Blockchain's Potential to Alter the M&A Dealmaking Universe
10 December 2018
A new wave of blockchain-focused technology may be on the horizon, and advisers are subsequently preparing for the possibility that blockchain does for dealmaking what the cloud did for consumers’ reliance on physical storage. To discuss that eventuality, Intralinks Senior Vice President and Head of Corporate Strategy and Innovation Peter Frintzilas brought together a panel of blockchain experts for a webcast analysis of the current uses of blockchain and what the powerful technology might be used for in the future.
“In lay terms, blockchain is nothing more than a distributed ledger or a spreadsheet that allows you to process and manage data and information sequentially,” Sullivan & Worcester LLP partner Joel Telpner told the panel. “But what is it that makes everybody talk about blockchain? It's that you combine that distributed ledger with cryptology. In other words, it's a new way to process and get that data onto a ledger.
“It's done through a secure and cryptographic way that, once on a ledger, becomes immutable data that can't be altered, changed, or tampered with,” Telpner continued. “Once you add the two, cryptology and ledgers, together that becomes an interesting new way to manage/process data and transactions with respect to that data.”
Blockchain’s distributed ledger properties provide a network of validators that have an opportunity to look through the data and validate and authenticate it, so everyone is confident with the quality and authenticity of the data, Crypto PR Lab co-founder and CEO Alexandra Karpova added.
Karpova said blockchain also provides an unprecedented level of trust, which has made it useful for various sensitive applications. She pointed to Ripple Labs Inc., a San Francisco-based technology company that is building a blockchain technology that will connect financial institutions with each other to facilitate quick and secure payments.
Crypto PR Lab co-founder and CEO Alexandra Karpova said blockchain also provides an unprecedented level of trust, which has made it useful for various sensitive applications.
Today, though, the primary application of blockchain is a platform for cryptocurrencies and tokens.
“Cryptocurrency comes into the blockchain space as a means of utilizing it, as far as a payment; or in the case of Bitcoin, blockchain is used to validate information and data that goes on that blockchain,” Telpner said. “The way that we achieve the ability of adding data to a distributed ledger using cryptology is by achieving consensus. In other words, we use mathematical formulas and problems in order for the world out there to validate new pieces of data that go onto a blockchain or a ledger.
“In order to encourage people to do that, there is a reward mechanism,” he added. “Bitcoin was one of the first blockchains to come with this structure where if you are able to validate data that goes on a blockchain, you're rewarded by receiving a newly minted Bitcoin that has value, because you can then go out and use that Bitcoin for other things.”
But there are other components of the blockchain-cryptocurrency universe, namely utility and security tokens, that have an interesting relationship in today’s world and could be taken as examples of how blockchain might one day affect dealmaking.
“Imagine you have a series of roads: infrastructure,” The Satis Group Chief Operating Officer Shala Burroughs said to the panel. “Think of that as the base layer, the protocol layer. A cryptocurrency is hooked to that. Think of that as having an investment in that road and think of utility tokens as driving on top of that road like a car.”
Security tokens are easier to analyze, Burroughs said, because they are treated the same as any other type of security.
But security tokens are not so cut and dry, Telpner argued. There are tokens that are really intended to represent equity, similar to other securities, and there are tokens that have other types of attributes that are sold in a way that fall under the exemption provisions of U.S. security laws, but aren’t a truly a security in the way the market traditional recognizes a security.
Sullivan & Worcester LLP partner Joel Teppner: “Once we were able to create virtual data rooms, it made the M&A due diligence process so much more efficient. However, there's still a huge amount of effort just getting into the virtual data room ... Over time, as more and more reporting and information with respect to companies goes on the blockchain – as we're starting to issue securities in digitized form – what we're also going to see is the ongoing reporting and other information being available on the blockchain as well.”
“When you're looking at these as an investment class, one of the most important things is to understand what the rights are you actually get when you buy that token because it may not be the same as what a traditional equity interest would give you,” Telpner explained. “Some tokens may just give you the right to access a business, access a platform, like membership interest; or maybe some serve as equivalent to reward points like you would get when you fly in an airline. Other tokens may allow you to buy goods or services, or some other types of interest or rights on a closed business or platform.”
Things are complicated further by the fact that tokens can seemingly change from one day to the next.
In other words, as Telpner explained during the panel, the U.S. Securities and Exchange Commission often might consider a token a security because it was sold as a means to raise capital to build a platform, or software, or business, and at the time it was sold there wasn’t any operating business so it looks very much like investing in a security in a startup company.
But overtime, the same token may become something one can use to buy goods or services on a platform, or get a buyer access to a platform or certain rights and activities.
“That's very different than a traditional stock,” Telpner said. “You don't take a share of IBM, and pull it out of your drawer, and walk into Starbucks, and use it to buy a cup of coffee. The same token that might be a security at one point in time becomes something very different to what the market often calls a utility at a later point in time because it's being used very differently further down the road.”
Blockchain enables all of this, but how might it begin to transform dealmaking, Intralinks’s Frintzilas posited.
“Obviously we are in the early stage,” Telpner responded. “But I think there are two ways to think about it. One is just how does blockchain technology change how you approach, or analyze, or go about doing an M&A transaction?”
Blockchain technologies are being looked at for greater efficiency in gathering and analyzing data, which in turn dramatically changes the ability to run projection models, he added.
“But, over time, it also changes the strategy over how you approach transactions,” Telpner explained. “If we talk about taking securities again, and digitizing, putting them on the blockchain, the way we trade and settle tokenized equity is very different. In effect, you can have a simultaneous trade and settlement of a security. You also have this record on the blockchain as to who owns the shares at all times. You may not have the names of the people, but you at least know where every single share is, and anybody can have access to that data.”
The Satis Group Chief Operating Officer Shala Burroughs: “Imagine if there are automated cap tables, if you're able to ensure that everyone has passed the requisite background checks automatically, and you know that they're able to hold that token, and you can see a list that's very clear and up to date instantaneously. I think that dramatically changes the process for service providers, regulators, and anyone who's involved in the deal.”
So if an investor wants to run a proxy contest, the way the shareholder would go about discovering who owns shares in order to conduct a vote is altered, as is the way a company might go about initiating a hostile takeover.
“If you are trying to potentially go after a target, and you're trying to do it in stealth mode, and you're doing things like entering into shorts – we may not have a short market going forward because if you have simultaneous settlement, you don't have this gap where you have to go out and borrow shares,” Telpner said. “It starts to change potentially how you arbitrage or assemble positions that lead up to M&A transactions.”
Another exciting potential blockchain-fueled addition to dealmaking is the automation of the due diligence process, Burroughs added.
“Imagine if there are automated cap tables, if you're able to ensure that everyone has passed the requisite background checks automatically, and you know that they're able to hold that token, and you can see a list that's very clear and up to date instantaneously,” she said. “I think that dramatically changes the process for service providers, regulators, and anyone who's involved in the deal.”
Because while the virtual data room has already done wonders for due diligence, there may come a time when it is even more of an efficient process, thanks to blockchain.
“Once we were able to create virtual data rooms, it made the M&A due diligence process so much more efficient,” Telpner said. “However, there's still a huge amount of effort just getting into the virtual data room. The end product is beautiful, but getting to that end product is still awfully messy. Over time, as more and more reporting and information with respect to companies goes on the blockchain – as we're starting to issue securities in digitized form – what we're also going to see is the ongoing reporting and other information being available on the blockchain as well,” he concluded.
“Now, it becomes tremendously more efficient and easy to get the data into the data room. It allows us to rely on the data with much greater certainty because that data that's coming from the blockchain, we can start out with the presumption that it is valid, that it is correct, it's not being tampered with.”
Top image: Moderator Peter Frintzilas of Intralinks with panelists Joel Telpner of Sullivan & Worcester LLP, Alexandra Karpova of Crypto PR Lab, and Shala Burroughs of The Satis Group.
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