Andrew Bahlmann | Chief Executive | Deal Leaders International (DLI) | mail me |
Cryptocurrencies such as bitcoin are unlikely to become commonplace as tender for mergers and acquisitions. Increasingly, sellers want hard cash and are not opened to listed shares as a medium of exchange never mind bitcoin.
The variability of crypto-currencies mimics listed instruments that sellers are avoiding more and more as it is their aim to control the value and price of the transaction.
Notwithstanding the massive rise in value of bitcoin since it was created at the height of the 2008/2009 financial crisis to offer an alternative to national currencies, the cryptocurrency is far from being an alternative medium of exchange partly because it lacks widespread usage and has a wildly fluctuating listed price.
Bitcoin value cannot be tampered with
The reasons behind its recent prolonged slide that turned into a selling frenzy in the past month undermine its most important investment case: that its value cannot be tampered with, especially by central banks and governments.
China’s recent announcement barring financial institutions from accepting the virtual currency for payment or to provide services such as savings and investments using them, sparked the plunge in bitcoin and others.
At the same time Elon Musk backed away from a previous plan to accept payment for his electric cars in bitcoin, further putting the market under pressure.
Cryptocurrencies suffer the same defect as listed shares, so similarly we are seeing sellers not wanting to be paid in shares – with the case of Tekkie Town being a classic example of why not when the sale was funded by soon-to-collapse shares in Steinhof.
Sellers cannot thereafter control the value of shares, and the same applies to cryptocurrencies to an even more exaggerated extent. In a matter of days, the payment might be worthless.
The share swap strategy
If you look at the primary motives for a sale as being value and risk, then clearly the seller is going to want cash in hand rather than accept the risk of a material fluctuation in the value of a listed share price, or bitcoin, or any other cryptocurrency.
The risk of that market dynamic is just too great for a seller. Instead of offering investors stability as a form of payment that can be used globally, cryptocurrencies promise wild gyrations. This factor makes it impossible for a seller to take them as a medium of exchange.
Although cash is the preferred medium of exchange, if the acquirer is a listed company, it will frequently offer a share swap as its first choice. This is because, unlike a cash transaction in a share swap transaction the risk is shared by shareholders of both acquiring and target companies.
There is some logic to this in a share swap as it shares the synergy risk, but the downside risk exists with a Bitcoin purchase without it benefiting the synergy.
The strategy behind a share swap is often that there will be a recovery in the share price of the listed buyer which wants to diversify but does not have the cash. In 99% of the cases as the seller’s sell-side advisor we would reject a share swap or bitcoin consideration, and so would our clients, because the payment instrument is so fickle.
A primary reason for the shift to cash is the value destruction seen on the JSE of some companies – such as Steinhof. While this may not be significant to the overall performance of the JSE’s ALSI it has had a ‘ripple effect’ in terms of confidence of valuations.
The market goes in cycles: when there is buoyancy in the market a share swap might be an easier sell, but at times of value loss it is much less attractive. It is a hard sell now with a lot of listed companies not doing particularly well in the current environment.
In conclusion
Gone are the days when a private company being bought by a listed company was a symbol of confidence and prestige.
There is a material increase in the governance and compliance requirements for a privately-owned business that enters the ‘listed’ fold through an acquisition. With the increased compliance reporting and compliance costs, process red tape and public scrutiny, the sacrifices made by the entrepreneur must be compensated through a robust deal value and structure.
Business owners, when selling, need to maximise value and de-risk their current exposure to their business.
Why would you hand the value of your life’s investment over to an acquiring company’s stock exchange traded instrument over which its management team has no control over its market value?
