The wave of startup M&A is already well underway. Last year, electric truck maker Nikola Corp. acquired his battery supplier Romeo Power Inc. Meanwhile, used-car dealer Shift Technologies Inc. and his CarLotz Inc. agreed to merge, as did two self-driving car sensor makers. Velodyne Lidar Inc. and Ouster Inc. were both loss-making former SPACs, and each transaction included a payment in stock rather than cash.
Beyond the SPAC universe, venture capital-backed fast grocery delivery company Gorillas Technologies Gmbh agreed to be acquired by Turkish rival Getir in December. The $1.2 billion merger consideration was well below Berlin-based Gorilla’s top valuation of $3 billion, and was paid almost entirely in his Getir shares.
Consolidation of start-ups was long overdue. Cheap funding drove valuations high and too many new entrants into hot sectors. The fierce competition was great for customers, but novice companies didn’t have the scale to turn a profit.
For example, about six lidar companies have gone public through SPACs in the past two years, one of which, California-based Quanergy Systems, filed for bankruptcy in December.
Mergers offer some hope of saving value, but there are risks. Acquiring a German rival will allow Getir to consolidate its network of urban warehouses, reduce advertising costs for customers and increase bargaining power with suppliers. But with Gorillas burning cash, Getir may struggle even more to break even in the short term.
The same applies to Nicola. Nikola spends more on building electric heavy trucks than it receives from its customers. The Phoenix-based startup warned in November that the recently completed Romeo acquisition would exacerbate this negative gross margin in the short term. Previously, Romeo sold his pack of batteries to Nicola at a low price, but Nicola, the owner, now has to bear the full price.
Together, the companies lost more than $760 million in the first nine months of 2022, forcing Nikola to slow down production of its trucks to avoid burning more cash.
Nikola hopes to make Romeo’s battery manufacturing more efficient, and the desire to prevent major supplier failures is understandable, although Romeo’s cash pile has dwindled to $4 million. , Nikola had $316 million in unrestricted cash at the end of September. However, Nikola’s market value has dwindled to around $1 billion post-acquisition, making future equity raisings more dilute.
The deal also illustrates one of the difficulties in coordinating a merger between two startups. They typically pay for shares to keep cash, but when valuations are liquid, it can be difficult to determine the value of each.
By the time the acquisition closed in October, the Nikola shares Romeo shareholders had received as payment were worth just $68 million, less than half what they were worth when the deal was announced in August. Down over 95% from its peak in 2018. (1)
Ensuring liquidity is often a bigger priority. Until recently, Velodyne and Ouster were tearing each other’s strips in court over intellectual property rights. The merger of equals between the two companies, announced in November, will generate approximately $355 million in combined cash.
Used-car e-commerce platform Shift closed most of its U.S. hubs in August and warned in November of its ability to remain a going concern. The following month, he completed a merger with CarLotz that, in total, would leave him with $125 million and promised to be profitable by 2024.
But investors don’t seem convinced that merging the two loss-making companies will deliver the promised economic gains in a rapidly deteriorating used-car market. It plummeted from a peak of $900 million to about $30 million.
Desperate times call for creative thinking, but startup mergers may only succeed in slowing financial calculations.
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(1) Nicola also waived a $28 million loan to Romeo.
This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering European industrial companies. Previously, he was a reporter for the Financial Times.
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