Getting the facts together

Firstly, let’s connect the dots. A SPAC is a special purpose acquisition company. It’s essentially a shell company, without any businesses in it to begin with. The SPAC lists on the stock market as a way to raise money from shareholders. With this money, it then buys or merges with other companies. In theory, a few years down the line, the SPAC will then contain a portfolio of different businesses.

How does Donald Trump fit into the picture? Well it’s been announced that DWAC will merge with Trump Media and Technology Group. Within Trump’s business is Truth Social network. There isn’t a lot of detail available about this, but I imagine it has something to do with rumours of Trump setting up his own social media platform. This comes after he was banned by several large platforms in the past year.

Trump might have lost some publicity since he lost the Presidential election last year, but he’s still a notable figure. With a large following in the US, and the potential for another run at office in 2024, his media company does have a high value.

Should I buy shares in DWAC now?

One point I need to remember is that DWAC doesn’t just have to be associated with Trump and the social network. It can buy or merge with other companies as well. So if I buy shares now, I’m really investing in the future potential of the companies that fall under the SPAC.

So with a price around $86, it gives the SPAC a valuation just over $2.8bn. The difficulty I have as a traditional investor is that I’m struggling to ping a fair value on the company. There’s very little tangible information I have about Trump’s platform or the future companies being eyed up by DWAC. As such, I don’t know whether $86 is a good price to buy shares at.

The other issue is that the stock is being heavily bought by retail traders. The same chat rooms that helped to pump up GameStop and AMC earlier this year have been posting about DWAC. The huge spike higher over the past week is an example of how speculation can drive a price higher. 

In the absence of any material news, I think speculation will continue to cause large swings (higher and lower) for DWAC shares. As a result, as much as I think this will be a very interesting company to follow, I struggle to justify buying shares now, so will be steering clear.

What is this business?

To understand what happened with the DWAC share price, I need to explain what Digital World Acquisition Corp actually is. This is not a traditional business as it sells no products and offers no services. The firm is, in fact, a special-purpose acquisition company (SPAC). These are also known as blank-cheque companies. And they serve as an alternative method for a private business to go public. Let me oversimplify.

The cost of going public via the traditional route of an IPO is actually quite expensive. After all, beyond the legal fees, there are financial service charges to cover, an investor roadshow to plan, and a lot of speeches to give. It’s effectively the investment world’s version of a political campaign.

With a SPAC, all of this can be avoided. When initially established, this unique type of firm issues shares to raise money on the public markets. It then uses this capital to merge with an existing private business. After the merger, the target company replaces the SPAC on the stock market. Consequently, it becomes a public business with virtually none of the expense.

Why did the DWAC share price explode?

Digital Acquisition Corp has found its target private business. And given what happened to the DWAC share price, I think it’s fair to say, investors are pretty excited. The firm has signed a definitive merger agreement with Trump Media & Technology Group. This business was established by former President Donald Trump after he was removed from other social media platforms due to the January Capitol riots.

The company is going to be launching a new social media platform called TRUTH Social. And in the words of Donald Trump, it was established to “stand up to the tyranny of Big Tech”. Regardless of the political aspect, the idea of a new rival social media business does sound like a promising venture. And with deep pockets behind it, leading companies in this space like Facebook and Twitter could be given a run for their money. Therefore, seeing the DWAC share price skyrocket on this news isn’t too surprising to me.

Should I buy now?

As promising as this company may be, I’m not tempted to start buying shares. There still remains a long road ahead. Firstly, while a definitive agreement has been signed, shareholders and regulators still need to approve the deal. But even if this happens, the DWAC share price has unsurprisingly become overinflated by speculation.

The signed agreement places a maximum valuation of $1.7bn. Yet the buying frenzy has pushed the market capitalisation of the SPAC to over $3bn. In other words, investors buying shares are paying a 76% premium for a business they know next to nothing about. That’s not something I’m interested in adding to my portfolio.