28 June 2022 |

FTX Leads Distressed Crypto Buyouts, But Who Else Can Follow?


I’m glad I decided to wait though—Monday afternoon, Bloomberg reported that FTX was thinking about making a play for Robinhood, the publicly traded stock trading app currently worth $8 billion.

This is on top of FTX extending Blockfi a $250 million credit line and lending Voyager Digital $485 million consisting of cash and bitcoin through Alameda Research (FTX CEO Sam Bankman-Fried’s other company). 

The Financial Times and other folks have likened SBF’s strategy to a bailout—some say SBF is acting like the government, others think that he’s acting more like Warren Buffet. 

I’d say SBF is somewhere in between—a government or central bank bailout would be more widespread and without prejudice, Warren Buffett only did two $5 billion deals with Goldman Sachs and Bank of America. SBF is picking up distressed assets for cents on the dollar, getting great economic terms in the meantime to reduce the risk on the deal. He’ll probably end up doing more deals over the next few months/years, but he’s not backstopping the entire crypto ecosystem. (When the Federal Reserve injected $250 billion into the US banking system by buying shares of publicly traded banks in 2008, Treasury Secretary Hank Paulson didn’t offer much room for negotiation and strongly recommended banks that didn’t need the cash to take it anyway.) 

By leveraging cash, his company’s strong balance sheets, and highly valued stock to execute distressed asset purchases, SBF is coming up with new and creative ways to expand his umbrella across the crypto ecosystem. And while SBF is really the only major player executing the strategy right now, there are others thinking about using this downturn to acquire crypto assets on the cheap too. 

For FTX, this strategy seems like a longtime coming. For awhile I wondered why FTX raised so much cash and at such high valuations—FTX raised at a $32 billion valuation in late January of this past year and has raised $1.7 billion in total according to Crunchbase. I think my idea was always that they’d use the capital and highly valued private stock to acquire companies, but it makes even more sense with the current crypto down. With crypto companies finding it harder to raise and harder to grow, expect more companies to be on the market for M&A. 

Another major factor is the slowdown in venture capital funding, which seems to be driven largely by the dip in late stage deals. Bloomberg yesterday reported a 23% dip in deal activity (the number of deals), and from this chart you can clearly see that the bulk of it comes from what’s classified as “late stage” deals. Deal volume fell 27%, so less dollars are going into the ecosystem too (this implies that the early stage deal activity is probably on the super early side, versus Series A deals, which is similar to our anecdotal research.) 

With the VC funding dip looking a lot like the public markets, most of the M&A here has been limited to well capitalized late stage winners and startups that can be strategically and revenue additive. We still haven’t seen nearly as much M&A on the super early side of things, as funding there still hasn’t pulled back as much. The early stage markets can play out two ways—either another dip in early stage funding occurs and becomes more prominent through Q2 heading into Q3, or it remains level as early stage investors are still finding great opportunities to invest in. If early stage deal activity falls, expect more M&A in that range too.

It’s fair to assume that we’ll see more crypto assets become distressed and hit the market over the next few years. For me, that has led to some broader questions:

Who else can be big players in snatching up crypto companies?

Goldman Sachs: GS is an expert in distressed asset purchases and restructuring—it could also be why the bank is making a play for Celsius, a distressed crypto lender that may or may not be insolvent (it probably is but who tf knows anymore). According to Coindesk, GS is putting together a $2 billion offer for the company—only $1.2 billion off its peak valuation. 

It’s important to understand the dynamics here—Blockworks says Goldman was approached to be a broker, but not participate in the deal itself. So Goldman’s not going bargain hunting in crypto, but instead looking this as an opportunity to make some solid cash off broker fees itself. 

However, its fair to assume that if the crypto market keeps falling, Goldman could become a more active participant in deals like this. At the end of the day,  $2 billion doesn’t seem like much of a discount off $3.2 billion (especially for an insolvent lender lol.) GS is already getting involved in crypto, by setting up a new trading desk and looking into crypto lending. An acquisition at discount prices could speed up that process.

Other Banks & Private Equity: You know who else is really good at this stuff? Other banks and private equity firms. In fact, there’s a history of private equity firms purchasing fintech assets, restructuring them or revamping their business, and then selling them off. KKR bought card and payment processor First Data in 2007, revamped the business, and then spinning it out into a $14 billion IPO in 2015 and was acquired by Fiserv in 2019 for $22 billion. 

Banks and private equity firms would have different strategies in theory: I think banks could use this market correction to buy crypto assets to jumpstart their internal projects or initiatives they’re planning on building for the next 5 years (don’t be naive—banks are quite eagerly looking to build in crypto, even with the current downturn.) Private equity firms can see this as an opportunity to make some cash. But in any case, expect more TradFi institutions to become larger players in buyouts and acquisitions in crypto. 

Not Coinbase: I don’t think most other companies that are at FTX’s scale can do this. Coinbase really fucked up by going public—there’s no way public market investors will be OK with Coinbase pursuing such an aggressive M&A strategy. Everything Coinbase does needs to align with investors expectations—grow faster or make more money. Not many companies in the crypto ecosystem can do that for Coinbase given their reach and scale. And, the ones that can move the needle for Coinbase probably won’t have any issue getting a term sheet from a VC if they’re also debating a buyout offer from Coinbase. 

How does this impact fintech? 

I’ve written in the past about how I fully expect more convergence between the crypto and fintech ecosystems. Now seems like a perfect time to see that come to fruition. I previously predicted that crypto companies can acquire fintech companies much more easily than the other way around—we’ve started to see that with FTX acquiring Embed Financial (a company I was a small investor in). FTX is also spoke to a number of other trading firms, according to CNBC—including Webull and Public.com. 

Now with FTX thinking about buying Robinhood (even though SBF denied any active acquisition talks, FTX could and should be discussing it internally), we could see some big deals come because of this. A lot of fintech companies are publicly traded and still have a lot of ability to do deals—Paypal is worth $80 billion, Block is worth roughly $40 billion, Adyen is around $46 billion USD, and the list goes on. And companies like Nubank, Revolut, and Chime are all highly valued private market companies. There’s still a lot of cash, highly valued (public and private) stock, and a tight VC ecosystem that makes this market ripe for M&A. While I initially thought crypto companies could be buying fintech companies, we could see it happen the other way around too.