Will the IPOF-Discord Merger Sail Through or Go the Equinox Way?

Social Capital Hedosophia Holdings VI (IPOF) stock rose over 4 percent on Nov. 9 but was trading flat on Nov. 10. There are rumors that the SPAC is looking at a business combination with Discord. Should you buy the stock on the merger rumors or stay away?

This isn't the first time that IPOF has been rumored to be in merger talks. In May, IPOF was rumored to be in talks with luxury gym operator Equinox Holdings for a merger. However, the talks didn't go through.

IPOF is the biggest SPAC from Chamath Palihapitiya with around $1.4 billion in the SPAC trust. Four of the SPACs sponsored by Palihapitiya have already merged with the merger targets. Virgin Galactic was the first company to go public with a Palihapitiya SPAC.

Opendoor and SoFi also went public through a reverse merger with a Palihapitiya-backed SPAC. All of these companies trade well above the SPAC IPO price of $10.

However, Clover Health is one stock that trades below the SPAC IPO price of $10. The stock has been very volatile and was also popular on the Reddit group WallStreetBets.

There isn't any official news about IPOF’s merger with Discord and it has only been floated on social media channels. Stocktwits users are particularly enthusiastic about the merger. However, unlike in the past where SPACs used to surge due to merger rumors, this time the reaction has been quite circumspect.

One notable exception that we see is Digital World Acquisition Corp. (DWAC), which has surged after announcing a merger with former President Donald Trump’s TMTG (Trump Media and Technology Group). The stock has whipsawed even though not much is known about the business combination.

In the September funding round when Discord raised $500 million, the company was valued at $15 billion. The valuation was over twice its previous funding round, which was completed in December 2020. In the first quarter of 2021, Discord was reportedly in talks with Microsoft where the latter was looking to acquire it for $10 billion.

Microsoft has been diversifying its revenue base and focusing on high growth and emerging industries. The stock has seen a valuation multiple rerating and recently surpassed Apple to become the biggest company by market cap.

Currently, we don’t have an official confirmation of the merger between Discord and IPOF. Once the merger details and other financial information are made public, including the valuation and Discord’s earnings, then it would be prudent to comment on the prospects for IPOF.

Barring Clover Health, which is still reeling from the impact of Hindenburg Research’s allegations and a slowdown in projected growth, all of the other companies that went public through a merger with Palihapitiya-backed SPAC have delivered good returns for investors, especially those who bought the SPAC near the IPO price of $10.

Now, it isn't guaranteed that IPOF will go the same way. The stock is still trading near the IPO price, which means that there isn't much risk. Even if the business combination doesn't appear attractive, investors always have the option to redeem the units in the de-SPAC process.