News of former US president Donald Trump’s plans to launch his own social media platform, called Truth Social, has sent shares in the special purpose acquisition company (SPAC) that’s set to take it public soaring.
The blank cheque company, called Digital World Acquisition Corp, saw its share price close at $94.20 on 22 October, up 107% – the stock had risen 845.8% since the 20 October close. During the trading session on 22 October, the stock reached a high of $175 and had to be halted several times.
What fuelled the two-day rally in the SPAC, and how have investors reacted to news of the merger with Trump Media & Technology Group (TMTG)?
Trump Media & Technology Group starts a retail trading frenzy
The sudden rise in the Digital World Acquisition Corp share price has been the result of retail investors viewing it as a ‘moonshot’ bet, Bloomberg reported. It’s no coincidence that the share prices of meme stocks, AMC Entertainment [AMC] and GameStop [GME], fell sharply in the two days after Trump's announcement last Wednesday evening, as the Reddit and StockTwits crowds looked to reduce their positions and poured into the Digital World’s SPAC to make a quick profit.
The rise in sentiment is at odds with the general movement of the broader SPAC market, which had the steam taken out of it earlier this year. As of 22 October, the Defiance Next Gen SPAC Derived ETF is down 35.2% from its 52-week high of $35.08.
A regulatory filing with the US Securities and Exchange Commission (SEC) indicates that Trump plans to roll out his social media platform in the first quarter of 2022, with further plans to launch a subscription video-on-demand service as well as news and podcast programmes. A beta launch for invited guests only is expected as soon as November.
Frenzied trading activity pushed the market cap of Digital World Acquisition Corp up to $3.39bn at the close on 22 October. In comparison, the deal with TMTG gives the company an initial enterprise value of $875m, although it has the potential to rise to $1.7bn if an additional earnout payment is granted.
Why the success of Truth Social may not be guaranteed
With the SPAC sell-off earlier this year resulting in weak returns for investors, SPAC sponsors have been forced to find quality mergers that have a higher potential of delivering. And on this front, the CEO behind Digital World’s SPAC deal with TMTG, Patrick Orlando, hasn’t had much success.
Orlando, a former Deutsche Bank derivatives trader, has been described by Bloomberg as “an obscure financier” working out of a WeWork office in Miami. His other SPACs, Benessere Capital Acquisition Corp and Yunhong International, have yet to successfully merge with a company. Yunhong International had reached an agreement with Chinese transportation solutions provider Giga Energy in May this year that was terminated in September.
Trump’s own business failings and history of bankruptcy may not bode well for TMTG either. Speaking to Investor’s Business Daily, Wedbush analyst Michael Pachter, who covers entertainment and social media stocks, said: “He's made money in real estate… And this is not real estate.”
Perhaps the biggest indicator that the market doesn’t view the TMTG SPAC deal favourably is the fact that two hedge funds – Lighthouse Investment Partners and Saba Capital Management – have already sold their positions in Digital World Acquisition Corp after news of the deal was announced.
“Many investors are grappling with hard questions about how to incorporate their values into their work. For us, this was not a close call,” Saba Capital Management’s founder Boaz Weinstein wrote in a statement seen by The New York Times.
“I knew that for Saba, the right thing was to sell our entire stake of unrestricted shares, which we have now done.”
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