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Five factors that can sink M&A

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Merlin Piscitelli, Chief Revenue Officer, EMEA at Datasite

 

2021 was a record-breaking year  for mergers and acquisitions (M&A) activity, with global volumes hitting the highest level since records began. This was a result of booming markets and the release of capital from investors that had built up during the pandemic.

This year circumstances are quite different. Economies are now dealing with geopolitical issues like the Russia-Ukraine war, rising inflation and interest rates, and declining company valuations, particularly in the technology, media, and telecommunications (TMT) sector. Companies are also facing growing regulatory scrutiny and shareholder activism related to environmental, social, and governance issues, including diversity, equity, and inclusion (DE&I).

Yet, these issues aren’t dampening deal making. UK M&A professionals are actually bullish about activity over the next 12 months, with 71% of 100 dealmakers anticipating an increase in deals.

With such optimism about future activity, how can companies and M&A professionals ensure their deals remain on track? By planning and mitigating for these five risk factors, which can sink deals.

  1. Inflation and the rising cost of capital

Interest rates are rising to tame growing post-pandemic inflation, which in the UK is expected to peak at 13.3% in October and remain at elevated levels throughout much of 2023.

This means capital borrowing costs are also rising, which can impact both company valuations and the desire to sell. This is also why 19% of 100 UK dealmakers surveyed by Datasite said that inflation and capital costs are leading risks to completing deals this year.

  1. ESG issues

Investors continue to prioritize an organization’s commitment to and proof of ESG credentials, especially when it comes to investment and long-term value creation, purchasing decisions, and disclosures. Furthermore, this focus, including the time and cost of compliance, is expected only to increase in the next five years.

To stay ahead of any potential post-transaction value destruction, investors and dealmakers need to evaluate and assess the risks of significant ESG exposure during due diligence. Here, technology can help. While there are no standard operating procedures to follow when assessing climate-change diligence risks, there are tools within virtual data rooms (VDRs) that include robust optical character recognition (OCR) search functionality that help dealmakers and advisers hunt for key ESG words, such as climate change. And with search alerts, they need search only once for a term and set an alert for when any new documents with that term are added. This way, no ESG-related documents or assets can be missed.

  1. DE&I-related risks

More than a fifth (23%) of 150 UK M&A professionals who were surveyed said they have seen deals fall apart because of DE&I-related issues, including concerns related to culture and a company’s hiring, advancement and retention policies. DE&I still isn’t viewed as great a threat as other risks, such as environmental issues like climate change, but it shows how a company’s culture can affect its performance and value.  

  1. Not using (enough) technology to manage the deal process

Successful M&A professionals are increasingly  turning to technology, such as artificial intelligence-powered, secure, virtual data rooms (VDR), to help them improve their productivity, reduce human error and ensure greater regulatory compliance throughout the entire deal process.

Today’s VDRs can also provide dealmakers with insights on how the entire deal process is progressing, including activities such as who is looking at documents, when and how often, and which documents they are viewing. These insights can then help deal teams better target potential buyers. In fact, there are new applications currently being tested to help deal teams automate lists of targets. This provides a huge time savings and gives dealmakers time back to focus on other areas of a deal.

  1. New regulations and scrutiny

New regulations, such as the National Security Investment Act and the Online Safety Bill, require dealmakers and companies, especially in the technology sector, to meet new compliance measures. In fact, more than 70% of 200 UK M&A professionals surveyed earlier this year said increased scrutiny around national security issues and changing tax and privacy regulations will prevent some deals from happening this year. For example, review periods may lengthen deal timelines and potentially put some deals at risk. Having a structured system in place to quickly identify and review relevant documents is key for dealmakers trying to minimize any adverse impacts of regulation on their deals.

M&A can lead to tremendous growth opportunities. It can also come with substantial risks. Tempering or mitigating these risks through due diligence processes, supported by technology, can keep deals moving forward effectively and efficiently. In these uncertain times, this is what M&A professionals need.

Finance

Crypto’s tipping point

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Chris George, Senior VP of Product at Somo argues that Crypto needs to improve its scalability to be taken seriously

Cryptocurrencies are no longer the exclusive domain of high risk financiers or tech Bitcoin jockeys, willing to ride a niche and volatile asset for good or ill. Today, neobank and mainstream banking apps alike offer crypto banking, helping them trade in Bitcoin or Ethereum from as little as one dollar(https://www.revolut.com/crypto/).

Indeed, in September 2022, Finbold reported that British citizens had invested nearly £32bn in cryptocurrencies, and additional research from HMRC would have it that one in 10 UK adults has bought crypto, double the number from the previous year. 

But even given the legitimacy lent to crypto by the fact that now 50% of UK banks allow customers to interact with these currencies as well as other digital assets, how can the asset management industry turn it into a significant – and mainstream – asset, particularly in today’s turbulent economic climate? With the collapse of FTX, this must be taken into serious consideration. FTX was sold as being a safe and stable way to trade digital currency, alas this has not been the case. It turns out Sam Bankman-Fried seriously over-promised and dramatically under-delivered, gambling away customer assets and ultimately prioritising fraud and malpractice.

First, we need to acknowledge that not all crypto is created equal. Some, such as Bitcoin or Ethereum, do function as a currency, are limited in volume and therefore can increase and (as 2022 amply showed) decrease in value. But other blockchain-based crypto doesn’t behave like what most people commonly accept as currency at all. 

For there to be significant uptake in crypto as an asset, there is going to have to be a far broader and deeper understanding of what it is and what it can do. As Christophe Diserens, chief compliance officer at SwissBorg has suggested: “Value and useability are going to be key. Metcalfe’s Law has been used to value tech and internet stocks so why not crypto?”. That value took a bit of a beating during the recent sell-off and crypto’s perceived volatility will need to be addressed if it is to achieve scale. Because that’s what it’s going to need if it’s ever going to be considered as a legitimate global payment alternative in the future.

 

The role of The Merge

Not the latest B-movie, sci-fi flick, The Merge in September 2022 saw the world’s second-biggest cryptocurrency, Ethereum, move from a ‘proof of work’ to a ‘proof of stake’ protocol. This was nothing short of seismic. 

Proof of work is how the vast majority of crypto has been mined to date. People solving complex equations to validate transactions (the ‘work’) uses masses of computer processing energy, accounting for a significant slice of the world’s electricity consumption. In today’s climate (in both senses of the word), that’s just not on. 

Proof of stake, on the other hand, relies on far fewer ‘miners’, fewer computers and less energy as a result. This so-called ‘Merge’ is not only expected to reduce worldwide energy consumption by 0.2%, but also boost the crypto economy as a whole, creating more opportunities for investors and allow developers to build more products and applications on Ethereum. Ultimately, it could be what drives the decentralised internet of blockchain, crypto and NFT – Web3 – mainstream. 

What does this mean in the ‘real’ world? This could present a real opportunity for the financial services sector as a whole. It will change the way it operates, speeding up transactions, creating new business models and generally just making the whole thing a more efficient way of working. Fully cashless payments for business would be a real boon, given the costs and potential losses involved in transacting in cash. Digitisation also makes transacting an altogether more intuitive experience. 

One thing crypto and its associated technologies and solutions needs to be wary of is becoming a solution in search of a problem. For a truly mainstream breakthrough, the industry needs to make sure it’s bringing the consumer along on the journey. For end users to be truly confident in crypto, it has to benefit from the same levels of governance and regulation that cover the rest of the financial services industry, building and maintaining consumer confidence will be extremely important as trust levels have been shaken by the recent lack of solid administration and “irresponsible lending practices” leading to the FTX implosion . It has to be simple to transact, but with all the protections that investors have come to expect. It can’t afford to take them on another rollercoaster ride like 2022’s. 

While 50% of the UK’s banks may be getting on board with crypto to some degree, there is still a wide open ocean of opportunity for asset management players to realise value for themselves and their clients. It will involve some reshaping and more investment in digitisation to manage the assets of the future, whatever they may be. 

Somo, part of the CI&T family, will be publishing a report titled ‘Assessing the Crypto Conundrum: Will cryptocurrency ever be a significant trading asset and how can digitalisation shape its future?’ in 2023. 

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Skedadle to change the game for advertising with Currencycloud partnership

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Currencycloud, the experts simplifying business in a multi-currency world, has partnered with Scottish start-up app Skedadle to provide its users an easy, secure and seamless way to transfer money earned in-app while playing games on public transport.

Skedadle rewards travellers for the time they spend playing on-the-go. They can earn £2 per day simply for playing games on the move. That’s an extra £60 in their pocket each month. This can be done thanks to a disruption in the advertising market, by using algorithms to verify and track the users’ engagement with ads, proven to be higher while playing than in traditional online advertising, which increases product and brand recall for advertisers. Thanks to the partnership with Currencycloud, Skedadle users can use the app on public transport and be reassured that all financial transactions and financial data comply with the highest standards of security and validations.

By connecting to Currencycloud’s API technology, Skedadle has been able to integrate in their app a state-of-the-art payments ecosystem that seamlessly bulk settles the money earned from advertisers into a secure account and then processes withdrawals from users fast. At the same time, Currencycloud also sets the infrastructure that will enable them to grow both geographically in the UK and globally, by providing access to 38 currencies and low cost, fast FX rates.

Says Nick Macandrew, CEO and Founder at Skedadle: “Trust and security are crucial, especially when it comes to people’s money. As we rapidly grow our platform, we need a solution that can keep up with our pace and Currencycloud do just that. Our cutting-edge technology requires a secure, stable, and simple way of managing payments, whilst guaranteeing the best user experience possible.”

Nick Cheetham, Chief Revenue Officer at Currencycloud commented: “Backing bold start-ups from day one has always been part of our DNA. Skedadle’s creation of new revenue streams for travellers and advertisers alike is an exciting business endeavour. We are eager to see how the  platform can grow and disrupt the market by integrating our seamless payment capabilities.”

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