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PaperclipPerfector  1mo ago (text post)   2385 thread views

Small-Scale Question Sunday for March 24, 2024

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Paging @2rafa

So what's the deal with Truth Social? It's completed its merger with DWAC, and it is being widely reported as a potential $3bn windfall for Donald Trump. Who would that $3bn come from?

Reports are that Truth Social has a comically small number of users, less than 1% the ADU of Twitter. It booked $3.4mm in revenue and lost $49mm in the first nine months of 2023. They're apparently planning a dividend which would appear to be in excess of total revenue! Perhaps in 2020 there was an opening for an anti-woke twitter alternative, post-Musk acquisition Twitter might have closed that gap, and various alternatives like Mastodon-instances offer an alternative. The problem for Truth social is that its growth theory is that DJT-Thought goes mainstream and people sign up, but in that case the existing social media giants would simply change their own moderation policies, the long term growth strategy is for MAGA to hold enough of a grudge to refuse to go back to R/TheDonald.

The share price has rallied from meme-stock Buy-and-HODL by Trump fans. That dynamic is well understood at this point. But where, if DJT sells his shares of DJT, is the hypothetical $3bn dollars going to come from? For Gamestop and AMC, the money theoretically came from a short squeeze, as shorts had to cash out their positions at a major loss, and shares were near or over 100% short so it was impossible to cash out. The short interest in DJT is more modest, at around 10%, so there's no $3bn in shorts to soak. Trump fans aren't going to fork over $3bn. What major market player is going to sink billions into a social network with no users? Until it makes some kind of profit it won't make most indexes or fund managers, so it won't be automatically purchased that way. He could try to borrow against the shares, but who would lend it?

I feel like there's something missing. Because the WSJ is reporting that Trump is getting a $3bn windfall, but then pointing out all the ways that he obviously won't/shouldn't get that windfall. I'm lost. Can anyone explain this to me?

ETA: Shares are SPIKING on the IPO to close to $70 this morning.

So this is a SPAC deal. SPACs are an alternative way of taking companies public (i.e. turning a company owned by a small group of shareholders who all know each other into a company owned by stockmarket investors) which became popular during the pandemic for reasons which are not clear to me, but may be something to do with COVID and associated government policy making a conventional IPO harder. The basic idea is:

  • A financial sponsor (the bank, hedge fund, or private equity shop organising the SPAC) launches a company whose only asset is the cash the investors put into it. Typically the sponsor gets 20% of the equity in the SPACco but only puts in a small amount of money to cover operating expenses (this acts as a fee for the sponsor). The outside investors put in the money to fund the acquisition (usually hundreds of millions, sometimes low billions) and get 80% of the equity. The SPACco is a public company and may be listed on a stock exchange (DWAC was on Nasdaq). At this point investors are investing based on their confidence in the sponsor's ability to do a good deal.
  • The sponsor has two years to find a company to buy. (If they don't, the investors are reimbursed with interest and the sponsor is out of pocket for operating expenses and any legal/banking fees associated with failed deals). The shareholders in SPACco must approve the deal, and there is usually a provision for dissenting investors to pull their money out.
  • There are various ways of structuring the deal, but the usual end state is that the merged company ends up with the assets of the business being taken public and most of the SPACco cash (companies going public are almost always seeking to raise money to fund further expansion) and owned by a combination of the SPAC investors, the sponsor, and the former private shareholders in the target company.
  • The merged company either takes over SPACco's existing stock market listing, or seeks a direct listing if SPACco didn't have one. In either case the share ownership is sufficiently dispersed (among the SPAC investors) that there is no need for an IPO to create a liquid market.
  • Usually, the sponsor and target shareholders are subject to a 6-month lockup, but the SPAC investors can sell immediately.

Looking at EDGAR filings, DWAC was incorporated in May 2021, listed on NASDAQ in September 2021, and first agreed in principle to buy Truth Social in October 2021 (before Truth Social launched). So since then, DWAC shareholders knew that they were likely to end up owning Truth Social, and the shares traded on that basis. In other words, the original DWAC investors have had the chance to sell at a profit to people who actually wanted to own Truth Social for several years now. It isn't clear how many of the new DWAC investors were people who wanted to give money to Donald Trump for nefarious reasons (the largest single shareholder in DWAC apart from the sponsor was TikTok investor Jeff Yass who invested around the time Trump flip-flopped to oppose requiring ByteDance to divest the US business of TikTok). and how many were hoping to make money flipping a Trump-themed meme stock. (I find it unlikely that anyone involved actually values Truth Social this highly as an ordinary business).

When the merger finally closes after two and a half years of malarkey, we expected to see a small bump in the stock (because of reduced uncertainty), but we have seen a much larger bump (>50%). This is pure meme demand - anyone who know what they were doing could have bought DWAC stock at much lower price than they are now paying for DJT stock. The $3 billion (now $5 billion) is the value of Trump's 58% stake in the merged company (which owns Truth Social plus about $300 million of DWAC's cash), based on the price at which DWAC investors are selling small numbers of shares to meme-stock buyers in the public markets. The other 42% is owned by DWAC shareholders - roughly speaking 8% by the sponsor and 34% by the outside investors.

How can Trump get this money out? For the duration of the 6-month lockup, he can't. (He can't even pledge the shares to secure a loan). After that, he can sell shares in the market, but if he sells more shares than the demand from meme-stock buyers the price will collapse. The cash would come from meme-stock buyers. He also has the option of selling a large block of shares to someone who is willing to overpay as a way of bribing him. There is no way he can get billions in cash out of DJT honestly (unless the underlying business of Truth Social takes off in a way which would justify the valuation). Any cash he does get out will come from investors who were happy to lose money, either because they wanted to give money to Trump or for the lulz.

I have a suspicion Trump’s sudden flip on TikTok after speaking to Yass is that Yass implied ByteDance or other Chinese investors might buy Truth Social if they didn’t have to divest. I don’t know if he could pull it off, but I can certainly see Yass suggesting it as a possibility. And a few billion is really a small price to pay for the Chinese. Trump isn’t fully loyal by any means, but he does have a certain sense of quid pro quo, he really would be a lot more favorable to China if they bailed him out. Provided Congress goes fully red and given the fact that as president he has de facto control over CFIUS, he might even have a chance.

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