Spacs, or special purpose acquisition companies, were once all the rage. Since 2019, more than 1,060 “blank cheque” shell companies have been listed on the tech-heavy Nasdaq bourse or the New York Stock Exchange, with the sole purpose of merging with a private company to give it listed status without going through an onerous initial public offering, or IPO, process.
Though spacs have been around since 2009, they gained momentum after the start of the pandemic in 2020 and exploded in 2021 in the aftermath of the meme stock mania.
Since 2019, over 370 of the spacs have been liquidated after failing to find a merger partner. Of the rest, four out of five saw their shares plummet 70% or more after they found a merger partner.
Unlike a conventional IPO that restricts listing firms from making tall claims about their future, firms merging with spacs can say whatever they want and provide long-term revenue, profit or cash flow projections. Inflated valuations of target firms have been cited as the main reason for the bursting of the spac bubble. Promoters say interest rate hikes, the slowing economy and the stock market downturn destroyed spacs. Not surprisingly, spac listings are now down a trickle — from 619 in 2021 to just 42 last year and 10 so far this year.
On March 26, a long-awaited “cult” spac was listed on Nasdaq with a huge splash. Trump Media & Technology Group (TMTG); the parent of Truth Social, a social media firm and a clone of Twitter (now X) founded by former US President Donald Trump after the media shunned him in the wake of the Jan 6, 2021, insurgency on the US Capitol Building; and a spac named Digital World Acquisition Corporation (DWAC), have been seeking to merge for over two years.
Shareholders’ votes, regulators, internal bickering between the top investors of DWAC and plenty of shenanigans have helped delay the merger.
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On March 22, DWAC shareholders finally approved the merger, paving the way for the merged firm’s listing. It now trades with the ticker symbol DJT. These are the initials of its founder Donald John Trump, last used by Trump Hotels and Casino Resorts, which went bankrupt with over US$1 billion in debts two decades ago.
TMTG shares soared within minutes of its listing debut, even triggering a brief trading halt due to extreme volatility. At noon, its shares were up 60% over the previous day though they closed up only 16% for the day. At one point, Trump’s social media platform had rocketed to a market capitalisation of over US$10 billion ($13.47 billion), or more than 2,000 times the firm’s total cumulative sales since its launch.
In the lead-up to the shareholders’ vote and the merger, Trump’s supporters have piled in to buy shares of the spac, drawing comparison to the meme stock mania of early 2021 when shares of video game retailer GameStop and cinema chain operator AMC Entertainment were bid up to giddying heights. The stock is up 232% this year and 326% over the past year.
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At the peak on March 26, Trump’s stake in Truth Social’s parent firm was worth nearly US$6 billion, giving the former President a net worth of US$9.1 billion, according to Bloomberg, and US$8.3 billion, according to Forbes. Blame the huge discrepancy on how the two calculate Trump’s heavily leveraged legacy real estate assets amid America’s deepest commercial real estate slumps since the Great Depression over 90 years ago.
But before I get into the nitty-gritty of spacs, Trump’s legal woes and his shiny new listing, here is a short primer on how much the former President is worth. The ever-boastful property developer once claimed that he was worth “billions and billions” and went on to reveal his own estimate — US$11 billion. That is nowhere near the US$2.3 billion that Forbes thought he was worth or the US$3.1 billion that Bloomberg listed as his net worth before this past week’s de-spacing or the DWAC-TMTG merger.
Indeed, the Republican populist sued biographer Tim O’Brien, who in his 2005 book TrumpNation: The Art of being Donald, argued that he was worth only US$250 million. Trump is widely known to be barely a billionaire even though the media routinely parrots that he is worth more presumably because they do not want to get sued like his former biographer.
Why is a Presidential candidate’s net worth so important? Should it matter whether Trump is worth US$250 million, or for that matter, closer to his fantasy US$11 billion estimate? Trump’s whole persona is all about being a big, successful, ultra-rich developer who has the skills to run a vast, complex real estate empire and as such could run the world’s biggest economy without breaking a sweat. If Trump were to say “I’m worth just $950 million but I have a better plan to Make America great again”, it would turn off a lot of his working-class “Hillie Billie” supporters from Utah or Idaho.
And, oh, by the way, entrepreneur Vivek Ramaswamy, who dropped out of the Republican primaries in February, is reportedly worth US$960 million so it just would not look good for Donald to admit he is worth less than some Indian guy who ran a smallish pharmaceutical company. The last thing Trump wants is to “devalue” his “successful” billionaire developer brand.
Here is the other thing: Trump actually needs a ton of money right now — to fund his election campaign, pay down his mounting debt load as well as over US$700 million or so worth of fines, penalties, court settlements and legal fees. Let us start with campaign funds. As of last week, Trump had US$33 million in cash in his campaign coffers that is being depleted fast.
Biden has over US$80 million cash in his campaign funds and he is adding more to it every week. Both Biden and Trump spent close to a billion dollars each in 2020. Just over half of the money spent went into media — TV, radio, online advertising, billboards and banners. This year’s spending could be much higher. They have already spent US$100 million each in the first three months on campaigning.
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Individual Americans are restricted from donating more than US$3,300 to a candidate. But they can give up to US$5,000 to a PAC or political action committee. Save America — Trump’s PAC — has raised US$200 million since his defeat to mount another challenge and put him back in the White House. PACs can raise a maximum of US$5,000 per person but can spend the money on whatever they want. Save America has been paying Trump’s legal bills as well as the bills of his supporters, many of whom were arrested during the January 2021 insurrection.
Another source of funds for Trump is the Make America Great Again “Super PAC” which has no restriction on how much it can raise and from whom, allowing it to receive money from billionaires and business groups. That money can then be poured into other smaller PACs.
But PACs and Super PACs, or indeed his billionaire friends, cannot pay for things like the US$454 million judgment in a fraud case against the Trump Organization which was accused of years of deception and deceit, conning banks about the true value of his properties. That allowed him to secure loans at lower interest rates with more lenient and lighter covenants.
The New York state judge ruled that he lied to lenders and insurers about the value of his assets to get better rates. The court had ordered him to pay up by this week even though Trump has appealed the decision. Though the former President boasted a few months ago that he had US$400 million in unencumbered cash, he was not able to pony up US$454 million in fines.
Trump also reportedly asked lending officers of major Wall Street banks for loans but was turned down, according to Anthony Scaramucci, his former White House Communications chief. Trump even went to distressed investors and was reportedly willing to pay up to 15% interest but was again rebuffed. That is US$68 million in annual interest payments. Why would a billionaire pay 15% interest on his loans? The large coupon was apparently necessary given the riskiness of his credit. Last week, the court agreed to lower the amount to US$175 million and gave him a 10-day grace period to pay. He also has to pay US$88.3 million to E Jean Carroll for sexually abusing and defaming her. And there are other fines, criminal and civil lawsuits and legal bills.
Spacs were once seen as a swift and easy way for dodgy, unprofitable firms like TMTG, which had no realistic IPO pathway in the foreseeable future, to go public. Over the years, however, spacs have evolved into something more sinister. They now have a reputation as a sort of back-door listing for companies that just cannot withstand the rigorous scrutiny and regulatory oversight of a conventional IPO.
Little wonder, then, that some of the highest-profile spacs, including heavy-duty commercial EV maker Nikola, space tourism firm Virgin Galactic, and online media entertainment outfit BuzzFeed, have all morphed into unloved penny stocks. The De-spac Index, which includes a bunch of post-merger spacs that peaked in mid-February 2021, is currently down over 77% since.
Can Trump access TMTG cash? Yes and No. He needs permission from the board, which includes his son and several of his friends, to sell the shares before the expiry of the six-month lock-up period or to pledge them as collateral. But his friends on the board are also major shareholders.
If Trump decides to sell a billion dollars of TMTG shares, the stock could collapse. A big chunk of shareholders are retail investors or Trump supporters, many of whom have bet a lot of their savings on one stock. A collapse of TMTG stock could turn some of them against their idol, Trump.
There is also the issue of court cases. Whatever the board does in the election year, there be no shortage of shareholders and lawyers who would jump at the chance to sue the company and its board. Trump may need some cash badly but he does not need the TMTG distractions that any selling might unleash.
If he does get elected as President in November — the polls currently show him leading in five of the eight swing states where the election will be decided — TMTG could be a source of more problems. How does the next Trump Administration deal with competitors like Meta Platform or Elon Musk’s X? And how does Trump deal with Chinese-owned social media player TikTok while owning TMTG? He cannot say: “I will just let one of my kids run Truth Social.” This is a social media firm, not a property investment firm collecting rents from long-term tenants.
TMTG will go the way all other spac stocks have gone — down over 70% or 80%. Just 5 million users and $5 million in total revenues over three years means it might take forever for Truth Social to break even.
If Twitter was not able to make money under its former owners and as X it still cannot make money under the current owner who also happens to be one of the world’s richest persons, it is highly unlikely that a small niche social media firm can ever make money even if its owner is elected as the President.
Assif Shameen is a technology and business writer based in North America
