This article was contributed by Nikhil Surve, Associate Director at R3.
The Covid-19 pandemic is taking an unprecedented toll on global financial markets, and the future is looking increasingly uncertain for business owners. Government-enforced lockdowns have forced companies in virtually every sector and every country to press pause on their operations, or radically change their way of working.
As a result, financial markets are spiraling, and the outlook for the economy is bleak. Against this backdrop, it is highly likely some sectors will see a spike in M&A activity in the coming months as firms look for any alternative to ceasing operations and laying off staff. After all, a classic by-product of tough times is consolidation in markets.
It goes without saying that a firm that finds itself seeking to be acquired or merge with another company will typically be strapped for resources and will be looking to complete the M&A process as quickly, cost-effectively and efficiently as possible.
Unfortunately, to say mergers and acquisitions are difficult and costly is a huge understatement. One of the reasons for this difficulty is the complex combination of legacy technology systems used throughout the process.
Out with the old…
The sheer level of paperwork required to complete an M&A deal is breathtaking. Until the transaction is truly complete, there is a phase where the two companies need to consolidate data across multiple financial and non-financial statements such as balance sheets, P&L statements, asset registers, shareholding patterns, inventory details and more. This leads to a lot of discrepancies and reconciliations, holding up the process and requiring a vast amount of internal and external resources, which all come with a price tag.
The lifecycle of an M&A deal usually involves multiple parties such as lawyers, external M&A advisors, auditors and tax consultants, each with their own disparate manual processes. Companies are often skeptical of M&A because of the time and cost involved without any certainty of return on investment, especially in the current challenging economic environment. Blockchain technology can ease – and in many cases, remove – these concerns.
Times of crisis often fast-track innovations in technology that can better equip us to handle similar events in the future. Blockchain is one such technology. We face a period of unprecedented uncertainty and hardship as a result of the pandemic, and a conversation about the benefits of blockchain and M&A can feel understandably insignificant. But it is important every industry plays its role in ensuring we as a society are better equipped to handle a crisis of this scale in the future.
…In with the new
Many of the inefficiencies in the M&A process are centered around the issue of establishing trust. Intermediaries such as lawyers and brokers are used to facilitate trust between the two parties partaking in the transaction. With its decentralized and irrefutable ledger of transactions maintained by the participants in a system, blockchain technology can help establish this trust and share information far more effectively and securely.
A blockchain platform, developed specifically for enterprise usage, can reduce costs, simplify and accelerate the M&A process. At a time when companies need to move quickly to lessen the impact of a pandemic-induced global slowdown, time and cost are critical variables.
By removing cost barriers, a broader selection of companies would be able to consider M&A as a route to protect and enhance their businesses. This includes SMEs with limited resources, which may be amongst the worst affected by the Covid-19 crisis. The efficiency and cost benefits also extend to the third parties involved in M&A deals, such as investment bankers and accounting firms.
Clearly, M&A is one of the most commercially sensitive processes in the financial services space, so the technology it uses must be secure, robust and handle data privacy appropriately. Legacy blockchains, like bitcoin and Ethereum, suffer from scalability challenges, low data throughput and privacy frameworks that share all data with all nodes on the network.
Purpose-built enterprise blockchain platforms were designed to tackle these issues while still delivering the core benefits of the underlying technology. A platform that offers a unique privacy-first approach only allows participants in a transaction to view sensitive data, and the platform offers a flow framework that could be leveraged to model various business processes. Further, notaries’ concept can be used to provide a view to regulators. The potential for such a platform to streamline M&A deals and make the process cheaper and faster is vast.
Applications are already being developed on enterprise blockchain platforms that will offer companies a critical lifeline in future times of crisis, such as that in which we currently find ourselves. Our financial services infrastructure must continue its digital evolution if it is to perform its required function for the broadest possible pool of participants when they require it the most – and blockchain will be at the heart of this transformation.
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine, Markets Media Group or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community.