The idea of using cryptocurrency as the means of payment in a merger or acquisition (M&A) will give most business people – and their lawyers and investment bankers – nightmares and cold sweats. But given the accelerated pace of adoption and the rapid, recent price surge in many currencies, it’s only a matter of time until we see some buyers and sellers rolling the dice on this approach to making deals.
While the widespread use of this practice is not even on the horizon, the question is when, not if, a few bold souls make news (and possibly history) by using cryptocurrency as payment in a M&A deal. (Based on published reports, a few have already tried this, albeit on a much smaller scale and before cryptocurrency was on the radar of global finance.)
Joe Castelluccio is a partner at Mayer Brown LLP and counsels clients on M&A financing and other corporate and business matters.
There are plenty of reasons not to use cryptocurrency as payment in an M&A transaction, including lack of price certainty and limited (but growing) usability as a means of exchange. But these challenges, as we show below, are not insurmountable.
As background, in most M&A deals there is a time delay between when the deal is signed/announced – i.e., when the deal value is largely fixed – and when it is closed. If the deal value is expressed as a cryptocurrency, the actual value (based on changes to the crypto/fiat currency exchange rate) may fluctuate significantly during this sign-to-close period.
Here are a few ways dealmakers are likely to solve for this.
Parties can put a collar around the exchange rate of the cryptocurrency to be used in the deal to provide parties with some fixed measure of value in the deal. If the exchange rate (to U.S. dollars or other fiat currency) shifts greater than “X” percentage above/below the target exchange rate, the deal consideration could either be supplemented by fiat currency or shift completely to fiat currency.
Alternatively, the collar could establish a cap and floor and maximum “price” that would be paid, which essentially caps the amount of exchange rate movement between signing and closing. This type of collar is often used – for the same reason – in transactions where the “price” paid is in the form of stock. This approach may be a baby step toward use of cryptocurrency as consideration because it provides some backstop of certainty on the value that will be exchanged at closing.
Another approach would be to stipulate a menu of cryptocurrencies that may be used to pay the purchase price at closing, while specifying the deal value/purchase price in U.S. dollars or some other fiat currency This approach would allow one or both parties to “convert” the fixed value to be exchanged into cryptocurrencies for the actual transfer of value at closing. By pre-selecting a limited menu of currencies that can be used for this purpose – either one or several from the menu – parties would have some flexibility to react to market fluctuations as the time for closing becomes more certain (e.g., to avoid certain cryptocurrencies that may be in the midst of a short-term or particularly wild price swing).
A third approach would see parties building into their transaction agreement a unilateral right to delay a closing by a short, fixed time period (i.e., one to three days) to allow the price of the cryptocurrency to be used in the deal to stabilize (if in the midst of a particularly drastic price move around the anticipated closing date).
For example, in a recent 48-hour time period (over a weekend, no less), the bitcoin/U.S. dollar exchange rate fell by more than 15%. If M&A parties had been planning on a Friday for a closing the following Monday, the value to be exchanged at closing would have been drastically different from the anticipated value (and bargained-for value) just one business day prior.
In this example, giving a party the right to pause the closing for 72 hours would (theoretically) allow time for the market and price to stabilize. (There may be other reasons that a unilateral delay may not be practical. These considerations would need to be balanced with other mechanisms for mitigating price swings.)
Cryptocurrencies are rapidly becoming accepted across industries as a means of storing and transferring value. With this ever-widening universe of crypto adoption, it’s more likely we’ll see a significant transaction using some form of crypto, whether because parties think it is an efficient way to transfer value or because a significant crypto player wants to blaze new ground.