Donald Trump set off fireworks on Wall Street the night of October 20, when he announced that a new business, the Trump Media and Technology Group, planned to go public via a special purpose acquisition company (or SPAC). Shares soared 550% in a week.
At one point on Friday, when they hit their peak at $175, a little-known investor who organized the SPAC controlled a stake of more than $1 billion. Hedge funds who got in early were sitting on hundreds of millions in gains, assuming they hadn’t already cashed out. And everyday Trump supporters, betting on the SPAC from their brokerage accounts, were doubling and tripling their money in a matter of hours.
“Holy s-—, I am rich with $DWAC,” a Twitter user named Huy Tran said on Thursday, using the ticker symbol for the SPAC. He wasn’t the only one gloating about his gains. “I knew it was big this morning,” said another person. “Enough to throw $310K at it. Would’ve done more if I had more capital freed up, but damn, that was shocking. Incredible move and probably pushes $100 tomorrow. Best day of my trading career.”
Not everyone is going to make money. In any frenzy, there are suckers and there are sharks. The suckers want to play the game but don’t necessarily understand the rules. In this case, that’s likely the Trump fans and day traders buying up the stock. Some of them will get lucky. But many—especially the true Trump believers, who want to stick with the former president for the long haul—seem destined to lose big.
The sharks, on the other hand, already won the game before anyone else even came to the table. Take the SPAC’s organizer, for example. Or the group that did the underwriting. Or the Wall Street firms that bought in early. The biggest shark, however, seems to be the former president, who will probably make a fortune on the frenzy, even as those who trust in him get crushed.
In order to understand all of this, you need to be familiar with how SPACs actually work. We’ll start at the beginning, with Patrick Orlando. It is Orlando—not Trump—whose firm serves as the so-called sponsor of the SPAC. On Trump’s final day in office, January 20, Orlando’s firm paid $25,000 for what would become 8.6 million shares of a SPAC named Digital World Acquisition Corp., or about three tenths of a penny per share.
At the time, Digital World Acquisition had no assets and no operations. But soon enough, Orlando gathered a small team, including a chief financial officer named Luis Orleans-Braganza, who is a member of Brazil’s National Congress. Orlando’s firm handed Orleans-Braganza 10,000 shares around the time he signed on as CFO.
In addition, Orlando enlisted an outfit named Benchmark Investments to help him do what SPAC organizers do—raise a big pile of cash from investors by taking a shell company public, with the hope of merging that company with a private firm, allowing the combined business to trade publicly. For the division of Benchmark handling the deal, it seemed to be a big transaction. The division’s website lists dozens of past deals, including a handful of involving SPACs, but almost all of them are smaller than the roughly $290 million fundraise for Digital World Acquisition. Benchmark and two smaller underwriters ended up handling the assignment in exchange for $10 million and 144,000 shares.
Next, Orlando started looking for big institutional investors that would help lend some credibility to his effort. He made them a hard-to-refuse offer—one that didn’t ask them to put much faith in his ability to operate a business. If they paid $10 apiece for 2.1 million Digital World Acquisition units, which each consisted of one share and one partial warrant, the investors could redeem the shares down the line for about $10.20—basically guaranteeing a $415,000 profit. On top of that, they could keep the warrants, which could become huge moneymakers if the stock performed well. And, as an additional sweetener, Orlando promised to sell them 150,000 shares at the same rate he had paid, three tenths of a cent apiece. For the investment firms, it was pretty much a can’t-lose deal, with enormous upside. Unsurprisingly, 11 signed on, including the well-known firm D. E. Shaw.
All these backroom agreements happened before any retail investors even had a chance of getting involved. But on September 8, Digital World Acquisition, which had neither operations nor revenue, launched an initial public offering. The investors still weren’t really betting on an actual business. Instead, Orlando was selling the same product he had offered to the institutional firms—a combination of shares and warrants, just without the extra shares for three tenths of a penny. But it remained essentially a can’t-lose trade. The units sold out, and Digital World Acquisition came away with about a $290 million pile of cash.
The next month, on October 20, they announced a target company to infuse with that money and take public in the process. The Trump Media and Technology Group, which no one had really heard of before last week, appeared to consist of little more than a hackable Twitter prototype and ambitions to do a lot of other business. A deck for the company listed competitors as Twitter, Facebook, Netflix, the Walt Disney Co., CNN, iHeartMedia, Amazon, Google and Stripe. The presentation included zero financial information.
Even compared to other SPACs, which are notorious for offering flimsy financials, the Trump deal stands out. In an earlier era, before SPACs went mainstream, it’s hard to imagine the Trump group going public at all. “You couldn’t do a traditional IPO,” says Michael Ohlrogge, a professor at the New York University School of Law who studies SPACs. “I don’t think you’d be able to find any investment bank who would have done this.”
Enter the suckers. Last Thursday, the day after the announcement, a crowd of ordinary investors piled into the stock, excited about the prospect of taking ownership in Trump’s bold ambitions. Shares of Trump Media and Technology Group were not for sale—that company remains private. Instead, traders seeking to get in on the action had to invest in the SPAC, Digital World Acquisition, on the belief that it would successfully merge with Trump’s group, ultimately giving them a stake in the combined venture.
Doing so got expensive, fast. On October 20, shares of Digital World Acquisition closed at $9.96, right about where they had traded since the day they went public. That price made sense. Remember, investors holding shares of Digital World Acquisition could choose to redeem them for about $10—making any purchase below that look like a no-lose proposition.
But on Thursday morning, after the late-night announcement, the stock opened at $12.73. New investors in Digital World Acquisition could no longer bank on the ability to redeem their shares for $10 without incurring a loss. Now, a new class of investors was getting involved: speculators and people who wanted to invest in the idea of a Trump’s media and entertainment company.
But the numbers didn’t provide much reason to be optimistic. With no operating business, Digital World Acquisition is now little more than a pile of cash—and a diluted one, at that. In the best-case scenario for investors, no one will redeem their shares, allowing the SPAC to retain its cash in the merger. That would leave it with an estimated $280 million and 37.2 million shares outstanding after it combines with Trump’s company and pays the underwriters. Put it another way, the amount of cash per share would be just $7.62. That’s because, although some of the initial investors put $10 into the pot, many of them—Orlando, his team members, the underwriters and the insiders who got special deals—put in less. The salesmen behind all of this should be fine, even if those who fall for their sales pitch get screwed.
The higher the share price climbs, the more difficult it is to rationalize. At one point on Friday, shares of Digital World Acquisition were trading for $175 apiece. That means investors were paying $175 to buy a $7.62 chunk of a cash pile. Shares closed yesterday, October 27, at a $64.89 apiece. It would be like if a jar with $100 in coins went up for sale, and people were bidding $850 for it because doing so might allow them to invest the coins in a Trump-branded venture.
If this seems absurd, that’s because it is. The investment firms that got in early aren’t complaining, though. Six of them disclosed holding investments last month that probably cost them less than $25 million apiece. By the end of the day Friday, those blocks were worth more like $250 million. While Trump acolytes, including Rep. Marjorie Taylor Greene, jumped into the stock, lots of Wall Street money was cashing out. D. E. Shaw ditched its unrestricted shares. Same with Lighthouse Investment Partners. A firm called ATW Spac Management amended an SEC filing to show it no longer held stock. Another investor, Boaz Weinstein, whose wife lost the primary to become the Democratic nominee for Manhattan District Attorney earlier this year, told reporters he got rid of the unrestricted shares that his Saba Capital controlled—spinning it as a righteous divestment. “Many investors are grappling with hard questions about how to incorporate their values into their work,” he said in a statement. “For us, this was not a close call.”
Orlando, meanwhile, is probably up even more money than any of the fund managers. It’s hard to pinpoint his personal stake, but his firm disclosed holding 6.6 million shares last month, for which it paid a total of $11 million. Its holdings are now worth an estimated $450 million. Representatives for Orlando did not respond to requests for comment.
As for Trump, it’s unclear exactly what percentage of the Trump Media and Technology Group he owns, though there are indications that it’s a significant share. A press release calls him “chairman” of the business, and an agreement calls him the “company principal.” A separate document mentions a “majority stockholder,” without saying who it is.
Assuming he has a big stake, the former president is sitting pretty right now. The deal announced last week, before the stock soared, valued Trump’s enterprise at $875 million initially. But by bidding up the price of the SPAC, investors are signaling that they think Trump’s business is worth far more. If shares remain at their $64.89, the current owners of Trump’s group will receive an estimated $5.6 billion worth of stock in the transaction.
And that’s just the start. Once the deal closes, if the share price consistently hits $30 during a period of roughly six weeks, the owners of the Trump Media and Technology Group will receive an additional 40 million shares in the merged business, diluting the investors buying into the SPAC today but enriching the owners of Trump’s group. At the current share price, the incentive bonus would be worth an estimated $2.6 billion more. In other words, if shares remain at their current level, the owners of Trump’s group should receive about $8.1 billion of stock. Add in the shares and warrants that the current SPAC investors hold, and you get to an estimated $11 billion for the whole enterprise.
To underscore how little sense that makes, consider this: Trump’s entire real estate empire—which he has spent his life accumulating—is worth just $2.5 billion. Investors are currently treating his barely formed media business as if it’s worth more than four times as much as everything else the former president owns. “Welcome to SPAC world,” says Michael Klausner, a business and law professor at Stanford. “Combine Trump with SPAC, and that’s what you get. It’s like more hot air than either started with in the first place.”
It’s impossible to predict the future, and perhaps Trump’s media empire will in fact turn into a giant. , According to a March poll from The Hill and HarrisX, 54% of Republican voters said they would use a Trump-backed social media platform. In a more recent survey, from Politico and Morning Consult, 61% of Republicans said they would engage with Trump’s new platform “some” or “a lot.” Even if the business never takes off, it’s possible that the former president’s supporters will continue to believe it will, propping up the stock for the long run.
It seems more likely, however, that investors will eventually begin to question the math underlying all of this. Shares of the SPAC dropped 30% in the first three days of this week. Trump seems to be intent on pumping things back up. On Tuesday, he issued a 900-word statement hyping the company. If his statements aren’t enough to keep the price at its current level, he should still be okay. Even in a disaster scenario, in which the stock fell more than 90% to $5 per share, wiping out over $1 billion for SPAC investors, the owners of the Trump Media and Technology Group would still be left with shares worth estimated $430 million. And that stock would be more valuable than anything else Donald Trump currently owns.