As an entrepreneur building and running a business you are always seeking greater market share, cost reductions, or new niche offerings. Acquiring or merging with another company is a popular route to achieving these, pushing your company’s mission to the next level. If your company is acquired it’s also a chance to get a nice exit for yourself and your investors.
In 2021 there was a record number of mergers and acquisitions (M&A) in the US cannabis industry, with 209 deals worth a total value of $10.1 billion in the US alone, according to Viridian Capital Advisors. The total value and number of deals outpaced 2019 and 2020 combined. M&A took place in every part of the cannabis supply chain with publicly traded Multi-State Operators (MSO) leading the charge, buying up other MSOs, brands and software companies.
The primary drivers for cannabis sector M&A are different from traditional companies in the tech or financial spaces. Federal prohibition of cannabis remains intact for the foreseeable future, therefore interstate commerce is off the table. Additionally, each state has its own complex system of licenses and regulations to navigate. For example, obtaining and developing property and getting licensed in a heavily regulated state like California can take years. If you are a well-capitalized or public company and want to expand into more states, it’s often easier to acquire existing licensed operations in those states, rather than start from scratch. Acquiring or merging with a company can cut that waiting time down drastically, even if you are paying a premium to do so.
Large publicly traded cannabis companies often have M&A as a core part of their long-term strategy. Canadian LP Canopy Growth has made 12 acquisitions and 3 investments totaling $4.6 billion in the past five years alone. In addition to the large deals, multiple smaller deals happen all the time. This year we’ve seen Harborside, a publicly traded California retailer lead a merger with cannabis brand and producer Loudpack, and UrbnLeaf a San Diego-based dispensary with eight locations to form Statehouse.
This deal perfectly illustrates cannabis M&A, as Harborside and the other companies are partnering together to gain as much market share in the world’s largest legal cannabis state. They combined forces to create a dominant brand, give access to the public markets, and increase their geographical reach with locations throughout the state.
The first quarter of 2022 has started out with a bang with the $2 billion acquisition of Columbia Care by Cresco Labs; a record M&A deal for the US cannabis industry. However, the number of deals compared to Q1 2021 is down. This is in part due to rough waters for many public cannabis companies, the rise and affordability of debt financing, concerns about the macroeconomic environment going forward and the perceived lack of any real prospects for substantive federal reform this year. These are all legitimate headwinds in 2022 but M&A will continue to play an important role in shaping the industry going forward. New markets are opening up, most notably New Jersey, New York and Connecticut. While more states continue to pass adult recreational laws, which will open up new markets, existing multibillion-dollar states like California, Illinois and Michigan are still growing rapidly every year. Companies are betting that expanding into as many markets as possible now through M&A will pay off handsomely. When banking is normalized, and federal legalization and interstate commerce arrive the industry will see massive expansion and national mainstream adoption.
Cannabis brands face their own set of challenges that M&A can help conquer. The Holy Grail of cannabis brands is building a recognizable national brand with a product line consumers recognize and demand when they order online or walk into a retail location. In addition to federal prohibition, severe restrictions on advertising on Google and social media platforms are additional obstacles. Merging with or acquiring a cannabis brand can greatly accelerate state expansion, economies of scale, diversification, greater market share and a larger marketing and sales budget and staff.
If you are a company looking to enter the M&A marketplace on either the buy or sell side and don’t know where to start? Connect with our Director of Business Development Sarah Falvo [email protected] – we have deep connections through the North American cannabis ecosystem and would love to assist you and your company through this process.
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