The Trump SPAC is doing stonk things, which is hilarious

Matt Levine wrote a lot about this in his newsletter yesterday too. I'll quote it all here (other than the images) since I think people often hit a paywall on Bloomberg:

Donald Trump is a very famous person who likes to talk and who has a lot of enthusiastic fans. If he started a television channel that consisted of him talking about whatever for two hours every afternoon, surrounded by 22 hours of other people talking about how great he is, it would probably get a lot of viewers and could carry a lot of ads for pillows or whatever. But this would probably involve a certain amount of work and competence — you’d have to hire people to point the cameras at him and negotiate cable carriage and ad deals — and television is expensive; there would be some real financial risk to it.

Or he could start a social media company for his fans, where he could send out his thoughts without being banned. I am not going to pretend to make a business case for that one — there is a long history of hilarious failure in the “social media for Trump” category — but maybe you can. It is not a sure thing, in any case. Maybe it would work, maybe it wouldn’t. When Twitter Inc. went public it had never been profitable and it was, you know, a real social network that people used. Maybe Twitter But Trump would immediately be profitable but boy I have some doubts.

On the other hand if Donald Trump launched a company that was like “I am going to start a social media platform for Trump fans,” could he get people to buy the stock? I think that two fundamental lessons of the last few years are:

1. You can get people to buy any stock; and
2. Donald Trump can get people to buy anything.

So if Donald Trump announced “hey I’m gonna do a social media company, buy some stock,” people would buy some stock. And then he’d get a lot of money. And then if the social media platform did not end up being profitable — as I cannot imagine it would be! — then he would, uh, still have that money? And if the social media platform did not end up being launched — if Trump and his crack team of technologists just couldn’t actually build a well-functioning online social network — then he would, uh, still have that money? And if there was no crack team of technologists at all, if nobody even tried to build the social media platform — then you see where I am going with this right?

The point is that if you launch a company with the goal of making it profitable, you have to, like, have a workable business plan and execute on it and deal with a million different operational complexities. If you launch a company with the goal of selling a lot of stock, you have to get people to trust you and give you their money. There is some overlap between those things! But they are different things!

Now, there are some difficulties with doing an initial public offering that is like “we’re gonna build a beautiful social network, trust me.” But a third important lesson of the last few years is:

3.    SPACs!

If you go public by merging your private company with a special purpose acquisition company, then you can just make up whatever you want and no one will check. No, I’m kidding, that is very much not the law! But it is maybe a little bit the law? In particular, there is a view that pre-revenue private companies can go public via SPAC merger and market themselves to investors using wildly optimistic projections of their future revenue, and that if those projections do not come true they won’t get in trouble. Again, this is not quite true — talk to your lawyer before trying this! — but there is an element of truth to it. If you are in the business of raising money to fund a social media company that you haven’t built yet and perhaps never will, the SPAC format has a real appeal.

Anyway, anyway, anyway, anyway, anyway, anyway:

PALM BEACH, FL -- October 20, 2021 -- Trump Media & Technology Group and Digital World Acquisition Corp. (NASDAQ: DWAC) have entered into a definitive merger agreement, providing for a business combination that will result in Trump Media & Technology Group becoming a publicly listed company, subject to regulatory and stockholder approval. The transaction values Trump Media & Technology Group at an initial enterprise value of $875 Million, with a potential additional earnout of $825 Million in additional shares (at the valuation they are granted) for a cumulative valuation of up to $1.7 Billion depending on the performance of the stock price post-business combination. Trump Media & Technology Group’s growth plans initially will be funded by DWAC’s cash in trust of $293 Million (assuming no redemptions).

Trump Media & Technology Group's mission is to create a rival to the liberal media consortium and fight back against the "Big Tech” companies of Silicon Valley, which have used their unilateral power to silence opposing voices in America.

Trump Media & Technology Group (“TMTG”) will soon be launching a social network, named "TRUTH Social." TRUTH Social is now available for Pre-Order in the Apple App store. TRUTH Social plans to begin its Beta Launch for invited guests in November 2021. A nationwide rollout is expected in the first quarter of 2022. Those who are interested in joining TRUTH Social may now visit www.truthsocial.com to sign up for the invite list.

President Donald J. Trump, the Chairman of TMTG, stated, “I created TRUTH Social and TMTG to stand up to the tyranny of Big Tech. We live in a world where the Taliban has a huge presence on Twitter, yet your favorite American President has been silenced. This is unacceptable. I am excited to send out my first TRUTH on TRUTH Social very soon. TMTG was founded with a mission to give a voice to all. I'm excited to soon begin sharing my thoughts on TRUTH Social and to fight back against Big Tech. Everyone asks me why doesn’t someone stand up to Big Tech? Well, we will be soon!”

Well. That's a real press release filed with the real Securities and Exchange Commission by Digital World Acquisition Corp., which is a real SPAC insofar as a SPAC can be real. It has $293 million in its trust. Traditionally SPAC deals are often announced with PIPEs, private investments in public equity, in which institutional or strategic investors commit hundreds of millions of dollars of their own money alongside the SPAC investment. Here, there is no PIPE; no institutional investors seem to be involved. Trump Very Tech Company Group is raising its money only from public investors in the SPAC.

Ordinarily that would be risky: The SPAC investors have withdrawal rights — they can take back their $10 per share in cash, plus a little interest, instead of leaving it in the pot for the merger — so the company might not get any money. Here, it is not risky. The reason it is not risky is that people who like Trump will buy the stock. (Also: People who think “people who like Trump will buy the stock” will buy the stock; the Keynesian beauty contest applies here too.) Yesterday, before this announcement, DWAC’s stock closed at $9.96, a bit below the approximately $10.20 per share that it has in its trust, sort of a standard price for a SPAC with no deal yet. At 11 a.m. today it was trading at about $19.38, implying a valuation for Trump Thing of something like $1.7 billion. If you think Trump Thing is worth $19.38 per share, you are not going to take your $10 back; you’re going to keep the stock and let Trump have your $10. He will definitely get all $293 million.

Why would you think Trump Thing, a company with no product and no revenue, is worth $1.7 billion? Are you looking at the wildly optimistic projections of future revenue in the investor presentation? No you certainly are not! The initial SEC filing doesn’t include an investor presentation, but there is a “Company Overview” deck on Trump Thing’s website, and, fun fact, there is not a single dollar sign in the whole deck. There is no financial analysis, no sources and uses of funds for the deal, no capital structure, and certainly no projections of future revenue. It does have a mock-up of the app with Donald Trump tweeting (TRUTHing?) “lorem ipsum” text:

Here’s a slide with Donald Trump presenting a trophy to a sumo wrestler:

Here’s a slide about “Tech Monopoly Censorship Threatens Free Speech”:

That sort of thing. You are not buying this stock because you have faith in its optimistic cash-flow forecasts; it has not bothered with cash-flow forecasts. You are buying this stock because you like Donald Trump and think that Tech Monopoly Censorship Threatens Free Speech. Cash flows, valuation, etc., are all irrelevant. It is just vibes.

It does feel a little bit like all of recent financial history has been leading up to this moment? Like, Donald Trump, sure; obviously part of the Donald Trump thing is “I could stand in the middle of Fifth Avenue and shoot somebody, and I wouldn't lose any voters.” Similarly, he can launch a company with no product, business plan or capital structure and the stock will double. 

But also the SPAC boom has made it viable for pre-product, pre-revenue companies to go public at multibillion-dollar valuations if they can get enough hype. But also meme stocks have prepared everyone for the notion that the value of a stock is based on the fervor of its community of online fans, not its projected cash flows. But also the cryptocurrency boom seeded that notion, and paired it with libertarianism and resistance to tech-company dominance. But also the boom in non-fungible tokens further proved the idea that membership in an online community has a value that can be captured and financialized and traded and turned into a bubble.

Or I talk sometimes about the “Elon Markets Hypothesis,” the notion that stocks (or cryptocurrencies) go up because Elon Musk tweets about them. Musk’s online cult of personality is enough to create financial value. I joke sometimes that he should use that to extract some of that value for himself, but honestly Musk is super-rich and has a lot of weird hobbies and just isn’t that interested in pumping Dogecoin to make a little day-trading profit. But if anyone else has their own large devoted online cult, they can use it to pump a stock and extract some value for themselves. Donald Trump has a Musk-level online cult and is clearly not above extracting value for himself. 

What is the long-term value of Trump Thing? Well I suppose you could make an optimistic case that it will eventually displace Twitter and Facebook and CNN and … Netflix? and … Amazon? and … Stripe? ... and become a dominant multi-trillion-dollar tech giant. Again the investor presentation doesn’t make that case but it does have a slide with Stripe’s logo:

And then you’d feel pretty good about getting in at $1.7 billion. Or you could make a more normal case that Donald Trump is a big media personality and you can sell a certain number of pillow ads against him and this will end up being a viable, profitable business and $1.7 billion is roughly the right price for it. 

But I think that a more realistic valuation method here is not to worry about cash flows at all — as Trump SPAC clearly does not — and treat the stock simply as a token of public interest in Donald Trump. My guess is that the price of Trump SPAC stock will not, for instance, be much affected by its earnings announcements, unless Trump himself does the earnings calls in which case it will go up no matter what he says. My guess is that the stock will not be particularly correlated with the stocks of other media or technology companies. My guess is that the stock will go up when Trump is on television, or if he announces that he’s running for president again. My guess is that if something bad happens to Trump — if he’s sued or arrested or banned by a new tech company or some new scandal comes out — then that will also make the stock go up, to own the libs or whatever. My guess is that each day that goes by without Trump news, the stock will go down a bit. My guess is that the stock is essentially a bet on Trump’s personal newsiness, on Trump-news volatility.

To be clear I have absolutely no corporate finance basis for these guesses; I don’t think that, like, getting sued for attacking protesters will be good for Trump Thing’s ad revenue or whatever. I don’t have some story of “public interest in Trump increases the expected value of Trump Thing's cash flows so the stock will go up.” I just think that the stock price will have nothing to do with the ad revenue; it will be based entirely on how much attention Trump’s fans are paying to Trump.

At the beginning of February, when GameStop Corp.’s stock price became unmoored from anyone's expectations about future cash flows, I wrote a paragraph that people still tweet at me from time to time:

But I tell you what, if we are still here in a month I will absolutely freak out. Stock prices can get totally disconnected from fundamental value for a while, it’s fine, we all have a good laugh. But if they stay that way forever, if everyone decides that cash flows are irrelevant and that the important factor in any stock is how much fun it is to trade, then … what are we all doing here? 

When people tweet this at me it is because GameStop’s price is still pretty much where it was in February (though arguably a bit more justified by actual changes to the business!), and they say “so are you freaked out yet?” And, I don’t know, yes? Doesn’t it feel like there has been a paradigm shift, a regime change? Doesn’t it feel like for the last 80 or so years there has been a dominant view of investing, a first-page-of-the-textbook given, that investments are worth the present value of their expected future cash flows? Doesn’t it feel like that world has ended and a new one has begun? I should go buy some Dogecoin.