LEXIT Whitepaper Analysis #1 - Merger & Acquistions Market Explained

Hi folks, starting today I'll write ~3 articles about Lexit (https://www.lexit.co). This is an interesting project with a smooth progress on their crowd sale. In the first article, we will talk in-depth about the market or field that Lexit wanted to revolutionize. I hope you will enjoy reading this article, as much as I enjoy writing about it.

What is #Lexit?

Okay, first of all, you must get a glimpse of what Lexit is before we go deeper. The descriptions of the platform, and how it works, will be the main topic for the next article. So, in this article, I'll tell you what #LEXITco is in short.

Personally, I'd love to describe Lexit as a platform where companies can sell their assets or acquire a new asset from other companies, without any traditional problems that arise within the traditional market of merger & acquisitions business using blockchain as its framework and cryptocurrency as the means of payment.

Too simplistic? Read the next article where I explain it in detail (or you can read the whitepaper). For now, let's focus on what does this project trying to solve.

Merger & Acquisitions Business Explained

Image from: https://fiereceo.com

If you visit the website, you'll see how Lexit describes themselves as "Disrupting the way in which companies and their IP are being bought, sold, and licensed". There are three important words here, "bought", "sold", and "licensed". What is being sold/bought/licensed? Companies and their IP (intellectual properties, not IP Address). However, merger & acquisitions business isn't as simple as described here.

According to Investopedia, there are many kinds of financial transactions (or M&A types) in the M&A business[1]. Some of them are mergers, acquisitions, tender offers, purchase of assets and so on. It always involves at least two different companies. Usually, the companies being involved are not equal in terms of money, assets, and so on.

Here are some of the M&A types:

# Merger

A merger is a process in which companies acquire other companies. The companies that got acquired will become the part of the acquiring companies and they will still run their business as usual, under the name of the acquiring companies.

# Consolidations

Consolidation is a transaction that will create a new company. Two companies join together with the approval from the stockholders, and in return, they'll receive the same equity shares in the new company. Notice that in this transaction, both of the parties involved will be no longer legally exist, unlike merger.

# Acquisitions

An acquisition is a process in which one of the companies acquires/buys the shares of the other firm. Both of them still exist as separate entities, there is no change required in the name or legal structure of the acquired companies. You can think that the other companies are an investor of the other companies, that will grant them the rights of the stockholders of the acquired companies.

# Purchase of Assets

In this scenario, one company simply buy the assets that are legally owned by other companies. The acquired companies must have an approval from its shareholder before they can sell their assets. These assets might include but not limited to intellectual property such as research details, physical assets and so on.

The Importance of M&A

Merger & acquisitions are important, both for the acquiring or acquired party IF, and only IF, it is done correctly. Usually, M&A, regardless of its forms, needs to be done because:

• From the perspective of the acquired party:

• Avoid bankruptcy
• Repay Debts
• Acquiring new capital/assets/legal standing that they can use to expand and increase their business activities
• etc.

• From the perspective of acquiring party:

• Securing a potential business for future profits
• Gaining access to private intellectual property legally, that is costly and time-consuming if they research it on their own
• Securing potential profits that is yet applicable in real life application
• etc.

If done correctly, M&A can bring a lot of benefits for the parties involved, that in turn will bring better services/products for the society. However, doing M&A correctly is a difficult task, with a lot of problems in the process.

Difficulties in the M&A Market

According to Lexit whitepaper, there are at least 3 key problems in the current M&A market. Let's see them one by one.

#1 Pricing

If you need to buy or sell something, you have to know what their price is. A price needs to determined correctly. Too expensive or too cheap will results in a loss, for the buyer or the seller. It is natural that the buyer wants to pay as cheap as they can, while the seller wanted to sell as high as they can. To make sure the transactions brings benefits for both parties, we have to calculate it correctly, which is hard to do right in the current market.

Determining how much assets or companies worth, needs a lot of expertise and times. Usually, the price is calculated as follows:

• Using past transactions of similar assets/companies
• Determine how much the assets worth in the future, or how valuable it is in the future
• Comparative ratios (P/E ratio or EV/sales), to put it simply, the acquiring companies will use the ratio of profits or enterprise-value-to-sale of other similar companies to determine how much does the acquired companies worth
  Discounted cash flow (DCF), in which companies worth is determined based on the estimated future cash flows.

Whatever the methods, it is not as easy as snapping your finger.

#2 Accessing experts & counterparties

In the current market, it is hard to look or find buyer or seller and the expert that is needed for the transactions. This is because there is no platform that can connect a buyer/seller and expert easily. Most of the time, companies rely on individual contacts. It takes time to find the right buyer/seller, and it takes more time to finish the deal.

These difficulties in accessing experts & finding the counterparties result in a higher risk, cost, and time that is needed for M&A transactions to occurs successfully and beneficial for both parties. This cause a lot of potential business to fail, which should not happen if they can find the appropriate buyer for their potential assets. On the other hand, this also 'cause the acquiring business can't gain access to assets that they need and in turn have to run their own research that is time-consuming and costly.

In short, the difficulties of accessing experts & counterparties makes business to be inefficient and ineffective.

# Measuring intellectual property

Another problem in the current M&A markets is valuation & discovery of unused intellectual properties. You can read the details of this problem on Lexit whitepaper on page 11. In my opinion, the most important reason why this happens is the lack of knowledge and skills to engage in the intellectual properties market from small-medium companies, because they don't have the necessary resources. Because of this, M&A acquisitions is hard, costly and time-consuming, to the point that some companies might think bankruptcy is a better choice.

Bottom Line

There are many problems in the current M&A market. If there is a platform that can solve all of those problems, then M&A transactions will be easier than ever. Companies that want to avoid bankruptcy, gain access to potential assets or discover partners to start a new business can achieve their goal as easy as they wanted to. That is why, in the next article we'll discuss how does Lexit solve those problems, and why it is a great solution.

Stay tuned for the next article, see you!

[1] https://www.investopedia.com/terms/m/mergersandacquisitions.asp