What are SPACs? Analysing the TMTG and DWAC merger

Throughout 2020 and 2021 Special Purpose Acquisition Companies (SPACs) have surged in popularity and have stormed financial markets and global news. In 2020 alone, more than $83bn has been raised with companies going public through SPACs and in 2021, 553 SPAC IPOs have been carried out. But what is the reason behind this incredible surge in popularity? And more generally, what is a SPAC and how does it work?

The purpose of this article is to provide a brief explanation of the functioning and structure of SPACs. Starting by considering the formation of a SPAC, we will focus our attention on their advantages over traditional IPOs and their history. Secondly, we will analyse one of the most recent cases of a company going public through a SPAC, by taking into consideration the case of Digital World Acquisition Corp (NASDAQ: DWAC), the so-called “Donald Trump SPAC”.

What it is a SPAC and how does it work?

A special purpose acquisition company (SPAC) is a company with no actual commercial business operations, which is set up for the sole purpose of raising capital through an initial public offering – or IPO – and with the goal of buying an existing private company. SPACs are usually referred to as “shell companies” or “blank-check companies” because of the way they are structured and the fact that they allow for investors to contribute their money towards a fund without any knowledge of how this capital will be used.

Generally, a SPAC is formed by an experienced management team – also called sponsor – who has nominal invested capital of around 20%. Through this equity share, the sponsor shows the other investors that he also has “skin in the game” and is committed to the investment. The remaining 80% of capital is held by public shareholders, and it is traded on the stock exchange. After the IPO, SPACs have different ways to raise capital:

  • By selling common stocks on the market with a price typically of $10
  • By selling warrants which provide the owner the right, but not the obligation, to purchase additional stocks later at a fixed price.
  • By selling a unit which consists of one share and a fraction of a warrant – usually ½ or ⅓ of a warrant.

Founder shares and public shares have similar voting rights with the exception that the former usually also have the right to elect the management team and directors of the SPAC. Units and warrants offer a unique way for investors to contribute to the capital of SPACs. If investors of a SPAC are not pleased or do not approve the decisions of the management team, they could simply decide to sell the share part of their units, keeping the warrants. This will give them the possibility to realize potential gains even for transactions that they have decided to opt out of. For this reason, SPACs are very appealing, especially during turbulent markets.

Once the funds are raised, they will be kept in a trust until one of the two following things will happen:

  1. The management team of the SPAC identifies a company of interest which will be then taken public through an acquisition – or reverse-merger – using the capital raised during the IPO.
  2. If the sponsor fails to identify or acquire a company within the deadline – typically 2 years – the SPAC will be liquidated, and investors will get their money back.
[Figure 1] The Typical SPAC Life Cycle (source : PwC)

What are the advantages of SPACs compared to traditional IPOs?

There are several ways private companies can go public.

The most common route is through a traditional IPO. Companies opting for this choice are subject to regulatory and investors’ scrutiny of their financial statements. In addition, an Investment Bank is usually hired to underwrite the IPO, which usually takes between 12 to 18 months to complete and costs about 3.5-7% of the issuance volume. Finally, meetings and roadshows have to be organised to create interest among potential investors. In addition, not all IPOs succeed. For instance, in 2019, co-working space company WeWork withdrew its IPO because of weak demand for its shares after massive losses and leadership controversies were revealed.

SPACs, on the other side, allow companies to go public more rapidly. A SPAC reverse-merger typically takes between 4 to 6 months to complete. Because SPACs are already public listed companies, merging with a SPAC is simpler and has many advantages:

  • The company sustains lower costs of marketing as it doesn’t have to generate as much interest from investors in public exchanges or roadshows
  • Merging with a SPAC allows the raising of additional capital
  • IPOs prices depend typically on market conditions at the time of listing. By merging with a SPAC, instead, the company can negotiate the pricing with the sponsor before the transaction closes

Considering the example of before, WeWork in 2021 has successfully been able to go public by completing a merger with SPAC company BowX with an equity value of $9bn.

However, there are also some drawbacks of going public with a SPAC:

  • Firstly, shareholder dilution. SPAC sponsors usually have a 20% stake in the company and have the right to receive more shares whenever the stock price achieves a specified target over a certain time frame
  • Secondly, lack of underwriting and comfort letter: In a traditional IPO, the underwriter makes sure all regulatory requirements are met but since SPACs are already public listed companies, the target company doesn’t have an underwriter
  • Thirdly, risk of volatility in the secondary market since the share price cannot be stabilized without the commitment of investment banks

The history and raising in popularity of SPACs

SPACs have existed since the beginning of 1990s and were typically seen as a last resort for smaller companies to go public. At first, SPACs were not very well received by investors as most of the time they were revealed to be scams. This was due to the fact that SPACs were not well regulated and on numerous occasions the sponsor, after having raised the capital through the IPO, simply ran away with the money. Since then, SPACs have put more restrictions on the usage of raised capital and now all the funds raised are kept in a trust.

The number of SPAC IPOs has fluctuated over the years in tandem with the economic cycles, making a resurgence more recently. This could be linked to the pandemic that has significantly slowed the pipeline of traditional IPOs, making SPACs more attractive. Furthermore, during the Covid-19 crisis, the levels of volatility have significantly increased. U.S Federal Reserve had also pumped extra cash into the economy, lowering yields and bringing markets to a crawl. Therefore, SPACs’ popularity rose as they offered the prospect of better returns.

[Figure 2] Number of special purpose acquisition company (SPAC) IPOs in the United States from 2003 to 2021 (Source : Spacdata.com)

Trump Media & Technology Group and Digital World Acquisition Corp.

The booming period of SPACs has attracted big-name underwriters such as Goldman Sachs, Credit Suisse, Deutsche Bank as well as senior executives and many celebrities who all decided to capitalize on this new trend.

This is also the case for Donald Trump who on 20th October 2021 announced that Trump Media & Technology Group would become public through a merger agreement with SPAC company Digital World Acquisition Corp. (NASDAQ: DWAC).

Trump Media & Technology Group – TMTG in short – is creating a new social media called TRUTH Social. This new platform has launched its Beta program in November 2021, whereas a nationwide rollout is expected in the first quarter of 2022. The overall TMTG’s mission is to rival the liberal media consortium and fight back against the “Big Tech” companies.

At the time of the announcement, TMTG had no financial statements, no description of how the funds raised through the merger deal will be used, no capital structure and no projection of future revenues. TMTG and DWAC case is very emblematic as it clearly shows both the advantages and disadvantages of SPACs. A company such as TMTG would have never been able to go public through a traditional IPO, given its lack of information, investors would have been very sceptical. On the other hand, by merging with a SPAC, TMTG was able to raise sufficient capital that could be used to finance its future operations.

How did the stock market react on the day of the announcement?

On the day of the announcement, DWAC stock surged immediately resulting in a closing price of $45, +365% from the previous day. The trading volume was equally impressive and reached 498 million shares. Given that the total number of shares available for trade was close to 28.5 million, it appears that the total number of SPAC shares changed hands approximately 17.5 times in a single day!

On 22nd October, the stock soared even more as more hype about TRUTH Social was spread. It reached an all-time high at $175. DWAC market cap reached $2.0bn.

[Figure 3] DWAC stock price chart from October 2021 to November 2021 (Source : Yahoo Finance)

What emerges from this analysis is that the SPAC boom has allowed companies with no actual product and no projections of future revenue, to go public and reach multibillion-dollar valuations if there is enough hype around it. The fervor of people willing to buy DWAC stocks was a result of many factors:

  • The rising popularity of SPACs and the pandemic that has halted stock markets and has slowed the process and attractiveness of traditional IPOs significantly
  • Talk of independence and censorship, already started from the former President during his political campaign
  • The rise in cryptocurrencies and decentralisation together with Trump’s fight against the “Big Tech” industries.
  • The prospect of a new social media platform for Trump’s supporters who were still dissatisfied with the outcome of the Presidential elections.

The DWAC case was an extreme case that reminded us how much stock markets could disconnect from their fundamental value.


In conclusion, SPACs are definitely an interesting instrument both for investors and for companies. SPACs, given their unique and complex structure, allow for a variety of return profiles, risk profiles and timelines, depending on investors’ goals. For companies instead, SPACs offer a great opportunity to go public without facing the constraints and costs of a traditional IPO.

The explosive popularity in SPACs and the subsequent involvement of celebrities and senior executives, has brought an increasing level of volatility and scepticism around certain types of SPAC mergers. As mentioned by the SEC on its website “Investors should always conduct their research and never invest in a SPAC based solely on a celebrity’s involvement”. SPAC deals can be considered riskier than traditional IPOs because, as seen in the TMTG and DWAC merger, SPACs could allow companies with no operations attached and no prospect of future cash flows to go public. Furthermore, the success of a SPAC is purely determined by the success of the company it acquires.

Looking forward, it is hard to predict whether SPACs are just a fad or will endure in the future. As it stands now, SPACs are filling an important gap in the market and given their unique offering will likely remain one of the primary options for companies looking to go public. Even though in the last quarter of 2021 the number of SPAC IPOs has decreased, this is not a sign of a weakening market but rather because sponsors have turned to completing deals with their active SPACs instead of raising new pools of capital. From the public investor side, a drop in the demand is not anticipated unless there will be a broader public equity weakness, rising interest rates or a change in SEC treatment of SPACs that materially distorts their incentives.

Author : Alberto Cambursano


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