Here is a great article by long-time Morningstar columnist John Rekenthaler about how ordinary stockholders are likely to lose big if they buy into Trump’s new media effort. The details are confusing if you are not an experienced Wall Street investor, but this article makes it pretty clear.
Look at the table at the bottom of the article to see the numbers that show that the early investors will probably make money, but ordinary buyers will probably lose out. Sounds like a pyramid scheme, doesn’t it? Go for it Trumpsters!
How to Lose Money: Buy Digital World Acquisition Corp.
Last January, the big news was GameStop (GME). Today, it is Digital World Acquisition (DWAC), which over the past eight weeks has surged from $10 to $77 per share. Digital World is a special-purpose acquisition company, or SPAC, that is scheduled to merge into a new Donald Trump organization, Trump Media & Technology Group. (Those unfamiliar with how SPACs operate may wish to read the Jan. 6 article, “Why SPACs Are a Racket.”) …
… The ladder of SPAC investors contains five rungs, four of which are occupied by institutions. On top are 1) the SPAC sponsor and 2) the underwriter, which put up little money. Further down the ladder are 3) the investors who deliver the seed capital and 4) PIPE investors. Those two parties supply the merger’s cash, while receiving volume discounts. Finally comes the public, which buys its shares on the secondary market. It obtains no special favors.
In other words, public shareholders pay a SPAC’s way. It must be so. If each of the other four parties collect fees from the SPAC or receive discounted shares, then the fifth party must foot the bill. The math insists. That holds particularly true with Digital World, for two reasons. One, the company’s PIPE investors received unusually favorable terms. Two, its acquisition target [Trump Media] is a shell that brings no assets to the bargain. Thus, public shareholders are twice diluted--once by the SPAC’s insiders, and then again by Trump Media & Technology’s ownership stake. …
… If they haven’t already cashed in their chips, the initial public offering investors will do so shortly. For their part, PIPE investors can’t legally sell their positions yet (although they can hedge their positions by shorting), but barring a collapse in Digital World’s stock price, caused by public shareholders suddenly agreeing with the Bear assessment--an event that seems highly unlikely--they also will record a handsome profit. However, public shareholders will only come whole if Trump Media & Technology performs something of a business miracle. [grows in value by an immense amount] ...