M&A in crypto winter is ‘like porcupines mating’

“Like Porcupines Mating”

After a severe crash, consolidation is the next phase for crypto. Strong players like FTX, Ripple and Binance are looking to pick off floundering competitors in M&A deals that have suddenly become dramatically less expensive. But the crypto crash also reveals which players have questionably shaky businesses. Merger deals in this environment can be difficult – even messy.

Downtime means good deals. The crash wiped out roughly $2 trillion in value and caused the collapse of major crypto players such as Terraform Labs, Three Arrows Capital, Celsius, and Voyager Digital. It seems like a perfect time to shop.

• BlockFi said last month that the crypto lender signed an agreement that gives FTX the option to buy the company for up to $240 million as part of a $400 million debt financing deal. Just a year ago, BlockFi was seeking a $5 billion valuation in funding calls.
• After Ripple CEO Brad Garlinghouse predicted in May that there would be “an uptick in M&A in the blockchain and crypto space,” the payments company said in a statement last week that it is “actively looking for M&A opportunities to strategically scale the company.” Specifically, Ripple is checking out what’s left of Celsius, the once high-flying crypto lender that filed for bankruptcy in July. The company said it is “interested in learning about Celsius and its assets and whether any may be relevant to our business.”
• Goldman Sachs is also reportedly interested, highlighting Wall Street’s growing interest in crypto. So was FTX before the crypto giant reportedly took a look at Celsius’ finances and decided to walk away.

This is a “buyer’s pass” market. Some acquisition targets were left at the altar after potential buyers took a closer look at what they are buying, Moor Insights & Strategy analyst Melody Brue told Protocol.

• Crypto is known for companies that “still operate in the wild west” and “when serious operators look under the hood, something as standard as audited financials cannot be produced,” she said. Deals fall apart “mainly due to a lack of regulation in the space, or standard practices for accounting and reporting.”
• This week, Galaxy Digital said it was finalizing a massive $1.2 billion merger deal with BitGo, accusing the crypto company of failing to produce “audited financial statements” that were supposed to be part of the transaction.

• BitGo rejected the claim, suggesting that Galaxy Digital wanted out of the deal due to recent business problems, including a quarterly loss of $550 million and the impact of the luna coin merger. BitGo says it plans to sue Galaxy Digital.
• Binance, the world’s largest crypto marketplace, was also involved in an aborted merger deal with WazirX, which it announced in 2019. But in the wake of recent reports that the Indian government was investigating WazirX for possible money laundering violations, Binance CEO Changpeng Zhao said that the deal was never completed – a claim disputed by WazirX co-founder Nischal Shetty.

“Crypto in M&A is like porcupines mating right now,” Logan Allin, managing partner at Fin Capital, told Protocol. Sometimes it is difficult to say whether a deal is “going to happen or not”. Customers have to deal with “complexity of complexity”, volatility and regulatory issues. Crypto is likely to consolidate, he said. But potential buyers are treading carefully, making sure they don’t end up with “toxic assets” and “lots of regrets.”

—Benjamin Pimentel (e-mail | twitter)

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