Guest post by Kemp Moyer from BPM LLP
Kemp is the senior manager, advisory of BPM LLP.
We studied some of cryptocurrency’s largest M&A transactions and discovered a few interesting trends. Here is what those in the crypto world may expect to see as a result of strategic M&A moves in the cryptocurrency space going forward.
Since the late-2017 price peak, the markets for the top cryptocurrency alternatives have been notably volatile, which has led to certain challenges in the crypto and—closely related but fundamentally different—blockchain technology spaces. However, as the old adage goes, market challenges also present opportunity, and certain players in the space have been acting on that opportunity to advance their offerings and accelerate growth through strategic acquisitions.
Along with other notable transactions, this acquisition prompted BPM professionals to analyze the data of 10 notable Mergers and Acquisitions (“M&A”) transactions in the crypto space that closed between April 2018 and June 2019.
Crypto companies will continue to target synergistic technology
Of the 10 M&A transactions BPM analyzed within the crypto and blockchain space, at least five enabled the acquirer to access new technologies to inorganically expand or improve an element of their platform.
In June 2018, Tron, a leading proponent of internet decentralization, acquired BitTorrent for $126 million in cash to utilize BitTorrent’s decentralized peer-to-peer file sharing service. Over time, the adoption of decentralized platforms is anticipated to help improve and ensure data privacy among users, seen by many as a necessary component for the crypto and blockchain industry moving forward.
A month later, Binance Holdings, a crypto and blockchain asset exchange, acquired Trust Wallet, giving Binance access to technology that improves user security and offers additional crypto wallet services. Binance users can instantly withdraw Ether into their wallet, a feature that was not offered by Binance prior to the transaction.
Similarly, Coinsquare acquired BlockEQ last December, whose technology enables the movement of tokenized crypto assets at low cost and with rapid settlement. Over time, Coinsquare is expected to apply the technological resources from the transaction to develop additional rapidly-transferable crypto assets, including stablecoin offerings.
Most recently, in June, Blockchain.com acquired slock.it to develop a distributed collaborative entity (“DCE”), otherwise known as a “smart city” with the acquired technology. slock.it allows users to buy, rent and sell goods or services online through the Ethereum blockchain, which is planned to serve as the marketplace for the DCE.
Anticipate crypto and blockchain companies to continue to target synergistic technology additions and accelerate platform development through strategic M&A.
Industry players will increase network exposure and user bases through M&A
While technology has been arguably the primary driver of transaction activity in the crypto and blockchain space over the past 15 months, many of the deals have focused on adding market share and increased exposure to established networks.
In Tron’s purchase of BitTorrent, the buyer not only gained access to BitTorrent’s peer-to-peer file sharing services, but also its networked user base. As a result, Tron has the opportunity to grow the capitalization of its token (TRX) through the network effects provided by increased exposure to BitTorrent’s established user base.
Tron is not alone in this approach. CoinFabric, who had previously acquired MainNet in a December 2018 blockchain technology and experienced personnel acquisition, added to its platform via the acquisition of CoinBeat last March. As a content contribution network company, CoinBeat provides CoinFabric with additional media exposure as well as an expanded user base.
Expect additional activity in the space by industry players looking to maximize and capitalize on the critical network effect, expand market share and accelerate user base expansion on a forward-looking basis.
Acquisitions will allow crypto companies to more easily expand globally
Beyond domestic user base expansion, multiple companies have completed acquisitions to expand into new international markets. Given the complex regulatory landscape in the industry, M&A can often be the most rapid method of gaining access to new international markets.
For example, in February Kraken acquired Crypto Facilities, an exchange registered with the U.K. Financial Conduct Authority (“FCA”). This acquisition enabled Kraken to accelerate its entry into the U.K. marketplace and to obtain regulatory licenses through Crypto Facilities. Additionally, given the market expertise of Crypto Facilities, Kraken can now offer futures and indexed securities internationally as a result of the transaction.
Similarly, Coinbase, an especially active M&A participant over the past 15 months, acquired Neutrino in February to expand its user base in Europe and, critically, to offer tokens to its current users while complying with international regulations. Reaching new user bases, both domestically and internationally, will continue being a driver for transactions among crypto and blockchain companies.
Given the complex regulatory aspects surrounding the industry, assume M&A activity will play a critical role in the strategy of many acquirers looking to accelerate entry into new international markets.
Industry professionals and experts will come with M&A deals
Finding and recruiting talent in a relatively-new industry is no easy task. However, acquiring companies in the space also often includes access to crypto professionals—with beneficial experience.
In April 2018, Coinbase acquired Earn.com, a company that began as a hardware maker for crypto mining, but adjusted its business model towards operating as a social networking company.
A key component of the Coinbase acquisition was to expand its expert management team, as Earn.com’s CEO Balaji Srinivasan joined Coinbase as its new chief technology officer. Coinbase indicated, based on his experience in multiple businesses in the crypto and blockchain industry, that Srinivasan would bring a unique perspective and expertise to the table and continue to drive platform and technological development.
As the industry continues to mature and consolidate, the acquisition of key talent will play a significant role in upcoming M&A deals.
We anticipate the M&A trend in the crypto and blockchain space will continue to evolve and expand through the rest of 2019 and into 2020, and technology will continue representing a primary driver behind many of these transactions. At the same time, expanding networks, entering new international markets, and adding key management and technical personnel will also be key motivators of M&A activity in this growing and ever changing industry.Posted In: Analysis, Guest Post, Venture Capital