Shares in Donald Trump-linked special purpose acquisition company (SPAC) Digital World Acquisition Corp. (DWAC) surged following the former president’s fallout with billionaire buddy Elon Musk.
DWAC is poised to take Trump’s Truth Social social media platform, which became his soapbox after Twitter banned the real estate tycoon “due to the risk of further incitement of violence” stemming from the January 6 capitol riots, public through a reverse merger.
The NASDAQ-listed blank cheque company is up over 26% since July 8, when it became evident that Musk intended to rescind his offer to buy Twitter for a US$44bln premium price tag.
This led Trump — who regularly met Musk and heaped praise upon him during his time in office — to label him “another bull***t artist” at a rally in support of Alaskan congressional hopeful Sarah Palin.
In contrast, NYSE-listed Twitter plummeted 13% following Musk’s renege, and while shares have since been in recovery mode, the current price of US$37.74 is a mere shadow of Musk’s US$52.20 initial valuation.
Closer to Musk’s heart, Tesla shares are also volatile in the lead up to Wednesday’s second-quarter results; equities analysts simply can’t shake of the feeling that TSLA is way overpriced.
The DWAC rally bodes well for the takeover and is likely to please Trump, whose combative nature often pits him against high-profile business people and celebrities.
Furthermore, TWTR’s and TSLA’s sluggish second-quarter performance could be seen as another win in the former president’s crusade against what he perceives “the tyranny of Big Tech”.
But the deal still has some hurdles to surmount.
SPAC's Regulatory showdown
Hedge Fund Kerrisdale Capital issued a 27-page short report on DWAC in April, stating: “We are short shares of Digital World Acquisition Corp., a SPAC valued at over US$8bn on a pro forma basis, because we believe it will never secure the necessary regulatory approval to close its proposed merger with Trump Media & Technology Group.”
Kerrisdale noted that SPAC enforcement is a primary concern for the Securities Exchange Commission (SEC), and given the merger’s high profile, “an aggressive enforcement action would be an ideal way for the SEC to send a loud, unmistakable message to the industry”.
However, there is currently no evidence that such an enforcement action is planned.
Trump is an immensely volatile brand and while it remains unclear whether a 2024 presidential bid is in his sights, a decision either way would have uncertain ramifications for the deal.
More macro pressures could also throw up some problems.
SPAC season comes to an end
SPACs have taken a recent nosedive to put it lightly, with deal value in the first quarter down a massive 94% year on year, according to US law firm White & Case.
Just this month, billionaire investor Bill Ackman’s record US$4bln Pershing Square Tontine Holdings SPAC was forced to wind up after the SEC pulled the plug on its 10% acquisition of Universal Music Group.
Since a deal between DWAC and Truth Social has already been shaken on, DWAC is not at risk of a wind up (SPACs come with a two-year window of opportunity to etch out a deal), but post-IPO SPAC performance is another cause for concern.
The SPAC market has been “abysmal” in 2022, according to a CNBC report, with post-merger losses far outweighting the tech-heavy NASDAQ Composite.
The SPAC market’s golden period has passed — Source: CNBC
Chris Senyek of Wolfe Research believes that “the SPAC bubble is bursting” due to their highly speculative nature.
DWAC’s short-term rally should also be taken into context; the vehicle is down nearly 69% from its all-time high on March 3, compared to NASDAQ’s 12% drop over the same period.
All in all, a flotation is far from a done deal, and Truth Social could yet be just another casualty in a long line of Trump-related business failures.