On Friday, August 13th, Ethereum interchain scalability solution Polygon (formerly Matic Network) announced its acquisition of Hermez Network, a ZK-Rollups-based Ethereum scaling solution, for $250 million. Polygon and Hermez are also merging their native tokens, MATIC and HEZ. This transaction is notable as it is the first time two companies have fully merged blockchain networks.
Polygon committed 250 million Matic tokens for the merger, which is equivalent to about $250 million based on the price at the time of reaching the agreement on August 4th. This committed amount comprises about 12.5% of Polygon's treasury. Holders of HEZ tokens will swap their tokens for MATIC tokens pursuant to a separate swapping contract at a ratio of 3.5 MATIC: 1 HEZ based on the price of each token as of 11AM on August 4. As part of the transaction, Hermez’s 26 staff members will join Polygon’s team of 80.
Deal terms and documentation have not been released, and it is not clear whether the transaction involved a traditional purchase agreement with extensive representations and warranties. Blockchain transactions implicate various legal issues that should be investigated and addressed in diligence and in deal documentation. An acquiring company should be sure to delve into past compliance with U.S. securities laws in the diligence phase if a company’s digital assets were offered to investors. Diligence should also cover past compliance with state and federal laws relating to money transmission for businesses that send and receive cryptocurrency. Multiple securities law-related considerations may also come into play – an acquiring company should assess whether a target company’s digital assets are securities that subject the company to the certain securities laws. A blockchain deal will also implicate cybersecurity and privacy concerns, especially if personal information is processed on the blockchain.
In addition to ensuring that deal diligence thoroughly covers all of the issues involved in a blockchain transaction, an acquirer should ensure that the purchase agreement includes representations and warranties that consider the unique risks and protect the acquirer. Another unique issue in blockchain transactions involves valuation. To the extent that valuation is based on future performance, the volatility of many young blockchain companies can make the calculation difficult. Additionally, there are few (and in the case of Polygon Hermez, no) comparable transactions to assist in the valuation process. Post-transaction difficulties include integration of technology as well as company policies. If, for example, personal data is stored on the blockchain, the acquiring company needs to ensure that it provides at least as much protection to that information as provided by the target company.
Nearly 500 blockchain and cryptocurrency M&A transactions have taken place since 2013. Total deal value in 2020 was twice that of 2019 at $1.7 billion dollars, and 2021 is on track to surpass 2020. As the volume of these transactions increases, market practices will develop and acquirers will be in more familiar territory with respect to deal procedure and documentation.