The State of DAO M&A | Bernard Schmid | Jillian Grennan | Joshua Tan |

all right everybody this is the week this is the afternoon of dows we got one more Dow conversation for you guys the state of Da m&a hosted by Josh from dowar please welcome our speakers oh my gosh it's so bright feel they added twice as many lights as they had last year man crypto really is doing well all right hi folks uh thanks for joining us this afternoon and uh we're going to get started um super quick I guess I'm Josh I'm co-founder of medov I think we just had a presentation from some of the other folks in medov uh just 10 minutes ago um but I'm also a computer scientist and mathematician at dowar uh pass it to Julian hi I am a financial Economist by training I work as a professor uh at emmer University and I also have done a lot about innovators and helping firms uh get Innovation out there and be more inclusive in their Innovation process and I got really excited about Dows as a potentially very inclusive environment awesome um yeah hi everyone I'm Bernard I'm a co-found of ARA we are crypto focused investment Bank um so we do a lot of m&a transactions um more on the kind of traditional side of of equity um have been the leading Bank by by deal count globally now um so Dow M and is a really interesting topic for us as well looking to the Future awesome so the subject of this talk is a wonderful uh new report on the state of Dow m&a that we just released uh I think 20 minutes ago so uh I think let me press the button over here so you can actually take a look at it um so it just heads up this is a review copy uh it is not the final final Final Draft um there may be some changes that are being made but I think we are very very proud of the work that we put into this but maybe as part of this initial conversation uh I'll just put out initial first question to Bernard uh what is m&a and why is it such a big deal yeah um yeah let me Let Me Maybe set the ground a bit um m&a mergers and acquisition um historically it's been a a tool I would say for companies in in capital markets um that you can use in a quite versatile manner so for growth to expand in specific jurisdictions or or markets or products and uh in the end strategically maneuver through through um the capital markets um it's been a long industry historically 100 years old or so 3 to four trillion uh annual volume so so a bit larger than the the crypto market cap um and what it's traditionally being used for what the main drivers are are cases like consolidation so say in the traditional space uh at Disney acquires Fox network to build out their content and acquire users um other cases are expansion that you see a lot so geographically say an American exchange buys a European exchange uh to acquire licenses FasTrack the process or to get access to to additional customers um and then on the expansion side you also see kind of product expansion so stripe for example uh I think is the was the biggest acquisition we've seen in the space for a while where where they acquired a stable coin um product to basically strategically expand in the in the space um the third category that's still I think worthwh mentioning is is equires where you basically acquire a a smaller team or larger team to to grow out your your base and then there are many nuances um between those um types of Acquisitions but in Ence it's a it's a strategic tool kit thanks Bernard uh Julian you've looked at some really big data sets of m&as and dowas in web 3 could you just give us like a brief overview of what is the you know based on your estimation what is the state of web 3 m&a right now yeah so this was actually what got me really excited about this project I as a financial Economist was why am I not seeing more consolidation every emerging tech industry goes through consolidation and yet there's this proliferation of coins and proliferation of downs and when I actually stepped back and got the data and this data was really unique because we went through press releases and Twitter files rather than just looking at traditional ways because sometimes it's announced on X what we found was there's actually been over a thousand deals so far so way more than I thought um and also you know as he was saying with this like Bridge stripe deal that's a $ 1.1 billion deal there are some big deals and I would say that's what of the big Trend that we are seeing while it might have been slow to start off with m&a in this space we are sort of ramping up it is true that typically during up Cycles um you see more consolidation and we're seeing it while Dow deals in particular still remain relatively small I'm really optimistic about uh you know getting some regulatory certainty here and with regulatory certainty will come more deals I think what we've seen though in the space so far has really been thinking what about the things he was saying so you're seeing more acquiring developer teams or you're seeing um I guess another Trend that we often see is actually finally this cycle as opposed to say 2021 you didn't see any Trad players coming in and trying to buy defi we are seeing Trad five players saying hey I I want to finally get into this space and find me somebody to partner with that seems appropriate and so I think those trends like going together and seeking consolidation are really going to help move the industry forward yeah so maybe this is a good time to dive into some examples uh so Bernard you know focusing on Dow m&a now um can you give us a brief overview of some of the Dow andas that you've seen um or you know that we've covered I guess in our report um yeah yeah of course um and obviously um I think Jillian is The Mastermind by now uh knowing the whole space and every little transaction that is out there in in Dow M and ever um but certainly I think the the the two two big ones that come to mind one is where you know maybe some folks also in the audience have have heard about was the Ferrari merger uh already a couple years back I think four or five years back where um Fay uh algorithmic stable coin at the time acquired Rari which was a yield aggregator and that was the first true Dow toow merger where you would see a community process attached to it and the community voting for for this mergers to also merge the two tokens um all the processes were kind of figured out on the Flies so you would see a lot of uh heat and discussions on the Forum um um back at the days um and yeah is an example also where um you would see the the nent nature of of what those two um protocols were trying to achieve because it ended up also in some you know legal um repercussions I think there's still processes out there um so I think that was certainly the first first big one of of true size um another example of a of a more I think successful one or successful example was the um nosis and iite chain merger also already a couple years back so hopefully we see some new president soon um that I canite you know newer ones um where basically noses um acquired XI and and it's it stable coin infrastructure and out of that nois chain originated um similar process the the core team decided on it before before there was signaling um only demanded from the community um and you could certainly kind of see those processes being a bit more mature in a sense or a bit more um successful in the end in its outcome as well so I think these are like Ferrari nosis xti some of the very classic like this is what a dow merger or acquisition looks like um there are also some pretty weird examples out there um and we've spent a lot of time talking about uh you know all the varieties between uh you know here's a dow here's another Dow and one got eaten by the other and now there's like shared governance uh and then there's stuff that notionally gets called looks like a merger it gets called a merger but you know is it really Julian I was wondering um if you had any thoughts on this you know obviously this kind of relates to some of the stuff we had looked at with year um and how to sort of you know stuff out the different versions of an MA that can really show up in this space right so I think um a lot of uh Dows so I'll put this as an example Arbitron started a committee and they were like oh we have this money let's go look and see if we can do some m&a activity and basically they came back with the conclusion that yeah for strategic reasons for Synergy purposes it would be a great idea but actually we don't quite have the infrastructure in place to do it full out and so I think what you're seeing out there and what's occurring are sort of smaller pieces that can happen so I've looked at many many of these Improvement proposals out there we've roughly put together a data set with over 20,000 Improvement proposals where we looked at probably the maybe top 200 most prominent DS and what we most of them are defi Dows CU I am looking for ones that have a liquid token so you can sort of think about about you know is there abnormal returns here um and what we were seeing is that actually you're seeing more things that are sort of like a joint venture or that's the roughly broad category I'll put in them they have elements of a m&a in them and so for example what you would see is token swaps right two people who may have sort of similar business models but want to diversify would agree to and vote on you know putting switching some tokens and or maybe even taking a step further and saying hey now that you have some of our tokens would you also come on and vote in ours process and be part of the governance regime so this is sort of baby steps towards integration I see it you can think of other examples that have been out there where it's really about a specific asset so I'm going to go after you and I want to actually acquire you mostly because maybe you have an operating license in Singapore you have something that I want to be able to run my product um we've also seen really these Talent ones in particular actually relative to the whole web 3 space uh Aqua hires have happen much more in the Dows setting and I think this is probably because you have so much that you can see with the contributors and Dows in particular one of their challenges is that most people who are contributing they're not paid employees they're not in the traditional sense where you have an employment contract you have a non-compete and we can value you from a classic like m&a perspective as a whole organization and so instead we're going out and acquiring these specific Talent OR team or set of developers um some other things that we've seen are not necessarily what I would call exactly m&a but people putting proposals forward saying we should hire this person to do risk management or we should do something to build out the ecosystem and we think that that goal would occur by working with this firm often these proposals actually don't get much attention sometimes they were the ones that are more likely to fail um so sometimes people will even go through processes of trying to incentivize other people in the Dow that they want to work with to maybe let's give them some benefits in the token and we'll get them on board to actually do this merger and so you see all these elements getting that way um just the same way you would in equity markets where people are buying up shares ahead of time and so I think in that sense they're ready people want to do it they just need more clarity on the regulation side for sure I honestly thought the aqua hire point was so interesting um and a really kind of clear way in which some of the like these uncertainties these are regulatory uncertainty but also these questions about valuation really do stand in the way of more activity in this sector and there these are very concrete things that we can fix that we can actually get some progress on maybe uh I'm going to do something a little bit terrible I personally uh found the very nerdy discussion of valuation methodologies in the paper extremely interesting Jullian I was wondering if you would be willing to share a little bit uh about that uh some of those methodologies and what you think could work in the future uh with the audience here sure so I will put as a person who has taught Corporate Finance many times I will put the Hat on that in the paper I went a little Deep dive said hey we have three methods to valuation we have discounted cash flow we have you know com multiples and then basically Market transactions there's not enough Dow volume right now you get rid of the market transactions and then on a multiples basis look maybe a or people have like traditional statements that sort of look like your 10ks but most Dows don't even like put out reports let alone you have a financial analyst who's going to tell you what it looks like so I don't think that you're really going to be able to come up with a multi approach and so that really leaves it at discounted cash flows and that's also equally challenging and it's almost even worse right because you have now your weighted average cost of capital which is what you should discount it at right we know equity in debt crypto markets super volatile arguably maybe you can put it in some like stable coin or something that's equivalent but I think it's just going to lead to this volatility and this is one of the interesting things in the Dallas space we've seen deals close really fast right because you don't want all this like uncertainty around the price going forward um if you're going to come up with a solution I really think that we do need like sort of you know more standard metrics for valuing cash flows and thinking them through and in particular as wonderful it as it is that everything's on chain it's all retrospective it's not forward looking where everything that you need is forward looking cash flows and so this brings us to this nobody knows you don't know the value there's going to be huge idiosyncratic risk there and people are unwilling to put money down unless it's sort of a booming Market where you're already like well I'm doing well anyways I can float it around please please read this section it's actually super interesting uh makes me think I don't wish I was a finance major but maybe just maybe um Bernard so valuation is definitely one of the big challenges that Dallas faced but there are so many others wonder if you could uh talk a little bit about some of the others you've observed yeah and maybe also to build up on the the valuation point where kind of you could see kind of a general pattern on what what is the overall challeng is just the maturity and the lack of processes and precedence and if you look at the Precedence um you know it's a two-digit number and if it goes into valuation how we do it typically on the um on the you know Equity side even in crypto most situations are valued on a comparables meta so you have these sheets where you look at okay which transactions have happened recently you know how comparable is it and then you take a multiple of any number you can find may be you know a financial metric or even a user metric so this is by large the biggest challenge right now in in Dow M because certainly that the data set is just so low um and how it typically happens it goes transaction by transaction right so it's hard to establish all these standards in kind of the the dry field if you if you want to look at it like this but where it typically gets applied is if there is a situation that people want to spend time on to figure out with the constraints that we have right now from a regulatory perspective um and the governance perspective as well how can we make it happen because there is a vetted interest in we want to make a deal happen we want to get it done so with these kind of precedents being worked through one by the other hopefully um more and more we will also find more clarity on kind of the toolkit of of Dow m&a which is then valuation uh onchain um framework so how decisions on on merg being made and then thirdly maybe also how is the community taken by the hand because when you look at the precedents that we have in the market already you see a lot of upheaval uh for any of these transaction because there's no very clean mechanism so far and it's always this notion of okay this transaction was decided behind the scenes the Dow wasn't really taken by the hand now it's you know being taken to the community and it's a bit an artificial uh decision right um and I think all of these things will be will be figured out over time and need to be figured out over time to get more velocity into you know Dow m so Bernard just mentioned the word standards which is I'm going to just plug very quickly so part of this is this is part of a research report um or research series uh by dowar which is the standards body for the Dow ecosystem so if you want to solve some of these problems and be on this stage next year uh please reach out go to Dow star.org and help us actually build some public goods write some specifications put out some standards so we can actually solve these problems and Ford Dows and DOW m&a let me and and also on De if I may up to that we are obviously on the on the other side of executing these transactions on the equity side and we were involved in dowo transactions already but it never came to Fresh because we didn't have those standards right so we also desperately need kind of your work and appreciate that a lot that you you know spend some mind space and and time and energy into developing these I love you guys um so let's let's dig into the into the future I know the blockchain is about the past but we're going to peer a little bit of the future Jillian and can you tell me what does the near future look like for Dow m&a and I'm going to I'm going to encourage you to go as crazy as you like um are you I I I'll go for one so I think there's been a lot of great conversations this week about Dows and you know fored me to rethink a lot on governance and originally right you have a corporation is typically solving these principal agent problems and most of the value in m&a deals come from Bad management and replacing bad management and this is the whole reason why we have something called the market for corporate control it's not exactly the same in the Dallas space and so a lot of my work on governance was saying like look yeah we want to look at traditional principal agent problems but we have other aspects like inclusivity or security concerns cuz there's a lot of risk on change what I've been pushed to think about more though is adaptability and flexibility and how do you make the governance agile because we live in an agile onchain world and so in the corporate space what you have these super majority rules 66% for some m&a deals I would love to see rules right away that are built in so you could get a deal done quickly and you could have sort of a much more agile structure to assess m&a and maybe this is having a council of experts that you pull from or a sort of random pool of people in the organization rather than trying to do a whole voting process with all of your members and getting like 50% I think you want to be able to be much more flexible and much more agile going forward what about you what do you think is what do we need to do to scale m&a in the future what do we need um I mean it goes into the same direction of what we've discussed already right so the the the toolkit regulatory certainty um processes whatsoever um I think what we or or what I could imagine the the near future to be the next 2 3 years um that there will be one party picking up a case and proving the value of Dow M Anda and it might be super Niche and some type of rollup case but some party basically taking the initiative of proving that there is something to be done and then just replic ating it over over the ecosystem because if you look at also the the Dow space in general and the different actors within it it really comes down to by now like individuals or individual groups that push this narrative and I think they will find a way whoever that may be I'm excited as well to see who will Who will lead this transition but they will figure out the way on how to work with the constraints that we have right now from a regulatory perspective from from a mechanics perspective when there's value on the table and when people are excited to getting deals done so want to throw maybe a wildcard here one of the things that you know m&a kind of triggers is you know it's it's a lot of it is about consolidation consolidation in an industry in a sector uh and you might think uh that consolidation is kind of in opposition to this idea of decentralization that we care a lot about uh in this space uh and you might imagine and I think it's both a cool and a scary and a super interesting idea like if m&a actually works if Dow m&a becomes better and becomes this superpower of of dows could you eventually start seeing a lot more consolidation can we eventually start to see protocol conglomerates um questions or curious your thoughts on you know this narrative and what that could look like yeah I think it's it's not unlikely if you also look at the traditional space or techm space how Tech m&a space how consolidation happened uh in thec Era when a lot of people built similar things and in the end there were the leaders you know established themselves and bought up smaller parties and it's not unlikely to see this happening in in a decentralized world right because there are products that are replicated that we don't necessarily need 10 times um which doesn't mean the ecosystem gets less decentralized in essence because that doesn't fundamentally or wouldn't necessarily fundamentally change the the mechanism behind but just the kind of Market um composition Julian last word uh we should see more deals let's do them do them in infrastructure there's lots of places to do it I love the idea of a big conglomerate amazing all right let's make more deals thanks everyone thank you