Once upon a time, the virtual merger used to be disrespectfully recommended by wise men with expensive suits and by reputable experts that charged astronomical hourly fees as a second-hand, half-baked alternative when a “true” merger could not take place. For example, because of poor economic conditions, lack of financing or regulatory issues. It was a dummy solution to console the disappointed parties after they were told that the doors to merger paradise would remain closed for them, so that they would not have to abandon all hope of combining forces with another entity. In those prehistoric times, mergers were all about clunky economies of scale, mercilessly reduced costs, larger geographical coverage, augmented market penetration, commercial diversification and often imaginary synergies. All of which have become quasi-irrelevant in the blockchain era.
Today, the virtual merger is all about two or more entities combining just their best features and most excellent strengths, about making optimal use of the very best minds from all entities and making up for shortfalls in the individual entities’ skillsets. It’s about doing so with a specific mutually beneficial objective, an obvious and logical common purpose and democratically set common benchmarks and interrelations. In the large majority of cases, they can do so as perfectly equal partners. The virtual merger is as such an amazingly dynamic and efficient strategy which enables two or more entities to integrate only those features, assets, operations, know-how, infrastructure, markets, enabling technologies and/or liquidities that are required and useful to achieve their common goal. And they can do so while retaining their discrete financial and managerial autonomy.
Traditional mergers look a lot like one of these huge cargo ships that cruise the world’s seas and oceans. These ships carry enormous loads at a tantalisingly slow pace. They follow prescribed routes because, due to their size and weight, manoeuvring is difficult. They can only dock, load and unload in mega-ports that are built and equipped specifically to accommodate them. They are so big that they simply could not be any bigger. Owing to inertia, once they are at cruising speed, they must travel many miles before they can come to a halt.
A virtual merger is much more like a speedboat than a cargo ship.
In the nascent blockchain industry, where due diligence of companies and the viability of their products is difficult to gauge using traditional metrics, advocates of virtual mergers say that subsuming intellectual properties and operations makes more sense than trying to allocate a value and acquire them outright.
Because there is no transfer of ownership or shares between companies, virtual mergers preclude shareholder approval which, in the case of publicly listed companies, could lead to disgruntled shareholders, unhappy with the deal selling their holdings and crashing the share price. In the unlisted world of blockchain companies, this is not as big a concern.
So how does a virtual merger differ from a traditional merger?
- It is governed by contract without reference to statutorily determined procedures or consequences
- A virtual merger does not result in the absorption of one company by another
- A virtual merger does not result in cash-outs or exchanges with either shareholding group; where regular mergers are often contested and brought to court by significant shareholders
While there is no bright-line definition of a virtual merger, they usually involve the shared use of assets contributed by each of the companies. The two companies remain legally independent, each with its own directors, officers, and shareholders.
According to Stuart R Cohn of the University of Florida College of Law, the conditions of a virtual merger typically involve:
- A significant portion of business operations of at least one of the two entities;
- Result in a joint management unit that directs the use of the assets contributed by each of the respective companies
- Permit either party to withdraw from the arrangement without penalty and
- Permit the parties, following withdrawal, to (i) reclaim their respectively contributed assets or (ii) effect a buyout of the withdrawing company’s interest, which would include the contributed assets.
The recent tidal wave of ICOs has seen billions raised but precious little so far in the way of products and services delivered. One reason for this may be that core developments are being sidetracked by assembling all the components of a ‘real’ business — and losing focus on their grand vision. One potential solution for these stalled projects, say some, is the virtual merger.
More on Mergers
AT&T/Time Warner 1 – US DOJ 0
On October 22nd, 2016, AT&T proposed acquiring Time Warner, including its debt, for an estimated $108bn. This vertical merger sought...
AkzoNobel: sailing against the wind
After merger plans came off the table at the end of last year, AkzoNobel (Akzo) has not been in the news...
Global M&A Outlook 2018: Strong Growth, Interest Rate Impacts and Emerging Markets
2017 was another strong 12 months for global M&A activity. It was the third consecutive year of total M&A values exceeding...