The consolidation that didn’t happen (+ memes)
Since the market downturn in early 2022, everybody in the industry has indulged in this consolidation narrative. Yet, it didn’t happen. Space companies flatten the curve.
Note, that you can read the article below in two tweets here. Please excuse my language.
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At every industry panel, a panellist will grab a mic, conduct a dramatic pause and then say something like “Not everyone can survive, the industry shall consolidate”. I haven’t seen Lord of the Rings but this is how I imagine it to be.
I was doing the numbers this weekend - and this is not quite what’s happened. I register about 29 industry M&As for last year (I don’t think I captured all, but a solid 80% probably) and about 24 this year excluding 1B+ deals. So roughly in line.
Big co-co-veat
For starters, I should contradict myself as usual and say that the last 3 years were actually quite productive on the corporate side of consolidation. Typically, GEO satcom stocks have started to tank with the emergence of Starlink, it took a while for anybody to take action. In the end, we saw Viasat+Inmarsat, SES+Intelsat, Eutelsat+OneWeb, and perhaps also Yahsat+Bayanat. Hardware manufacturing side, we saw some divisions reshuffling among big primes, L3 Harris ultimately ending with Aerojet Rocketdyne, Maxar’s private takeover and the Arbus/Thales space division merger tbd.
From the small companies and startup side, that is not what a massive exodus looks like. Everybody was predicting a consolidation wave - and everybody was wrong. (*I should as almost/many, but never get nuance in the way of a good story). Industry proved to be more resilient and has flattened the meme curve. Let’s look at what happened.
The answer goes in two - we saw less M&A activity as expected (the buyer side) and companies found several different ways to survive (the sell side).
Less M&A than expected
Past performance is not an indication of future returns, but also often the only information source we have. So 24 months ago I’d have expected that a majority of M&A in 2024 would be driven by Redwire, RocketLab, Bradford, Antarctica Capital in line with past transactions - and I was obviously wrong.
A couple of reasons
Delays in several 100M+ rounds translated into delays in M&A. I know a few companies about to announce big raises in the next few months which have been in process for the last 12+ months. Those often calculate with some strategic company snap-ups, but obviously cannot happen before raises are completed. So that yields a slowdown of the activity or a more continuous distribution over the next 18 months or so.
Somewhat similar situation in public markets - RocketLab completed a massive 300M+ rights issue intended also for acquisitions, but no announcements were made to date
As for the inactivity of PE groups, we are talking about several different reasons here. Some of them revised the strategy not necessarily due macro conditions, some were/are stuck raising more funds and some of them near the phase where they bring less auditions to the portfolio and instead try to max out the ROE on the current group.
Part of the weaker M&A activity might be that there is simply less cash circulating the ecosystem since several high-profile investors exited the space market following multiple high-profile failures. On the other hand - some of them are willing to step twice in the same river, while we have also some net new sophisticated investors entering the sector for the first time.
This is a good time to highlight that M&A is a double-sided market and so the reasons transactions are not happening lie on both sides - and there is always a price at which either party is willing to sell/buy.
A while ago I noted on Twitter that I see so many lost startups. I see to many companies which are trying to raise but have some fundamental problem, which can be however superficial or deep
They have been around for a long and this cannot convince investors they will suddenly get on a 2x growth every year track
There is something weird on a captable - bad leaver (in Europe, the founder vesting is much less common, or it is no longer applicable due to the previous point) or some angel who got 20% of the company for a 200k check.
One or more of the founders aren’t really likable, or considered able to pull whatever their thing off
The idea is not a 10x.
And in my experience, there are always investors who will write the check anyway - but they will be no good. So you have B players stuck with B players and then it just becomes a mess.
And often a strategic acquisition could be a good solution - the primary idea can flourish without the need to do 100x, founders can get decently compensated and most importantly get some upward mobility in their new enterprise.
But again, this is not happening. I don’t see all of those lost companies actively exploring strategic sale. I see a few roadblocks
Often companies do not realize they have an issue and think that their current development is fine (or have a delusional idea about getting a 40M investment after four years of nothing).
In rare cases, there is just nothing of value that would justify an acquisition - I saw a horror case where nobody in the team ever made a written record of anything and so the company was burning cash for a year while producing no value whatsoever).
As I have repeatedly said, the small business segment of the space industry is underbanked - I spend way too much of my time on weekends telling people that they really won’t get a 1M investment next week because they need to do a copayment on a government grant. That kinda makes sense - those companies are too small to generate fees attracting good corporate finance advice/activity.
Finally, I see a massive chasm between how much founders would want for their companies and what they are realistically worth (especially in a non-vc scenario). As an investor I obviously think that every company is overvalued - but one of the reasons for small M&A activity in space (and actually in the rest of the corporate/private sector) just is that the valuation expectation still didn’t come down.
Back to the original discussion
So - what happened to all of the dozens/hundreds of companies which were supposed to go bankrupt?
Some of them actually failed - the most ZIRP companies are no longer with us, Virgin Orbit or Lyteloop are good examples.
Some got quietly acquired for close to nothing - the acquisition of Kleos would be a good example
Some of the companies reoriented to SBIR/one-off contract work - that is the reason Momentus is still around
Debt is the new equity: I will write some about this later on, but a few companies managed to get to the stage where they are able to get some debt on their balance sheet (or banks/funds are too desperate to deploy). HE360, Slingshot Aerospace come to my mind on the debt side.
Some companies are virtually unkillable. I would have guessed that Mangata Networks would no longer be with us, but the truth is that if you raise a big round projected for x employees, XX% of them leave - you can basically survive indefinitely with a few executives trying to sell around. Astra is another example of a company which apparently will survive everything.
But away from those, some companies also committed to a serious turnaround. Reoriented to the ultimate government customer, rationalized their workforces, adjusted business plans and projections and committed to raising new cash to have their companies survive. Tomorrow.io, WorldView, D-Orbit could have all imploded following their SPACs - but they didn’t. They went inside, figured out what does the new environment mean for them and made their companies act accordingly. Or I follow a variety of opinions about HE360, but again - the company is still here.
Implications
This all of course has an implication - when a company's cash balance gets dangerously low, you really don’t have a different option but to raise whatever cash is available. But that leads to downrounds, bad structure and makes further fundraising more difficult. I was just discussing with colleagues who did not pursue an investment in otherwise a very attractive company because ugly downround was complicating things over there. Or I know an entrepreneur who took a strategic investment of less money than they needed for the next 24 months, which helped the company survive but left the co stuck in a situation where the big holding co doesn’t feel a responsibility due to the relatively small ownership, but the company cannot pursue independent fundraising either because for that the strategic’s share is relatively too high. An implication of smoothening the curve is we will be meeting bad structure deals for the years to come.
This time is no different
The 2022-2023 period is not unique in companies showing resilience. One of the companies on my mind is Astro Digital. The company raised 16M series A in 2017, if you look today, it is abundantly clear it did not make 10x on the investment. You can also find out that the original Astro Digital was supposed to run an EO constellation for agriculture, and today the company is much closer to a dedicated satellite manufacturer. But they have a reasonable CEO, some 50-60 employees, the company works on interesting projects. Investors must have written off the investment a long time ago (or maybe they get some dividends, I really don’t know, would doubt it).
And this is just magic which happens to companies once you remove venture constraints. Imagine you do 10M in a year in revenue. How much more business development effort/expenditure do you have to extend to try to get to 100M next year (which a VC would need)... a lot. How much less of an effort do you need to get to 11.5M and grow 15% a year? I see this playing out in the software VC world - taking companies which have solid fundamentals but no VC growth and buying them out, rationalizing captables and letting them flourish. If you are thinking of starting a PE fund - there is a brewing idea right here.
Two more considerations
I wanted to stay mostly on the ground level of specific companies, but of course the macro environment plays a major role in corporate decisions. The rise of interest rates made and M&As more difficult (pushes the minimum return expectations up), including in the space sector. Secondly, more volatile years (which we certainly had, in the macro level with wars, supply chain, election uncertainty and likewise in the space sector with Starlink, Starship expectations, Iris2 in turmoil and so on) make companies reorient to themselves and also make any M&A decisions more difficult.
Two final notes
This article might and does sound doom-ish. I’m in the jaded and cynical part of my investment Yet, the fundamental takeaway is however abundantly positive - via a mix of means, companies got much more resilient and the predicted consolidation sweeping tsunami did not happen.
This piece also risks an overgeneralization - but bear in mind there might be transactions/realities I don’t know about, the n number is small for valid generalizations and the world is more complex than one guy's observations.
Some takeaways
Major consolidation happened at the corporate level.
Small to Mid-cap companies had a rough few years, but a massive exodus aways from the market is not happening.
Companies were resilient in finding ways to withstand the turmoil.
Bad structure deals will be sustained in the industry for the next ~3 years at least.
Companies with attractive assets are still prone to strategic acquisitions.
The benefits of scale for smaller space companies do not seem to be there - we didn’t see smaller companies merging in between being a higher occurrence.
Thanks for reading - if you want to get in touch, send me an email to any of my seven email addresses.