Trump’s Truth Social merger facing 'catastrophic threat' as deadline looms: report

02 September 2023

Ex-President Donald Trump's Trump Media & Technology Group, which owns his Twitter/X-inspired microblogging platform Truth Social, is supposed to complete its merger with Miami, Florida-based Digital World Acquisition on September 8th, 2023. But the pending joint venture to "create a tech titan worth $875 million at the start and, depending on the stock's performance, up to $1.7 billion later" is gravely imperiled, The Washington Post's Drew Harwell reports.

"Digital World is fast approaching a Sept. 8 deadline for the merger to close and has scheduled a shareholder vote for Tuesday to extend the deadline another year. If the vote fails, Digital World will be required by law to liquidate and return $300 million to its shareholders, leaving Trump's company with nothing from the transaction," Howell writes. "For Digital World, it would signal the ultimate financial fall from grace for a special purpose acquisition company, or SPAC, that turned its proximity to the former president into what was once one of the stock market's hottest trades. Its share price, which peaked in its first hours at $175, has since fallen to about $14."

The negotiations were troubled "almost from the start, beset by allegations that it began its conversations with the former president's company before they were permitted under SPAC rules," Harwell recalls. "Then, in the past year, its issues became more pronounced: Its chief executive was terminated by the board, a former board member was arrested on charges of insider trading, and the company agreed to pay an $18 million settlement to resolve charges that it had misled investors and given false information to the Securities and Exchange Commission."

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University of Florida finance professor Jay Ritter observed to Harwell that the agreement has "been pretty much unprecedented in terms of all of the glitches," noting, "The deal does seem to be running out of time. You can't just keep getting extensions forever."

Harwell explains that "SPACs are known as 'blank check' companies because they raise money from investors to buy a private company before identifying who they intend to target. Once the SPAC decides on and discloses its target, it works to merge with that company and bring it to the public stock market, avoiding some of the demands of a more traditional initial public offering, or IPO."

But "if the SPAC is unable to complete the merger within the time it specifies, it must return the money it raised to shareholders," Harwell continues.

He further highlights why the process, along with its momentum, may foretell bad news on the horizon.

"Digital World needs 65 percent of the shares held by its nearly 400,000 investors to vote 'yes' on the deadline extension; unvoted shares are counted as 'no' votes. If the extension fails, Digital World said in a filing in July that it would 'cease all operations except for the purpose of winding up' and repay investors at a price of about $10.24 per share — far below what many shareholders paid," Harwell says. "Deadline-extension votes like these are almost always approved because SPAC shares usually are bought by professional or institutional investors who closely track how a deal unfolds, Ritter said. But Digital World's shareholder base is made up largely of small-time 'retail' investors, making it harder for the company to boost shareholder participation in critical votes."

Harwell further points out that although "Trump Media has blamed the SEC for the deal's troubles, saying in a statement last year that the agency had worked to 'sabotage' the merger for political reasons with 'a bureaucratic black hole of inaction,'" the agency has pushed back against those claims.

The SEC, Howell recalls, "requires SPACs to meet disclosure requirements and other closing conditions before permitting a merger" and "said in July that it had investigated Digital World and found it had made 'material misrepresentations' to investors."

View Harwell's full analysis at this link (subscription required).

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