This article was published in ACG New York 2017 Private Equity in Review. It is reprinted here with permission.
According to PitchBook, 23 M&A deals in the blockchain and cryptocurrency space closed in 2017.
Within the first month of 2018, five more deals closed. While most of the 2017 transactions occurred between industry participants due to consolidation, increasingly, other companies are evaluating the many potential benefits of blockchain technology, particularly companies that engage in extensive transaction recording, such as those in the financial services, shipping and logistics, and data protection industries. A potential acquirer of a blockchain technology company should carefully consider whether the technology will be a true strategic fit or whether a more established, existing technology could achieve the same goals and should carefully diligence issues of nontraditional capital generation before signing an acquisition. In addition, the acquirer will need to understand the capital and financing structure of these often uniquely financed companies.
Although blockchain technology has been tested as the solution for any number of problems — from the United Nations’ World Food Program using it to provide food vouchers to Syrian refugees to the Louis Dreyfus Co. using it to trade a cargo of U.S. soybeans to China — the technology is still in its development stage. Companies are testing the technology through individual pilot programs, but, at the moment, no company outside of the blockchain industry has converted its entire logistics department or trading platform to run solely on a blockchain-based system. A company interested in acquiring blockchain technology should consider the following questions to help it determine whether the technology is a strategic fit for the company and whether the acquisition makes sense for the company’s long-term strategy:
Is the product or service that the company offers something that needs a faster, more secure, immutable method of record keeping? These are the attributes that make blockchain technology more attractive than traditional technology. If these attributes are not helpful for a company, it may not make sense to invest in blockchain technology.
Are there alternative, already-established technologies that the company could use instead of blockchain technology? As discussed above, blockchain technology is still under development. A company may find that there are alternative technology solutions that already exist and may be as good or better for the company’s needs than a blockchain-based solution. By using already-existing technologies, companies could avoid some of the risk that often comes with adopting a new technology.
Is the company comfortable with an acquisition that may involve nontraditional issues, such as token sales or cryptocurrency funding? Blockchain companies often engage in nontraditional funding and revenue generation methods, such as token sales or cryptocurrency funding. If a blockchain company has conducted a token sale, it is important that the acquirer know how the sale was conducted, whether it was conducted in compliance with U.S. securities laws, and to whom the tokens were sold. If a company has accepted cryptocurrency investments, it is important to know how those investments are stored, as there is currently no banking protection for stolen cryptocurrency. In addition, an acquirer should know what kind of cryptocurrency was accepted and have a way to track any value fluctuation the cryptocurrency may experience during the acquisition period. Finally, for both token sales and cryptocurrency investments, the acquirer should have a clear understanding of how the company records these items in its accounting.
Companies may see value in acquiring a blockchain technology business, but these acquisitions should be reviewed and diligenced carefully to ensure that liability issues unique to blockchain companies have been fully disclosed and that the acquisition is a strategic fit for the acquirer.