Should You Buy DWAC Stock or Will It Go CCIV's Way After the PIPE?

Mohit Oberoi, CFA - Author

Nov. 9 2021, Published 8:14 a.m. ET

Digital World Acquisition (DWAC) has been the most active SPAC after it announced a merger with former President Donald Trump’s TMTG (Trump Media and Technology Group). Meanwhile, the SPAC stock has whipsawed. It went as high as $175 but now trades at almost a third of that. Should you buy the stock before the merger and could it go the same way as Churchill Capital IV (CCIV), which plunged after the massive PIPE (private investment in public equity) investment.

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The steep rise in DWAC is a welcome break for SPAC investors. Several SPACs, including those backed by credible sponsors, are struggling either below or just above the SPAC IPO price.

SPACs have been volatile

Also, several companies that went public through a SPAC merger trade below the SPAC IPO price. However, while the sharp rise in DWAC might appear positive, it also looks speculative, just as we saw with CCIV, which took EV startup Lucid Motors public.

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Will DWAC go the same way as CCIV?

Before DWAC, the most hyped SPAC merger of 2021 was CCIV’s merger with Lucid Motors. Usually, these mergers get “leaked” as rumors, which was the case with CCIV. The stock rose almost 550 percent from the SPAC IPO price even before the merger announcement.

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However, CCIV plunged after the deal was officially announced. There was a massive PIPE investment of $2.5 billion as part of the deal. While the PIPE came in at $15, or a 50 percent premium to the SPAC IPO price, it was way below CCIV's stock price at the time. The valuations for Lucid Motors didn't leave much room for CCIV stock to run higher and it eventually fell below $20.

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DWAC PIPE investment

DWAC is a different case altogether. The company announced the merger before the official filings, which is an exception rather than the rule. Markets are still left guessing on the key aspects of the merger including the PIPE investment.

Reports suggest that there could be a PIPE investment of around $500 million in the business combination. If this happens, the stake that PIPE investors would hold in the new company would be bigger than that of DWAC stockholders. DWAC only has about $293 million in the trust account.

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All we know about the valuation is that the deal would value TMTG at an initial enterprise value of $875 million. The valuation could rise to $1.7 billion based on the post-merger stock performance. However, there isn’t much information on the equity value of the company.

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What’s the forecast for Trump Social Media stock?

Trump’s social media could be a champion of Republican and conservative voices. Trump has been the flagbearer of conservatives, many of whom believe that the mainstream media and the major social media channels are biased against them.

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Trump was blocked by social media companies like Twitter and Facebook after the Capitol Hill violence. The market potential for Trump’s social media looks positive. While he lost the 2020 election in the historical turnout, millions of Americans voted for him. Looking at the swelling crowds at his rallies, Trump seems to have a captive base for his social media network.

If the social media plans go as planned, many of Trump's over 80 million Twitter followers might also get on the new social media network. Looking at that number, the $1.7 billion enterprise value doesn't look too high.


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