As Goldman spots signs of an M&A rebound, Galaxy and Castle Island predict an acceleration in crypto deals

Goldman Sachs said in a note to clients earlier this week that the second half of 2020 would see a resurgence in merger and acquisition (M&A) activity — and two executives from the digital asset world say that would likely trickle down to the crypto world as well.

It's been well documented that the COVID-19 health and economic crisis hit the brakes on a number of big M&A deals during the first half of 2020. Indeed, available data shows that 1H2020 M&A volumes in Europe and North America have hit the lowest levels since the first half of 2010. The slump was "most pronounced in April and May — months which set new monthly record lows of $66 billion and $50 billion."

Still, as Goldman Sachs noted in its August 4 note, the past few weeks have showed signs that inorganic growth among companies is picking back up. 

"We continue to expect that the pace of M&A activity will further accelerate in 2H2020, as firms adapt to the new environment and rely on inorganic growth to pivot their business models to better serve customers and compete effectively," strategists at the bank wrote, adding:

"The bank went on: June M&A volumes ($107 billion) showed modest signs of recovery vs. April and May, as reopening plans progressed across regions (albeit at different paces and with varying degrees of success). As corporates' visibility further improved, the M&A appetite accelerated even more in July – which generated $172 billion worth of deals. And in the first few days of August, another $40 billion of transactions have been announced."

Interestingly, the cryptocurrency market — which represents a mere $200 billion in aggregate token market capitalization — saw a number of big-ticket deals close even as COVID-19 was on the rise.

In early April, crypto exchange Binance confirmed an earlier report by The Block that it had acquired crypto data provider CoinMarketCap. Sources close to the matter told The Block at the time that the deal was valued close to $400 million. Then, at the end of May, Coinbase announced that it would acquire Tagomi, following months of speculation about a tie-up between the two companies. 

Still, both Chris Ferraro — president at Galaxy Digital — and Matt Walsh — co-founder of crypto venture firm Castle Island – expect crypto M&A to accelerate even further, echoing Goldman's expectations for the broader business market. 

In an email to The Block, Galaxy told The Block that it agrees M&A activity will pick up in the second half of 2020, but that the drivers for such moves in the crypto space will be unique. 

"M&A dialogue actually increased as we went into quarantine, driven by a combination of i) perception that the venture capital environment will be constrained for the foreseeable future, and ii) the larger cap end of the sector, which was already starting to make strategic moves, seeking to press that access to capital advantage," Galaxy's Ferraro said. 

Walsh is of the same opinion, adding that several crypto companies have had a hard time raising funds. As for who will be doing the acquiring, Walsh said he wouldn't be surprised if traditional banks and broker-dealers move in to buy favorable companies.

"What I haven't seen yet but expect to see are banks and B/Ds [broker/dealers] moving more aggressively into custody and wallet infrastructure," he said. "I would expect BitGo/Anchorage and a bunch of the other brokerages/custodians to be pretty well positioned if that were to happen."

As for Ferraro, he expects larger-cap exchanges to drive most of the inorganic growth.

"Expect to see the larger cap exchanges and platforms being the most active acquirers, with a focus on adding inorganic user growth, additional services (e.g., Prime), and opening up new markets. We are also seeing a willingness to consider consolidation via mergers in the small-to-medium segment of the market," he said, going on to note:

"As previously announced, Galaxy Digital's investment banking group has several live mandates in the sector, and is seeing significant inbound interest from corporates and projects regarding strategic alternatives, including M&A."

This post has been updated from its original form to properly attribute comments to Galaxy's Chris Ferraro.