Trump’s PSPC investors don’t know what they’re buying

Donald Trump’s new venture, which aims to launch a rival on Twitter, made several important announcements this month. First, the company said it made deals to raise $ 1 billion in cash. Second, he admitted that he was under investigation by the Securities and Exchange Commission. Third, he revealed that Devin Nunes, a staunch ally of Trump in the House of Representatives, would be leaving Congress to become his chief executive.

Investors have reacted with some caution, but more enthusiasm. On December 6, stocks fell 3%, possibly in response to the announcement of the SEC investigation, which Senator Elizabeth Warren had suggested the committee consider. The next day, the stock jumped 17%, with Trump fans appearing to focus on injecting cash and new hires. “Go away Pocahontas!” One tweeted, borrowing the nickname Trump from the senator. “You have no power here!” Shares climbed another 28% the next day, before finally falling to the current $ 51. Overall, since the announcement, they are up 13%.

Small investors who raise prices don’t know what they are buying. Of course, they understand that they are investing in a specialized acquisition company, or a SAVS, rather than in a traditional company. Traders still cannot buy shares of Trump’s company, the Trump Media and Technology Group. Instead, they have to acquire shares in a SPAC – essentially just a bunch of cash – with the understanding that it will merge with Trump’s group and therefore give them a stake in the combined entity. But they have no idea how many shares will exist in the company after the merger, which means they don’t know what percentage of the company they are actually buying.

PSPCs often come with tricks and surprises that can hurt retail investors, but this particular PSPC has additional pitfalls. Current owners of Trump Media and Technology Group will receive between 86 million and 126 million shares as part of the merger. In addition, institutional investors who have just agreed to inject $ 1 billion into the company will get around 30 to 100 million shares. In total, this means that there are 110 million shares that may or may not be part of the company. It’s a bad setup for little guys. If the stock goes well, the current owners of Trump’s business will receive more stock. If the stock is doing badly, big investors will get more. Whichever direction you take, the family shareholders will eventually become diluted, leaving them with a smaller percentage of the combined business.

Nonetheless, they are winning stocks, with an enthusiasm that seems to be motivated as much by political passion as by financial analysis. “It’s not just a SPAC,” said one investor on Twitter. “It’s to take back our freedom of expression. If there is ever a chance for a group to beat the shorts, the Patriots will.

But these self-proclaimed patriots may be on the verge of losing a fortune.

Ebeginning this month, As Trump fans flocked to public exchanges to buy a slice of Trump SPAC for $ 45 a share, a separate group of investors were closing a billion-dollar behind-the-scenes deal that would allow them to ‘buy at a very advantageous price. The identity of these lucky investors remains a mystery, but we do know a few details. There are 36 of them, and they are all referred to as banks, savings and loan associations, insurance companies, registered investment firms, investment advisers, or people with assets of at least $ 50 million. To keep things simple, we’ll call them whales.

At first glance, their entry seemed like good news for everyone. Social media businesses are expensive to run – Twitter budgeted between $ 900 million and $ 950 million in capital spending this year. Before the Whales agreed to invest $ 1 billion in the new venture, the Trump group was only due to receive around $ 280 million from the PSPC merging with it. “Puff money,” as stock analyst Mark Zgutowicz of Rosenblatt Securities called it. The new cash should give Trump’s group a better chance of creating a credible competitor.

Retail investors applauded the news, boosting PSPC stock and therefore the implied value of the entire company. Prior to the announcement, PSPC’s stakeholders had estimated capital of $ 1.9 billion. That’s $ 2.1 billion, an increase of $ 240 million. By the end of the merger, the owners of the Trump Media and Technology Group are expected to receive around 86 million shares, which once appeared to be worth $ 3.9 billion, but now appear to be worth $ 4.3 billion. Assuming the share price stays at $ 51, that same group will receive an additional 40 million shares, which now equates to $ 2 billion. In addition, the whales that have just bought are able to receive $ 1.7 billion in shares.

Add it all up – the PSPC shares, the warrants, how much Trump’s group will get, plus the shares for new investors – and the whole company is now worth around $ 10.2 billion, if you think about it. trust the current negotiation price. That’s up from $ 7.5 billion earlier this month, before the behind-the-scenes deal went public. Turning a $ 1 billion investment into $ 2.6 billion in shareholder value is a neat trick. The problem, however, is that it may not be sustainable.

When things are going well in the corporate world, insiders often benefit the most. Employees earn bonuses, CEOs get stock awards, and investors get deferred interest. Depending on the size of these perks, they can raise eyebrows. For example, people could challenge, in this case, the multi-billion dollar payment that appears to be coming to the owners of the Trump group. Either way, it still makes sense, in theory, that those intimately involved in growing a business would get disproportionate rewards if things go well.

What doesn’t make sense, however, is when someone is compensated for things that go wrong. Unfortunately for Trump’s PSPC retail investors, this is the kind of deal the whales were able to negotiate. Not only did they receive a discount on the stocks, they also got a deal that protects them – while hurting everyone – if the stock price drops.

Here is how it works. Initially, the whales will receive the equivalent of 29.8 million shares. But if the value of the shares goes down, the number of shares they receive will actually increase. The moves occur in tandem, so as long as the share price is between around $ 16.67 and $ 56, the whales will receive $ 1.67 billion in shares. Since they only invested $ 1 billion in cash, that means they should generate an ROI of around 67%. If the stock price exceeds $ 56, their returns, along with everyone else’s, should rise.

But with such gains at their fingertips, big investors might want to cash in as soon as they can. If they give up on everything immediately, however, the stock price could plunge, as so many stocks will be hitting the market at once, as Bloomberg’s Matt Levine detailed in a column earlier this month. It might torpedo the value of retail traders’ investments, but it wouldn’t do much damage to whales. After all, if the stock drops, they’ll get more stocks to make up for the drop in price. They could then abandon these new actions, causing the price to fall again.

“If this was a normal business,” says Michael Ohlrogge, a New York University law school professor who studies SPAC, “and they said,“ Hey, we’re making new investments. , and these are the terms we give our new investors, ”that would be a terrible sign – and the stock price would almost certainly drop immediately. ”

What do it say the guys with a lot of money being given such favorable terms in the deal with Trump? They could not be reached for comment as their identities remain withheld. But if they were to weigh in, they would probably point out that they have skin in the game, which is true. If the stock price drops below $ 16.67, they won’t be guaranteed a 67% return, and if it drops below $ 10, they could actually lose money. But that seems like a distant possibility at the moment, given that Trump fans are currently buying shares at five times that amount. The whales, in other words, should be fine.

Same thing with the people who organized this masquerade. The man who helped found SPAC, Patrick Orlando, controls a company that has invested $ 11 million in the company and received the right to 6.6 million shares. The latest deal would theoretically put these stocks at risk, just like those owned by retail traders. But the fine print details a special arrangement for Orlando and other insiders, giving them an additional 744,000 shares and warrants, worth about $ 50 million, as part of the deal. In total, Orlando, which did not respond to a list of questions, now holds assets worth an estimated $ 380 million. Not bad for an investment that only cost $ 11 million.

The division of Benchmark Investments that served as an advisor and placement agent, known as EF Hutton, is also well established. He helped PSPC raise its first amount of money, along with two other companies, in exchange for $ 10 million and 144,000 shares. After helping with the new billion dollar injection, EF Hutton will receive an additional $ 25 million, bringing its total transport to around $ 42 million.

The owners of the Trump Media and Technology Group, which presumably includes the former president himself, are in a better position than anyone. With little more than Trump’s name, they managed to strike a deal that will give them up to 126 million shares. But after making the initial merger deal, they still needed to find more money to build a working product. Now, thanks to mystery investors, they will have more than a billion dollars. It would be hard to spend so much money and not start some kind of meaningful business. With the stock currently raging, their interest is now worth around $ 6.4 billion. But even if things turn out badly, they should still come away with a stake of several hundred million. Representatives of the Trump Group did not respond to a request for comment.

The reason all of these groups are in such a good position is that a lot of their risk has been placed on one last class of investors: the regular traders who buy from home. Those who have entered recently, at exorbitant prices, are particularly vulnerable. They don’t even know what percentage of the business is for sale.

And yet Trump fans continue to buy.

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