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FORMER US president Donald Trump is richer than he’s ever been, and it’s all thanks to a back-door deal to take his latest venture public.
Trump Media & Technology Group, which generated less than US$4 million in revenue for the first nine months of last year, was worth US$8.4 billion on Thursday, bringing — on paper — a massive windfall to its largest shareholder: Trump himself.
The money may come in handy for Trump, who faces 88 felony charges in four different cases on top of massive damage awards in civil cases as he campaigns for the White House.
The startup went public through a deal with Digital World Acquisition Corp, a shell company created to merge with a private company.
Special purpose acquisition companies, or Spacs, gained popularity during the pandemic, when investors happily speculated on startups without proven business models. Most of the companies to complete deals have since floundered.
Yet in a trading frenzy reminiscent of the outlandish Spac and meme-stock booms, retail traders on both Truth Social, a social media platform that is the company’s main asset, as well as Reddit Inc.’s WallStreetBets forum have helped fuel the stock’s surge. Here’s how Trump’s company has so far defied expectations — and what might come next.
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Why the Spac suited Trump
At the height of Spac mania, dozens of companies used the vehicles as a way to go public with less scrutiny than the more traditional initial public offering. Management teams used lofty projections and world-changing pitches in their presentations to justify sky-high valuations. Many Spacs were built on personality more than substance.
Trump took advantage of the opportunity in October 2021, announcing the deal between Digital World and Trump Media months before Truth Social was even available.
The company’s presentation included no lofty projections like other Spacs — or much detail about its potential revenues.
Trump Media instead boasted about “galvanising a conservative media universe” that could rival the likes of Twitter, Facebook, Netflix and Disney, and said it would launch a subscription video on demand service focused on “non-woke” programming.
After the deal was announced, Digital World quickly became the top-performing Spac ever, surging 1,657 per cent in a two-day span to trade as high as US$175 in October 2021. It closed at US$61.96 on Thursday.
The meme stock following
After the Spac announcement in 2021, legions of investors posting on Reddit’s WallStreetBets and Stocktwits immediately embraced it.
Investigations into insider-trading and money-laundering allegations by the Justice Department and the US Securities and Exchange Commission, as well as a flurry of lawsuits, threatened to torpedo the deal.
Yet these obstacles fed Trump Media’s anti-establishment narrative, and investing in the company became a way to support Trump as he pursues a return to the presidency.
In turn, the stock — which originally traded under Digital World’s ticker DWAC — has soared 254 per cent this year as Trump steamrolled his Republican rivals for the party’s presidential nomination. DWAC “gave him the opportunity to, in effect, turn his celebrity into a publicly traded security,” according to Bloomberg Opinion’s Matt Levine.
With the stock, which now trades under Trump’s initials DJT, continuing to advance, it has taken on qualities similar to stocks that were embraced by hordes of amateur traders in early 2021. They drove up the price of GameStop to thwart hedge funds that had shorted its shares. The mania sent shares of the video-game retailer soaring, to the delight of Redditors.
While Trump Media’s financial statements may look paltry so far, it’s difficult to use traditional metrics such as price-to-sales ratios to value the company.
As Matthew Tuttle, the chief executive and chief investment officer at Tuttle Capital Management, put it: “This is a meme stock, it’s not the type of thing where you bust out P/E ratios — you can throw that out the window.”
One potential problem
Trump has added some US$4.9 billion to his net worth, which could grow if shares continue to trade well. The key issue for Trump is that the terms of the deal may restrict him from selling shares for six months.
But there might be an out. The former president and Trump Media executives could get approval from the company’s board of directors (which includes names from his administration, such as Robert Lighthizer, Linda McMahon and Kash Patel) to shorten his lockup period.
The risk is, if the lockup is waived and a significant number of shares go looking for buyers, that would depress the stock price — something that has historically plagued Spac deals.
“He needs the money but he can’t sell too much at once without risking tanking the stock,” said Usha Rodrigues, a professor at the University of Georgia School of Law.
Trump’s biggest financial threat stems from a US$454 million verdict against him in a civil fraud suit brought by New York Attorney General Letitia James for inflating the value of his assets by billions of dollars a year in bank transactions.
He was ordered to pay a reduced US$175 million bond by April 4 to put the verdict on hold while he appeals, but he’ll be on the hook for the entire US$454 million — plus about US$112,000 in interest every day — if his appeal fails.
What’s next
The question for investors is whether shareholders will keep the faith and prop up Trump Media’s share price. The firm ultimately sits at an interesting intersection: a meme stock that went public via Spac. Companies that debuted through blank-check deals have historically fizzled after bouts of volatility.
More than one-fifth of the nearly 500 Spac deals that have closed since 2019 are trading below US$1 each, representing a greater than 90 per cent plunge. And dozens of them at times saw share prices surge in retail trader-fueled frenzies, meaning losses for some are far greater.
Trump Media has become the most expensive US stock to sell short, with short sellers paying over 200 times the average cost to borrow shares, according to financial analytics firm S3 Partners. That makes it difficult for Wall Street to pressure shares but also creates plenty of room for the same speculators to push the stock higher.
“It is difficult to predict how long the meme status can last,” said Jay Ritter, a finance professor at the University of Florida. “It could be weeks, or it could be many years.” BLOOMBERG
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