With Donald J. Trump’s ascension into the White House and the headline volatile stock prices of Trump Media & Technology Group Corporation (DJT), it would be prudent to look back into the firm’s history and more specifically, the deal surrounding how it became public. Like many public firms, DJT was acquired by a SPAC or Special Purpose Acquisition Company. These firms are publicly traded and exist solely to raise funds for the merger or acquisition of an existing private company to take it public without a traditional IPO process. They experienced a recent wave of popularity between 2020 and 2021 but have now fell short. The value of the SPAC index IPOX peaked in the beginning of 2021 followed by a declining trend.
During this time, a favourable regulatory environment and sufficient liquidity in the markets made SPACs an attractive option to traditional IPOs. They benefit private firms who want a quick and efficient entrance into the public market space and they offered flexibility in the structure of the deals. They were highly tailored, allowing terms to be customised to the needs of the target company and its investors. Many SPACs are managed by sponsors with industry expertise and strong networks which deeply benefit less established target firms as this provides them with access to strategic guidance and support in their operations.
The Process
Initially, a qualified investor or a sponsor creates a blank cheque company which goes through the IPO process through an underwriter (a firm known for marketing newly issued shares such as an investment bank) who raise funds via a ‘road show’ to other investors. These funds will be used for either a merger with or an acquisition for a target company. The SPAC then has up to 2 years or sometimes less to acquire before it is liquidated and the funds are returned to the investors. In the case of an acquisition, a ‘de-SPAC’ occurs, a process whereby the company changes its objectives and operations to that of the acquired firm.
Returning to the example of Trump Media & Technology Group Corporation (formerly TMTG), the firm is a popular case of a SPAC-facilitated debut on the public market through a merger with the Digital World Acquisition Corporation (DWAC). Its popularity has arisen due to the involvement of the president elect and its potential to establish itself in the social media space as competition for Facebook and Twitter. The deal itself became a cautionary tale as it sparked regulatory investigation, delays in completion, and unmet revenue expectations which led to volatility in its performance.
5 Key Takeaways:
SPACs as an investment vehicle do hold certain pitfalls. The nature of a SPAC attracts speculative investors betting on the success of a future merger. In the case of DWAC, the hype surrounding Donald Trump’s involvement drove stock prices to unsustainable levels, even before the business model proved viable.
SPACs also operate with limited initial disclosures about their acquisition targets. This can mask financial and operation risks. The lack of transparency can create uncertainty and erode investor confidence.
The Securities Exchange commission (SEC) adopted tightening regulations to enhance disclosures and provide investor protections in IPOs by Special purpose acquisition companies. The increased scrutiny has resulted in prolonged waiting times for SPAC transactions; however, new regulatory oversight may make these types of business combinations more legitimate.
SPAC sponsors receive high compensation upon completion of a deal which creates potential conflicts of interest. The incentive structure can lead to leads being finalised regardless of the long-term prospects for shareholders.
The deadlines for SPACs to complete mergers can lead to rushed decisions or poor target selection. A 24-month timeline pressures firms to move forward with deals which creates a risk of prioritising speed over due diligence and strategic fit.
コメント