Crypto’s Merger Problem and What Can Be Done When M&As Go Wrong

Mergers. They're a tricky business at the best of times, but when conducted in a nascent industry in which regulations, guidelines and best practice haven't been firmly established, they can be absolutely perilous. Just ask Coinbase, which acquired blockchain analytics startup Neutrino in February for what turned out to be a fee of $13.5 million. This seemed all fine and dandy at the time, but it soon emerged that founding members of Neutrino's staff had links to Hacking Team, an Italian software firm that had controversially sold surveillance tools to international law enforcement agencies and even to authoritarian governments (e.g., the United Arab Emirates).

Given that crypto prides itself on helping individuals escape the overbearing control of centralized institutions, it would be an understatement to affirm that this merger — once the above details were made public — didn't go down too well with the wider community. Indeed, the merger created a public relations nightmare for Coinbase, which hurried doggedly to wash its soiled image (largely by affirming that ex-Hacking Team staff will "transition" out of their new roles at the exchange giant).

Yet, more broadly, this episode has also raised the wider issue of mergers and acquisitions (M&As), particularly as they relate to and occur within the cryptocurrency industry. That's because Coinbase is one of the largest companies in the industry, and seeing as how even it couldn't quite exercise enough due diligence in this case, it begs the question of what other players in the space are doing when they merge with or acquire other companies.

This question becomes all the more urgent when it's recognized that 2018 set a new record for the industry, with $559 million being spent in the United States alone on mergers and acquisitions. However, lawyers specializing in M&As explain that there are a number of things shareholders can do in serious cases of mismanagement, while it's also clear that mergers are another area that will improve for the industry as it becomes more mainstream and regulated.

Due diligence

What makes the Coinbase incident particularly interesting is that the San Francisco-based exchange was aware of Neutrino's links to Hacking Team prior to the acquisition. In other words, the failure of the company to perform “due diligence” didn't fall specifically on finding out about these links, but on recognizing that such links would be viewed negatively by Coinbase's customers and by the wider cryptocurrency community.

As a Coinbase spokesperson told Motherboard at the end of February:

"We are aware that Neutrino’s co-founders previously worked at Hacking Team, which we reviewed as part of our security, technical, and hiring diligence."

So once again, the oversight didn't relate to awareness of Neutrino's affiliations, but to awareness of how such affiliations violate the values of people likely to trade, own and use cryptocurrency. And in some ways, this is a more serious failure than simply not knowing about Hacking Team, since it indicates a startling lack of understanding of crypto on Coinbase's part and intimates that its values possibly don't align with the majority of people who involve themselves with the likes of Bitcoin and Ethereum.

And the question is, did people at Coinbase really not ask themselves how the links between Neutrino and Hacking Team would be perceived by the general crypto public?

Well, according to a blog written in early March by the exchange's CEO, Brian Armstrong,