Achi news desk-
Trump’s top news on Friday was that investors in Truth Social, his money-losing social media platform, voted to take him public at a valuation that could net the former president about $3 billion.
There is some speculation in the press that the transaction will ease Trump’s current cash crunch, which includes the need to post a bond to cover a roughly $500 million court judgment by Monday to prevent the seizure of some of his properties by New York Atty. Gen. Letitia James. That guess, although not certain, is probably wrong.
From a financial perspective, the main questions are: Should you believe that figure? And, would anyone in their right mind invest in this thing?
My back-of-the-envelope judgments are: It’s not likely, and it’s not likely. This isn’t investment advice, but, really?
Let’s take a closer look.
Truth Social will go public by merging with a special purpose acquisition company, or SPAC, called Digital World Acquisition Co. The merger was approved by investors in DWAC on Friday.
That arrangement comes to fruition despite several questionable aspects of the transaction. SPACs are supposed to come into being (through an initial public offering) without any pre-arranged acquisition deals, but instead hunt them down within a certain period, usually within two years of their formation.
However, the Securities and Exchange Commission charged in July that DWAC had “formulated a plan to acquire and was pursuing the acquisition of TMTG” before its own IPO, and failed to disclose that to investors. (TMTG is Trump Media and Technology Group, parent of Truth Social.) SWAC settled the SEC case for $18 million.
It should be noted that SPACs generally do not have the best reputation in the corridors of the SEC, as they could be used to carry out initial public offerings without making the usual pre-IPO disclosures to investors.
The Trump deal, which has been percolating for more than two years, initially looked like a potential high-water mark for SPAC-related investment scams, as I wrote in 2021.
The combined entity is expected to be valued at a valuation of approximately $5 billion. As a 60% owner of the entity, Trump would be able to own about $3 billion in shares.
It should be clear that the valuation has no logical relationship to Truth Social’s financial picture, which is ugly in the extreme.
In a prospectus published last month, DWAC revealed that Truth Social collected just $3.4 million in revenue in the first nine months of 2023 and booked a loss for that period of $49 million.
The estimated $5-billion value of the combined company stems from the interest shown mainly by small investors fascinated by the Republican presidential candidate as a political and celebrity figure.
That puts Truth Social in the category of a “meme stock,” similar to GameStop, which reached a stratospheric valuation in January 2021 because credulous retail investors thought they were striking against short sellers and hedge funds by increasing market value and a company that had little real value as a video game vendor in the mall.
GameStop’s share price peaked at more than $500, or about a split-adjusted $125. It has lost 90% of its value since then. In other words, you shouldn’t expect Truth Social’s market value to have much to do with its revenue or profits but with Donald Trump’s public status. As Mark Twain wrote in Huckleberry Finn, “You pay your money and you take your choice.”
As for how Trump can use Truth Social’s earnings as a public company, the prospectus states that Trump and other executives agreed to lock up their shares for six months, meaning he could not sell them or borrow against them until mid-September . at the earliest. That means he would not be able to use them to cover the judgment against which James could begin action as early as Monday.
But there is an escape clause written into the deal: Trump can try to skip the lockout from the table after the merger. How likely would that be?
Quite likely, I’d guess. Of the 12 people Trump has nominated for the post-merger board, at least seven have personal ties to him. They are: Devin Nunes, who as a Republican congressman from California was an embarrassingly silent supporter of Trump, and who left Congress in January 2022 to become the chief executive of Truth Social; Trump’s son, Donald Jr.; Kash Patel, former aide to Nunes and member of Trump’s executive branch entourage; Scott Glabe, former aide to Trump in the White House and Trump appointee to an important post in the Department of Homeland Security; Robert Lighthizer, US trade representative under Trump; and Linda McMahon, former CEO of World Wrestling Entertainment who became chairman of America First Action, a Trump-linked super PAC, and is now chairman of the America First Policy Institute, a think tank devoted to Trump policies.
What are the odds that they would vote to block Trump’s need to cash out his shares? You be the judge. Keep in mind that any large-scale selloff of Trump’s shares would likely crash the stock price and take his unwary investors to the stock market’s woodshed.
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