Mergers and Acquisitions

Blockchain as an M&A driver

Mergers and acquisitions in the blockchain technology space are still in their infancy. Most of the transactions so far have been “intra-industry” where two companies working on similar early stage blockchain solutions decided to join forces. This may well be driven by the scarcity of available talent, rather than by the underlying economic incentives.

In 2017 Companies raised more than $1.2B through Initial Coin Offerings (ICOs) – significantly higher than they raised through traditional early-stage venture capital financing. This surge in ICO financing shows that there may be a lot of independent viable businesses that come online as their technology matures and stabilizes. This is good news for a broad array of existing companies who will move to acquire these upstarts as they gain market traction.

As blockchain drives these deals, we expect:

  1. Technology, financial and healthcare companies to pay a significant acquisition premium for early stage proof of concept companies
  2. Significant number of deals consummated will be  cross-border deals
  3. Legal, regulatory and compliance will be bigger hurdles than the underlying technology itself

Existing frameworks for merger and acquisition may not apply to ICO funded companies. Companies will need to reconcile how tokens are valued vis-a-vis their business model. If the tokens already command a high market capitalization, it will attract only the well-heeled buyers. On the other hand, if the token valuation is minimal, the board will have issues endorsing a deal for the merits of the technology.

At Proteum, we understand that all acquisition models will need to take into account the structure of the company and the token model. Alternatively, as the company runs out of ICO cash, it may need to attract VC financing. In either case, the traditional model of adding the token price to the price of equity will need to be refined with a greater emphasis on the role of the token to the operations of the company.