Mergers and acquisitions (M&A) refers to the corporate strategy of bringing two or more companies together through various financial transactions such as mergers, acquisitions, or takeovers. M&A is a common practice in the financial industry, but has unique implications for the Web3 field.
In the ever-evolving financial landscape, the application of mergers and acquisitions (M&A) has found a new challenge in the Web3 space. This is because M&A does open up various opportunities for ventures in the blockchain world as well. However, the young nature of this industry requires a tailored approach.
M&A in traditional financial markets
In the dynamic landscape of the modern economy, mergers and acquisitions (M&A) serve as powerful tools for transforming industries and influencing economies on a global scale. These strategic maneuvers, in which companies join forces or acquire each other, have evolved over time to become a critical force not only for corporate growth but also for the broader economic ecosystem. Beyond their immediate impact on the companies involved, mergers and acquisitions have the unique ability to steer markets toward greater efficiency and balance.
In traditional financial markets, the synergistic benefits of mergers and acquisitions are evident as a byproduct of centuries of fine-tuning, both at the individual company level and from a broader market perspective. Accordingly, the total volume of the global M&A market in the first half of 2023 was approximately $1.32 trillion, still down 40% from the first half of 2022.
M&A in Web3:
Given the importance of mergers and acquisitions in traditional financial markets, Web3 players also have an interest in creating an environment conducive to such market activity. However, a look at the numbers shows that global M&A activity in Web3 was only about $800 million in the first half of 2023. Admittedly, this slowed pace has been reflected in almost all industries, but the delay in Web3 M&A is not just due to general market conditions.
As mentioned earlier, the efficiency of mergers and acquisitions in traditional markets is the result of countless years of trial and error in the marketplace. The fledgling Web3 does not have this luxury. Management teams cannot rely on decades of precedent to gauge how and whether synergies will materialize; a problem only complicated by the innovation of the underlying blockchain technology.
In addition, uncertainty about the upcoming regulation of digital assets and their service providers/issuers in some of the major global jurisdictions is fostering a wait-and-see attitude among many potential M&A acquirers and targets, especially large institutions. In the Web3 space, two broad M&A structures can be observed, which highlight the specifics of the sector:
- Token Deals: This often involves how the tokens of the merged or acquired companies are handled. Two common approaches are the consolidation of existing tokens into those of the acquiring company or a "fresh start" with the introduction of a new token for the combined company.
- Equity Deals: Despite the centrality of tokens in Web3, most companies in the industry still own equity. Therefore, many M&A transactions in Web3 resemble those in traditional markets.
Drivers of M&A in the Web3
The aforementioned cyclicality of M&A activity, combined with its relative disconnect from general market conditions, suggests that there must be other drivers of this type of market activity. We will highlight some of the key drivers of M&A activity on the Web3:
- Early maturity of the industry: Although the market is still very young compared to traditional industries, early consolidation is emerging in many of Web3's older verticals. The NFT market, characterized by acquisitions such as Gem from OpenSea, is an example of the appetite of the incumbents in the sector to buy into smaller protocols with high growth potential and many users.
- Protracted bear market: Faced with the ongoing bear market, companies continue to bleed out as web3 financing declines significantly. Faced with impending financial obligations, many teams opt for distress sales.
- Buy-or-Build: Traditional companies that appreciate web3's strategic and financial capabilities are faced with the decision of how to enter. In particular, they often face the strategic decision of whether to pursue mergers and acquisitions or build their capabilities from scratch. Opting for mergers and acquisitions can be a shortcut to entry by leveraging the strengths of existing players, while internal development allows for a more tailored approach but requires time and resources.
- Regulation and compliance: As regulatory standards remain fragmented and varied around the world, there are significant considerations and barriers to entry for companies seeking to enter new markets. Many companies choose to acquire existing companies that have the necessary approvals and licenses in new markets rather than go through the lengthy and rigorous application process themselves.
- Acquihire: In the rapidly evolving Web3 landscape, companies are increasingly recognizing the immense value of specialized talent, particularly developers of blockchain applications and smart contracts, who have become the linchpin of innovation. For more established companies, an effective way to attract such developer talent is to "aquihire" a company with many specialized employees.
Conclusion
The world of Web3 is still in the early stages of its development, and M&A will undoubtedly play a key role in its further evolution. It remains to be seen how the landscape will evolve, but one thing is certain: M&A will definitely play a central role in shaping the digital space of the future.
