The March and April SEC filings provide the information needed to analyze the Trump Media merger. Unfortunately for the new shareholders coming from Digital Acquisition, the result is disappointing.
What happened? Four negative developments
First, after an enthusiastic 2021-22 market environment, conditions turned negative in 2023. The delay decreased interest, so the merger actions slowed, and the Digital Acquisition stock stagnated.
Second, Digital Acquisition expenses remained high, made worse by a misleading SEC filing that ended up costing an $18M settlement. That amount, along with the expenses, ate into the money that would transfer over to Trump Media in the case of a merger.
Third, Trump Media was running negative earnings, with moderate revenues and large expenses. As a result, they turned to private loans to keep the firm afloat, meaning the company’s shareholder (equity) balance was getting more negative.
Fourth, there began a questionable strategy used by both Digital Acquisition and Trump Media management as they sought money. The idea was to raise cash by offering a conversion into new, bargain-priced shares of stock when/if the merger was completed. The result was the lenders received stock for repayment, not cash. Trump Media used convertible promissory notes, and Digital Acquisition used other convertible items.
What is wrong with that?
That strategy undermines the value of all shareholders that bought the Digital Acquisition shares at full market value. Look at it this way:
Digital Acquisition was shrinking the per share assets behind the IPO shares. Management has a duty to protect shareholders, not to take advantage of them.
Trump Media took the strategy a step further. The merger was not complete, so they were offering conversion into something they did not own.
So, how big a deal are those convertible borrowings?
Very. It is visible in the March 25 8-K filing, on page C-7, under “Note 5 — Loss Per Share.” Their table shows all the new shares coming together because of the merger:
Now to the book value
Shareholders undoubtedly remember the Digital Acquisition IPO at $10 per share. And we know that money was in trust, earning interest. Perhaps forgotten is that there was a “founder” position that equaled a quarter of the offering at a near-zero cost. Therefore, spreading that $10 over all shares drops the per share book value to $8.
However, as discussed above, there have been sizable Digital Acquisition expenses, so the book value in the merger was $7.60.
Now to the bad news. Coming into the merger, Trump Media had negative book value. Worse, the number of original Trump Media shares was three times the number that came from Digital Acquisition. That pushed the per share book value down to $1.88. Include the other shares in the tables above, and the book value drops further.
The bottom line: Do not expect magic from the cash infusion
Trump Media has been struggling with low revenues compared to expenses. Moreover, the common stock is approaching the 200M shares shown in the tables above (up from the pre-merger 87M). Therefore, without a significant improvement in growth and revenues, it will be a challenge to maintain its high price.
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