Blockchain has been one of the fastest-growing technologies in the last decade. While some of this impressive growth has been organic, mergers and acquisitions (M&A) have aided substantially, particularly in the last several years. The recent cryptocurrency report of PricewaterhouseCoopers emphasizes the extent of this contribution by documenting that “(t)he total value of crypto M&A deals in 2021 has grown just over 50x the total in 2020”. The recent industry turmoil, however, has forced some companies to reconsider initiating and, perhaps more importantly, going through with some of the already-announced M&A transactions. Figure 1 shows the impact of this trend, particularly for the years 2021-2022, by reporting not only the number of announced mergers but also the completed and incomplete (pending or withdrawn) M&As in the blockchain/cryptocurrency industry.
A natural question is whether the observed lower rates of M&A completion are a recent phenomenon or an embedded part of the unique characteristics of this sector, such as volatile return patterns and high correlation with the industry firms’ returns, especially with Bitcoin. In our recent study, we aim to shed light on this issue by focusing on three primary questions: does the eventual success – as measured by the completion rate – of the announced mergers in the blockchain/crypto industry differ from those observed in other industries? How do these deal closure rates, and their difference with other industries’ closure rates, change over time? And finally, do these rates differ based on certain transaction characteristics? We hope the results will not only provide previously unexplored M&A dynamics for the blockchain/crypto industry but also give a glimpse of the eventual fate of the ‘pending’ transactions for recent years.
Figure 1: Blockchain/Crypto M&A volume over time
To investigate the determinants of the deal completion dynamics of the blockchain/cryptocurrency industry, we first download detailed M&A data from the SDC database. Since many firms in different parts of the globe have invested in blockchain technology and have done deals in the past, we do not limit our analyses to a specific country and consider all domestic and international deals. Also, we populate the transactions announced from the beginning of 2013 until August 2022 so that the sample has comprehensive coverage that spans the initiation and development of blockchain technology. There are no standard industry codes or indicators for tagging blockchain/cryptocurrency firms, but luckily, SDC has a “business description” field where it provides somewhat detailed information on the merging firms’ line of business. Using this field, we label firms as blockchain/cryptocurrency if their business descriptions include the keywords “blockchain” or “cryptocurrency.”
Next, we model the deal completion likelihood of the announced deals using the standard empirical models used in extant research. The control variables include the relevant deal characteristics, public status of the merging firms, and time, industry, and nation-fixed effects that capture the otherwise unobservable characteristics. In this conventional deal completion model, we include an indicator variable for the merging firms classified as “blockchain/cryptocurrency” firms using the above procedure.
As a first step, we examine whether the deal completion likelihood of the blockchain/cryptocurrency deals differs from those of the other sectors, on average. When we look at the sample period, results show that blockchain/cryptocurrency deals are ten percentage points less likely to close successfully than those in other sectors. An investigation of deal completion likelihood for each year separately shows that this difference is contained in years 2016, 2018, and 2019, when blockchain/crypto deals appear to be significantly tougher to close. Interestingly, these years coincide with a period when the blockchain/crypto industry experienced a tumultuous period, not unlike the recent year.
As Figure 2 shows, Bitcoin prices, which are highly correlated with the prices of other cryptocurrencies, show a notable decline starting from the beginning of 2018 until the end of the year. While there is another bout of activity in the first part of 2019, the year’s second half brings disappointing returns for Bitcoin investors. In light of this evidence, a natural next step is to explore whether the changes in cryptocurrency prices determine the lower deal completion rates observed in 2016, 2018, and 2019.
To investigate this possibility directly, we create a deal-level variable that captures the change in Bitcoin prices from deal announcement to closing (for successfully closed deals) or withdrawal (for withdrawn deals). We then use this as a variable of interest in our regressions where the sample is limited to the blockchain/crypto industry and find that the deal completion likelihood is, in fact, positively associated with Bitcoin prices. More specifically, we show that a ten-percentage point increase in Bitcoin returns after the deal announcement leads to a 1.5 percentage point increase in deal closing likelihood for firms in this industry.
Figure 2: Bitcoin Price over time
Taken as a whole, our study shows that the initial result of the blockchain/crypto industry’s completion rate being significantly lower than those of other sectors is driven primarily by the years in which the industry, and Bitcoin in particular, experiences exceptionally volatile and negative returns. In other years, blockchain/crypto M&A do not appear to be significantly harder to close than other sectors. Our research may also have implications for the ultimate impact of the recent turmoil in the cryptocurrency markets that started towards the end of 2021 on industry M&As announced in the last year. While we do not find a significantly lower completion probability for the blockchain/crypto industry for the first half of 2022, the final picture is murky until pending deals are resolved.
Evrim Akdoğu is an Associate Professor of Finance at the Sabanci Business School of Sabanci University.
Serif Aziz Simsir is an Associate Professor of Finance at the Sabanci Business School of Sabanci University.
This post is adapted from their paper, “Are Blockchain and Cryptocurrency M&As Harder to Close?,” available on SSRN.