Former President Donald Trump is poised for a major financial windfall — at least on paper.
As long as Trump Media & Technology Group’s stock price doesn’t implode spectacularly before Tuesday’s closing bell, Trump is in line to receive an additional 36 million shares as owner of Truth Social.
This step is on track to be achieved after the market closes on Tuesday.
Even if Trump Media is losing money and Truth Social is very small, the new shares Trump is in line to receive would be valued at about $1.3 billion at current prices.
Trump’s net worth has been on a roller coaster ride since his social media company finalized its deal to make it public late last month. The former president is the dominant shareholder in a stock that has been called a “meme stock on steroids.”
Although Trump Media’s stock price has been cut in half since its March 27 peak, it is still trading comfortably above levels that would trigger certain performance provisions in the merger agreement.
According to SEC filings, Trump Media may issue additional shares to pre-merger shareholders, such as the former president, if the volume-weighted average dollar price is equal to or greater than $12.50 per 20 trading days during a 30-day trading period beginning March 25.
The full earnout of 40 million shares would be triggered if that price was at or above $17.50 over the same period.
Tuesday marks the 20thth trading day and Trump Media’s stock price has never been below the $17.50 level since the clock started on March 25.
“It seems almost certain to me that the earnout conditions will be met at this point, given the high level of the stock price,” said Michael Ohlrogge, an associate professor at NYU Law School.
Trump’s dominant issue
The merger agreement calls for Trump to receive 90% of these additional shares, which translates to 36 million additional shares.
That would give Trump an even more dominant stake of 114.75 million shares, or 65% of total shares outstanding, according to filings.
Of course, Trump Media’s stock price is subject to extreme volatility, which means the value of this stake can vary widely.
There are also practical and legal restrictions that would likely prevent Trump from taking these actions in the near future.
According to filings, the earnout shares that Trump appears set to receive are subject to lock-up restrictions that prevent insiders from selling or borrowing against their shares for months after the merger closes.
Even if Trump were able to circumvent this lock-up agreement, experts say it would be virtually difficult for him to sell a significant portion of his stake without causing a crash in the stock price. After all, Trump is Truth Social’s largest shareholder, president, and most popular user.
“Highly overvalued”
Although Trump Media’s stock price has retreated since peaking at $66 last month, experts warn that it remains overvalued based on fundamental metrics.
A common way to evaluate stocks is to compare their price relative to their earnings.
The average social media stock trades at a price-to-sales ratio of around 10x, according to Matthew Kennedy, senior IPO strategist at Renaissance Capital. This peer group includes the owner of Facebook Meta, Pinterest, Snap, Reddit, and Rumble.
For comparison, Trump Media trades at north of 1,200 times sales, according to Kennedy.
“The stock appears to be significantly overvalued,” said Jay Ritter, a finance professor at the University of Florida.
Ritter, who has studied IPOs for four decades, expects Trump Media’s stock price to eventually plunge to just $1 or $2 per share.
Trump Media Gives Tips to Prevent Short Selling
Ohlrogge, a professor at New York University, said Trump Media’s stock price “responds primarily to non-rational factors.”
For example, Ohlrogge pointed to the stock’s plunge last week after the company announced plans to register new shares.
“There would be nothing surprising about this filing since it did exactly what the company said it would do after its IPO…There was no real rational reason to have a “negative impact on price,” he said, adding that the price reflects the “whims and feelings of very uninformed traders, who determine the price one way or another.”
In a sign that Trump Media is worried about its stock price, the company took the unusual step last week of telling its shareholders how to avoid having their shares loaned to short sellers who bet against them.
Trump Media has updated an FAQ section on its website to include short selling prevention tips.
“It’s very unusual,” said Peter Byrne, a securities lawyer at Cooley who focuses on IPO companies. “We don’t typically see companies publishing such information.”
For more CNN news and newsletters, create an account at CNN.com
yahoo
