MW 'DJT' is booming. Here's why other SPAC stocks haven't been so lucky.
By Gordon Gottsegen
There was a boon in companies going public via special-purpose acquisition companies in 2020 and 2021. Since then, not so much.
Shares of Trump Media and Technology Group Corp. have been rallying in the buildup to the U.S. presidential election. After the stock hit an intraday low of $11.75 on Sept. 24, it tripled over the next month to reach an intraday high of $36.77 on Oct. 23.
While shares of Trump Media $(DJT)$ have had a volatile year, it may be worth remembering that before bearing the name and initials of the former president, the stock went by an entirely different name altogether: Digital World Acquisition Corp.
Digital World was one of more than 1,000 special-purpose acquisition companies, or SPACs, that have hit the public markets since 2020.
SPACs, sometimes called "blank-check" companies, are essentially shell companies that exist to acquire or merge with a private company, in order to take that company public.
Going public via SPAC involves a different process than a more traditional initial public offering, and there are a handful of reasons why a private company may opt to merge with a SPAC instead of pursuing a usual IPO. For instance, SPAC deals tend to close faster than IPOs, while private companies may also have more clarity into how much money they can raise through a SPAC listing.
Numerous companies elected to go public via SPACs at the height of their popularity in 2020 and 2021. According to SPAC Analytics, there were 248 SPAC mergers in 2020, which accounted for 55% of the 450 total IPOs in the U.S. that year. In 2021, 613 of the 968 total U.S. IPOs were SPAC deals, or around 63%.
Year SPAC IPOs Total U.S. IPOs SPAC %
2024 38 99 38%
2023 31 72 43%
2022 86 118 73%
2021 613 968 63%
2020 248 450 55%
2019 59 213 28%
2018 46 225 20%
2017 34 189 18%
2016 13 111 12%
2015 20 173 12%
2014 12 258 5%
2013 10 220 5%
Source: SPAC Analytics
But both the number of IPOs and SPAC mergers cooled dramatically in 2022 as stocks entered a bear market. That year, the number of U.S. IPOs dropped to 118, with 86 of them, or 73%, being SPAC deals. In 2023 and 2024, SPAC mergers returned to pre-2020 levels, while the total U.S. IPO market remained below average compared to the previous two decades.
The SPAC boom - and bust
With SPAC hype reaching its peak in 2021, we've had a few years to see how the companies that went public via SPACs during that time have fared since.
As it turns out, not so great.
The IPOX SPAC Index is a weighted stock index that was designed to track the performance of top publicly traded SPACs. It includes both SPACs and de-SPACs, the latter being the term for the postmerger combination of the SPAC and the private company it took public. For example, Digital World Acquisition Corp. would be the SPAC, while Trump Media and Technology Group would be the de-SPAC.
Some of the companies included in the IPOX SPAC Index include AST SpaceMobile Inc. $(ASTS)$, Hims & Hers Health Inc. $(HIMS)$, Lionsgate Studios Corp. $(LION)$, Lucid Group Inc. (LCID), DraftKings Inc. (DKNG) and, of course, Trump Media.
The IPOX SPAC Index launched on July 30, 2020, and almost doubled by the end of that year. But it fell in 2021, and by early 2022, it ended up back where it started. The index dipped in and out of negative territory throughout 2022 and 2023, and as of Sept. 30, it has gained only slightly since its inception, with an annualized total return of 3.4%.
For context, the S&P 500 index SPX saw total returns of 89.4% over that same period, giving it an annualized compound growth rate of 16.5%, according to FactSet data.
However, even the slight returns on the IPOX SPAC Index beat out the De-SPAC Index, which tracked a bucket of U.S. companies that had gone public via SPAC mergers. After a sizable jump in 2020, the De-SPAC Index lost more than three-quarters of its value from 2021 to 2023. It continued to decline in 2024 before being discontinued in April.
Why have de-SPAC companies struggled so much?
The fact that entire indexes tracking their prospects have struggled significantly paints a pretty bleak picture for these post-SPAC merger companies.
"The track record of the stock prices after the merger, on average, has been really disappointing," Jay R. Ritter, a finance professor at the University of Florida, told MarketWatch.
According to Ritter, one reason for this has to do with the way these SPAC deals were set up. In many cases, the SPAC companies agreed to terms that overvalued the private companies they were taking public. Ritter said that 2021 was a "seller's market" and some private companies were getting offers from multiple SPACs, potentially leading to bidding wars and overpayments.
On top of that, some companies with not-so-great track records were attracted to the SPAC process.
"Before 2021, we found it very difficult to distinguish the quality of companies that were doing traditional IPOs versus doing SPAC mergers. In terms of trailing 12-month sales, profitability and industry mix, there wasn't much difference," Ritter said, citing an academic paper he co-authored. "That changed in 2021 and later, where it's much more likely that the companies merging with a SPAC have lower revenue or lack of profitability."
Ritter added that more profitable and desirable private companies were able to negotiate better terms or conditional clauses on their SPAC deals. But lower-quality companies weren't in a position to make the same demands, which often made mergers with those companies more desirable for SPACs, prompting them to move forward with those deals.
"I would view most of those companies as desperate," Ritter said. "And their track record is totally consistent with them being desperate companies, where the business model just isn't working and they didn't raise any cash in the merger. So they've got this problem where they're now publicly traded, but they're losing money and didn't raise any cash."
In some ways, Trump Media is like these other de-SPAC companies. The company has struggled with its profitability since merging with Digital World; in the second quarter, the company lost $16.4 million and generated only $837,000 in revenue. But at least that's a step in the right direction compared to the first quarter of the year, when its net loss was $327.6 million on a revenue of $770,500.
But in other ways, Trump Media is far from your usual de-SPAC. For the past few months, shares of the company have been significantly affected by news surrounding Republican presidential nominee and former Presidet Donald Trump - who owns a majority stake in Trump Media - and his odds of winning the U.S. presidential election. For example, shares jumped when Trump survived an assassination attempt in July, fell after Trump debated Kamala Harris in September, and rallied again this month as betting markets increased Trump's odds of victory.
Read more: How Trump proxy stock 'DJT' has come to reflect election-betting data
Shares of Trump Media have acted as a proxy for traders to gamble on the outcome of the election, which may explain why its stock price has increasingly reflected election-betting data. That's even as some experts have voiced skepticism about betting odds as a reliable indicator of election outcomes, and as a select few, very large bets may be moving the betting markets.
As such, it's been difficult to decouple Trump Media's stock performance from this year's presidential campaign. Otherwise, it may well have traded more like other de-SPAC companies that have struggled based on their business fundamentals.
Of course, that could change - depending on who wins the election on Nov. 5.
Keep reading: Election-betting odds are swaying some stock-market investors as Trump's chances improve
-Gordon Gottsegen
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 24, 2024 14:41 ET (18:41 GMT)
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