The impact of smart contracts should certainly not be understated.
However, most of the oft-touted applications for smart contracts are applied to areas outside stocks, bonds and traditional securities. But that is precisely where the greatest benefit is to be gleaned.
Consider a very typical, boring M&A transaction whose consideration could include one or more of the following:
- Cash
- Stock
- Earnout
- Note
One might be able to add a fifth item here to include digital assets, but it would like fall in as a subsidiary of one of the traditional group of four.
The pros and cons of smart contracts are covered elsewhere in greater detail, but let’s apply some of the pros to traditional consideration for corporate mergers and acquisitions.
While cryptocurrency and tokenized equity may work well for numbers 1 and 2 above, the tech is not quite as involved as a smart contract that performs a particular function over a period of time. Using cryptocurrency for consideration in M&A is likely to be best served by some type of peg or tether to USD, so as not to undermine value with fluctuations in the price of the currency. However, the complexities in such a peg may warrant buyers converting to fiat and calling it a day.
Smart Contracts Use in M&A Consideration
The most likely use for blockchain among traditional M&A investment bankers is likely to occur with earnouts and notes–two oft-sweated areas for both buyers and sellers, but almost textbook use cases for implementing smart contracts during mergers and acquisitions.
A note is typically a straight-forward contract or negotiable instrument. The terms may differ (i.e. amortized vs. interest only + balloon, etc.), but the basic construct is some type of regular payment to the seller over a period of months or years. Putting such on a blockchain smart contract is relatively straight forward.
Earnouts on the other hand are much more complex. They can require third-party audits and can be crafted as creatively as a buyer or seller might mutually agree.
But an earnout is the perfect scenario for building a complex contract immutably linked to the blockchain. If properly written, it will–in particular–give sellers more confidence in an outcome that may be tied to numerous third-party audits of the mutually-desired earnout success peg (most likely gross profit). With our dev team, we are currently exploring ways in which an out-of-the-box earnout could be tied to the blockchain as a more trustworthy consideration for M&A transactions.
Are there other ways you see smart contracts disrupting M&A? How else can they be used in traditional investment banking and capital raise transactions?
