The Barbarian at the door of the blockchain: read “M & An in encryption Industry”

Although the cryptocurrency industry is still in its infancy, mergers and acquisitions involving encryption companies are on the increase. However, apart from rumors, media news and high-level summaries, there has been no relevant thorough analysis and forward-looking forecasts. This paper hopes to change this situation and provide a reference analysis and summary.

Transaction behavior.
Since 2013, there have been 350 mergers and acquisitions involving cryptocurrency and blockchain companies. 2018 was the most active year for M & An activity, with more than 160 M & A transactions, and we estimate that there were about 90-100 transactions for the whole of 2019.

M & An activity has a lot of ups and downs, and it seems to be positively related to the price of cryptocurrencies and industry sentiment. Monthly M & An activity peaked in early 2018, when cryptocurrency prices and attention peaked.

Transaction amount.
We estimate that the value of related M & A transactions has totaled about $4 billion since 2013, including about $2.8 billion in 2018 and $700m in 2019.

These numbers sound good, but they are still small compared to the overall network value of each cryptocurrency network (more than $200 billion). However, if you consider the early stages of the industry, this makes sense: most companies are less than five years old, and it seems years before there will be a high-profile IPO for the industry as a whole.

If you take a closer look at transactions that are noteworthy and interesting, you will find that there was only one deal worth more than $100 million in 2019, compared with five in 2018. However, notable deals in 2019 include Facebook’s acquisition of its Libra project, consolidation of the cryptographic asset escrow industry (Coinbase-Xapo escrow) and the first token merger.

Financial mergers and acquisitions Vs Strategic mergers and acquisitions: not all mergers and acquisitions have the same value.
We can divide these M & A transactions into two categories: financial mergers and acquisitions and strategic mergers and acquisitions, which are described as follows:

2018: the motivation of financial mergers and acquisitions is not clear enough. As can be seen in the chart below, there were more financial mergers and acquisitions than strategic mergers and acquisitions in 2017, and the two are roughly the same in 2018. A closer look at financial M & An activity reveals that many acquisitions can be divided into two categories:

A) dysfunctional non-cryptographic enterprises are transformed into cryptographic investment enterprises through the acquisition of small cryptocurrency start-ups (such as Long Island Blockchain).
B) reverse merger, in which private encryption companies acquire listed shell companies.

2019: strategic mergers and acquisitions continue to be strong. When the cryptocurrency market was revised in 2018, opportunistic, ill-targeted financial mergers and acquisitions disappeared, and by 2019 they were completely absent. Strategic mergers and acquisitions, on the other hand, have maintained a good momentum, with about 70 deals expected in 2019.

Sector: funds and exchanges are at the forefront of acquisitions.

More than 50% of mergers and acquisitions are done by investment funds and exchanges: investment funds and cryptocurrency exchanges are the most active acquirers. Taken together, they account for more than half of all transactions.

Exchanges are frequently attacked strategic acquirers: trading and speculation are the first killer applications of the encryption industry, which gives them sufficient cash reserves and online resources to make acquisitions.

“paid entry”: unencrypted companies have been expanding their presence in the industry by acquiring cryptocurrency start-ups. Most of these deals are aimed at bringing in talent from start-ups. Facebook, for example, has acquired two startups (Chainspace and Servicefriend), to supplement development capabilities for their Libra and Calibra projects.

Cryptographic infrastructure and mining: acquisitions by development teams involving cryptographic infrastructure enterprises, protocols and decentralized application (DApp) are also active, with 40 deals. Mining companies were very active before the cryptocurrency market price correction in 2018, but largely disappeared in 2019.

Exchange: Coinbase is a big player in mergers and acquisitions.
Exchanges and trading-related companies are the most active strategic buyers. Which companies are the most active in this field?

Coinbase is the largest company in strategic mergers and acquisitions, with a total of 16 acquisitions. The company’s M & A strategy mainly focuses on talent and technology tuck-in (Note: tuck-in M & A, generally refers to the acquisition target into the acquirer, directly into a department, so that it is easy to obtain relevant technology and advantages, and the cost is lower than its own construction and development. Coinbase also made two major acquisitions: $100 million for Earn and $55 million for Xapo’s hosting business.

Kraken and Coinsquare are not far behind Coinbase. Kraken has seven transactions and Coinsquare has five. One of the heavyweight deals was Kraken’s $100m acquisition of Cryptofacilities, a UK-based compliant cryptocurrency derivatives exchange.

So, what about Yuan an? Despite its high size, speed and product richness, Yuanan has so far made only three public acquisitions (Trustwallet, JEX and Wazirx). However, Yuan an has made large investments in other cryptocurrency companies and partners, which is actually similar to the strategic effect of mergers and acquisitions.

Mergers and acquisitions are also used as a way to circumvent regulatory hurdles: cryptocurrency exchanges use mergers and acquisitions as a strategic tool to facilitate regulatory approval in a jurisdiction or certain products. They achieve this by acquiring companies that already have relevant regulatory licences. We have found that 15 deals since 2018 (the following is an example) have explicitly mentioned in their announcements that regulatory issues are an important consideration for their acquisitions.

The tuck-in of talents and technology is an important driving force of strategic mergers and acquisitions.
In order to understand the motivation of each M & A, we first divide all M & An into three categories: tuck-in, horizontal acquisition and diversification.

The barbarian at the door of the blockchain: read “M & An in the encryption industry.”

Tuck-in*, which brings together talent and technology, is currently the most common motivation for strategic mergers and acquisitions in the cryptocurrency sector, and such mergers and acquisitions have maintained a steady momentum from 2018 to 2019. The focus on recruiting talent and early technology acquisitions is in line with the budding characteristics of the industry.

  • We quote the word Tuck-in from Emilie Choi, Chief operating Officer of Coinbase, who has used this term in various interviews involving mergers and acquisitions in the cryptocurrency sector:

Horizontal merger: it accounts for only about 1/4 of all strategic M & A transactions. However, it accounts for more than half of the transaction value because it represents the integration of larger and more mature companies.

Diversified trading: this is a broad category with a mixture of situations. It includes both the acquisition of traditional financial institutions by encryption companies to obtain their compliance licenses (such as Coinbase, Bakkt and Kraken), as well as the acquisition of non-encryption companies by cryptocurrency agreements to obtain their existing user base (such as wave field acquisition Bittorrent).

Decentralized merger and acquisition.
So far, we have only focused on conventional concepts such as “traditional” finance and the merger of centralized companies, and below we will discuss how cryptocurrency networks can be merged.

There are already a number of thought fragments trying to build theories to predict what mergers and acquisitions of decentralized cryptocurrency networks will look like and what problems will arise. For example, what happens if two competitive privacy currencies merge, or if a decentralized forecasting market launches a hostile takeover of a competitor? Of course, such pure “decentralized mergers and acquisitions” have not yet emerged. After all, many cryptocurrency networks are still in their infancy, mostly run by centralized companies and foundations.

Some pieces of thinking of decentralized mergers and acquisitions:

Protocol Machia by Ryan Selkis.

What the First Token Hostile Takeover Could Look Like by Andy Bromberg.

Encryption native M & A concept: with the maturity of existing cryptocurrency network and block chain projects and the improvement of the degree of decentralization, new stakeholder, concepts and mechanisms will appear in the M & A process. We summarize several concepts and mechanisms of “traditional M & A”, and at the same time conceive the corresponding concepts and mechanisms of encryption native and “decentralized M & A”.

Real-time experiments: in fact, we have also seen some experiments trying to turn theory into practice, such as mergers and acquisitions by development teams, and transactions with tokens instead of capital and / or cash. We will talk about these examples in the following chapters.

Mergers and acquisitions initiated by agreements and DApp projects.
Although the real “decentralized mergers and acquisitions” have not yet emerged, there have been a number of mergers and acquisitions by cryptocurrency development teams. Many development teams want to create a decentralized protocol or application, and mergers and acquisitions can be a useful strategic tool for them to seek transformation. We found that the deals used by these teams can be divided into the following three categories:

Accelerate development: acquisitions initiated by the development team of the decentralized agreement. Much like tuck-in ‘s acquisitions, these deals focus on acquiring talent and technology. We have seen several teams raising money through ICO make such deals.
Expand the consumer base: acquire unencrypted enterprises / networks that already have a large user base. Without the need for organic growth of users, such transactions can help acquirers acquire a large number of new users and start using their cryptocurrency network and / or tokens.
Commercialization of protocols: the ultimate goal of such acquisitions by the development team is to commercialize its open source cryptocurrency protocol. For example, the entity Lightyear, made up of the Stellar development team merged with Chain, an enterprise blockchain company. After the merger, the company will re-brand Interstellar and bring Chain customers into the Stellar block chain.

The first batch of encrypted currency mergers and acquisitions.
2019 witnessed the first wave of cryptocurrency consolidation. After a frenzy of ICO and token sales in 2017, overfinanced encryption projects ran out of momentum and it was only a matter of time before they merged with each other. We found two cases:

In April of TRONAce & TRONDice:2019, two gaming applications running on the wave field block chain, each with their own tokens, announced that the TRONDice, TRONDice tokens acquired by TRONAce would be merged / exchanged for TRONAce tokens.
COSS & ARAX (a.k.a LALA): April 2019, Singapore cryptocurrency Exchange COSS and cryptocurrency wallet ARAX announced the merger of the two companies. Both companies raised money in 2017 by issuing their own functional tokens through ICO. After the merger, the holders of the two projects will exchange the original tokens into a new token that represents the merged entity.
Although neither of the two deals is strictly “decentralized” because the projects involve traditional enterprises, from a token point of view, they both have their own meaning and value.

Using centralization / decentralization matrix to describe the whole picture of related transactions.
The results of various M & An activities involving agreements and DApp development teams in the centralization / decentralization matrix (horizontal axis and vertical axis of the acquirer and target, respectively) can be seen in the following figure. Since there is no objective measure, the location is only relative. For example, we put the TRONAce-TRONDice merger in the upper right quadrant because it involves two DApp, and the merger mechanism used is token merger. By contrast, although COSS-ARAX (LALA) also uses tokens to merge, the two bodies are highly centralized. The upper right quadrant is a hypothetical decentralized M & A case, and their entities and mechanisms belong to the decentralized camp.

Essence summary.
To sum up, we analyzed 350 transaction cases between 2013 and 2019 to understand the role of mergers and acquisitions in the encryption industry. Looking ahead, we considered what the “decentralized M & A” would look like and evaluated some of the deals that could provide clues.

Industry maturity cryptocurrency industry has not been stingy with M & An activities. There have been 350 mergers and acquisitions since 2013, involving $4 billion in deals. Although this has great significance in the encryption industry, the number and amount of cryptocurrency networks are still small compared to the public value of cryptocurrency networks, or compared with mergers and acquisitions in other areas. The field of cryptocurrency is still a relatively immature industry, and M & An is a symbol and strategic tool for the upgrading and iteration of cryptographic enterprises.
Volatility M & An activity is very volatile, showing signs of a positive correlation with the price of cryptocurrency. The frenzied rally in the second half of 2017 contributed to a surge in speculative financial mergers and acquisitions. The subsequent price collapse and recovery also created a better environment for strategic mergers and acquisitions.
Most cryptocurrency companies are supported by venture capital. However, it is unlikely that a large encryption company, IPO, plus most encrypted VCs will emerge in the foreseeable future, so mergers and acquisitions are not a good capital exit strategy.
Corporate and strategic cryptocurrency exchanges such as Coinbase and Kraken have become leaders in mergers and acquisitions in the encryption industry. Acquisition (talent) and technology mergers and acquisitions are the most common types of mergers and acquisitions in the industry, and we expect this momentum to continue in the foreseeable future.
There are clear signs that cryptocurrency exchanges are using mergers and acquisitions to meet regulatory requirements in different countries and regions. With the rapid change of regulatory policies in various countries, mergers and acquisitions, as a strategy for global compliance of encryption companies, will become more attractive.
Decentralized real “decentralized” mergers and acquisitions have not yet emerged. However, many development teams are already actively acquiring companies to help them move from a centralized start-up phase to a more decentralized ultimate state. In addition, 2019 also witnessed the emergence of token merger cases, which will be an important mechanism for decentralized mergers and acquisitions in the future.