Can you Fund a Merger or Acquisition using Bitcoin?

Blockchain–and by association Bitcoin–remain on the yet unpractical bleeding edge for many real-world applications. That is quickly changing–especially for the underlying blockchain tech which is disrupting everything from escrow to the traditional world of transfer agencies. But what of its consumer-geared offspring in Bitcoin? In a curious recent conversation, an off-handed question was floated: “Has anyone used cryptocurrency as consideration to pay for stock or assets in a merger, acquisition or other capital transaction?” I too was curious, so I started doing some digging. As of this writing, there have been two M&A transactions consummated using Bitcoin as consideration (at least from my somewhat limited research).

1. Acquisition of Bitcoin gambling service SatoshiDice by unnamed buyer in 2013
2. Acquisition of Bitcoin exchange price aggregator, ZeroBlock by BlockChain.info in 2013

Currently, the only available data on M&A transactions using Bitcoin have been those consummated with other Bitcoin-related companies. Could it be that the inconvenience (and cost) of acquiring and even liquidating Bitcoin (it’s not as liquid as some have surmised), is a barrier to anyone outside the immediate confines of crytocurrency from using it as consideration for making an acquisition. In addition, there remains a general lack of both confidence and trust in Bitcoin as a stable option for consideration, particularly in a transaction that could be as large as a high-profile M&A deal. The larger the transaction, the more difficult and risky using Bitcoin becomes. The price fluctuations in recent history are enough to have many folks running for the exits. For instance, over a five year period the value of Bitcoin has fluctuated between $2 and $1,300.

Combine the lack of price stability (at least compared to more stable, government-backed fiat currencies) with the lack of complete regulation on the market for cryptocurrencies and anyone considering being acquired using Bitcoin should take serious consideration at other methods. That does not even take into account the security risks associated with Bitcoin and others (the $460M heist at Mt. Gox should come to mind). To avoid some of the risks, anyone using crytocurrency for consideration in mergers and acquisitions would likely want to create some type of hedge or structured collar against the currency in the event that a massive devaluation may occur. If there is a market and/or advisory for such, I’m unaware of it at present. That’s getting into the complexity level of a bulge-bracket investment bank.

Other issues also stand out in my mind. First, are the potential tax implications. If a transaction is performed completely using Bitcoin, the unregulated environment of the currency may have the government up in arms over a deal if they are unable to get “their fair share” on the value extracted as a result of the transaction. Given the nature of regulators, I would imagine a taxable portion of the proceeds in cryto would likely need to be converted to fiat and given over to the IRS. The unregulated nature of the beast could also lend itself to criminal activity like money laundering. In fact, Canada’s anti-money laundering laws were amended in 2014 to include virtual currencies. Someone there is thinking ahead of creative ways to circumvent the system.

As a niche, the rise of Bitcoin has been exponential in its proportions. But, I highly doubt the use of Bitcoin as serious consideration for payment in M&A will be a growing trend anytime soon. That’s not to say it could eventually become a cottage industry for crtytocurrency and even fintech deals, where the seller may have a greater grasp at the potential of what is there. Until then, it’s likely to remain the topic of speculative conversation.

Update: Recently (as of May 2016) it should be noted that KeepKey acquired MultiBit using only Bitcoin. The Seattle-based bitcoin wallet hardware maker, KeepKey’s valuation nor the terms of the deal were not disclosed. It was released, however, that the deal was funded using cryptocurrency as the means of providing consideration. If we fast forward three years, this is only the third transaction I can find that uses Bitcoin and still remains within the industry itself. I suppose cash still really is king.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
  • Brian Mustard
    Posted at 18:46h, 06 August Reply

    I’d be interested in hearing your thoughts on utilizing B.C. as a collateralized investment as a crowd funded mezzanine, as an Investment Option for the acquisition of companies.

    As you pointed out, there isn’t a real precedent for this so getting an acquisition to the finish line will have it’s challenges. Choosing the right approach, sector(one that is currently not in the crypto sphere), and an appetite for non-status quo would be key.

    Note: I am keeping in mind that a play such as this may only be actionable contingent upon the health and trajectory of Bit Coin value.

    Main Idea:
    1) Utilize Bit Coin investor-holders as an investment group, utilizing their B.C. holdings as the leveraged investment.
    2) Investing acquisitions for purposes of consolidation of a fragmented industry of motivated sellers of free-cash flow businesses.
    3) Utilize the B.C. Collateralized Investment to fund the controlling interest (ex. 51%), in the target company.
    4) Actual payment of this acquisition to take place over 3 years and paid out through Free-Cash Flow (other sources of payment of the 51% interest will be noted later).
    5) Perform this with 3 or more companies who operate in the same sector that provide mutually beneficial services/components/technologies.
    6) Consolidate these entities into one entity.

    Consolidate fragmented Bricks & Mortar skill and technology based companies into a Modern Optomized Tech Bricks & Mortar company (that is tech relevant and Industry 4.0 compliant).

    Some Acquisition Target Criteria:
    – Skills, Technology, and IP based bricks and mortar
    – Positive history of healthy free-cash flow
    – Real Estate Holdings (which could be used as debt refinance for the company purchase as well)
    – Motivated Seller
    – Strong Management Team, with interest in company investment through a direct investment or ESOP

    Key Benefits:
    * The typical B&M company is selling at a 1-3x EBITDA (that is if they reach as sale, and data is showing less than 30% reach a sale successfully).
    * The exit in 3-5 years, as a modern tech B&M company would be valued at a 6-12x EBITDA (through a sale or IPO).
    * This model for B.C. holders/investor would provide a means to utilize their holdings in a liquid investment model…and also provide them future equity value in companies and Real holdings.
    * For the seller, staging out the investment over 3 years would be positive for tax planning purposes.

    The ways in which such a model could be structured would be wide spread (I just wanted to touch on the premise for now), but given your back ground, I’m interested in your thoughts on:
    A) The feasibility
    B) The implications
    C) Future potentials

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