has weathered an array of past business failures and bankruptcies, getting Truth Social’s parent onto the public markets – even at a lofty and speculative valuation unlikely to hold – represents a lucrative potential windfall that would surely earn him another spot in the financial history books.
It may not answer the former president’s cash needs. However, for Trump, who has already gone through multiple business failures during this lifetime, it’s still a great chance to rebuild a narrative and image of a successful billionaire reborn.