2021 was an excellent year for mergers and acquisitions deals in the cannabis industry, reaching a record high of $10.27 billion. Seemingly, many thought the trend would follow suit into 2022, or even surpass the M&As of 2021.
Instead, the cannabis market has been unyielding in the last 20 months, with M&A volumes decreasing by 62% in 2022 compared to 2021 and transactions reducing by 39%.
Nonetheless, 2022 seems to perform better than 2020, with a 9% increase within the same data range. And with the anticipation of the $400 million acquisition of Goodness Growth Holdings by Verano Holdings and the $2 billion acquisition of Columbia Care by Cresco Labs, 2022 still looks bright.
Here are some of the other trends we can look forward to in Cannabis M&A.
From Equity Investment To Debt Financing
Mergers and acquisitions happen because of investor sentiment, political reforms, whether globally or locally, new market developments, or high-profile company failures. But at the core of it, the cannabis management team’s strategic planning, industry intelligence, viability, and proficiency (or a lack of these factors) determine whether the M&A does take form.
Management teams must continuously stay ahead of trends and market dynamics to attract investors. This is challenging because the cannabis industry is highly decentralized, making it difficult to access real-time information about the industry’s opportunities for M&A.
Additionally, investor sentiment is rooted in promoting revenue streams with a positive cash flow, a factor lost on the cannabis market and the industry since raising capital is becoming difficult. And with low stock prices and high-interest rates, stock-based M&As are expensive.
Remember that the cannabis market is not protected by the same bankruptcy and insolvency laws as other industries. Also, proposed legislation forms are yet to pass in Congress, meaning the cannabis business is still inept to traditional equity investments. Even though larger companies have the cash flow to merge or acquire smaller cannabis businesses, the possibility that the federal banking reform will pass encourages many to wait.
Cannabis companies looking for merger or acquisition opportunities must use industry-specific tools to identify and seize opportunities for new investments.
The Secure and Fair Enforcement (SAFE) Act Factor
SAFE significantly impacts the cannabis market and M&A events, whether it passes or not, because the SAFE Act impacts the cannabis industry’s access to capital. If Congress fails to pass SAFE banking, small and mid-sized cannabis companies will sell to potential acquirers or close their operations for lack of proper funding and no access to loans.
On the other hand, passing SAFE banking would give these SMEs access to capital which would counterbalance acquisitions. An increase in funding would consequently increase stock prices and, inadvertently, the potential for more investment opportunities. Overall, passing the SAFE Act would improve the cannabis industry.
The State Factor
Despite Federal regulations, the cannabis industry is highly influenced by state regulations and laws. This is why states like New Jersey practice exemptions in equity investments for cannabis businesses. Similarly, most investors tend to propagate around state markets with local connectivity.
Since some states are still in the process of legalizing and allowing cannabis sales, possible acquirers and investors might lie in wait. Additionally, if interstate cannabis sales were legalized, it would propel investors into the more mature markets, thus increasing the M&A potential of the cannabis markets.
California cannabis, for example, is infamous for being high-quality but low-cost. Therefore, the recently signed interstate commerce legislation gives cannabis businesses in California an excellent opportunity to penetrate other mature markets within the U.S.
If federal reform is passed, other M&A offers from non-cannabis industries like alcohol and pharmaceutical will also ensue. In the meantime, more focus is placed on cannabis-legalized states.
Finding Opportunity in Evolution
The cannabis industry is one of the most dynamic and ever-changing markets, so inconsistent and inflexible cannabis businesses will fail. Although there has been a substantial drop in M&As in 2022, the industry will remain firm.
What is the current state of the cannabis M&A?
Unlike 2021, mergers and acquisitions in the cannabis industry have reduced by 62%. Nonetheless, huge acquisitions have kept the trends at per when compared to 2020 and within the same data range.
What are the current challenges of cannabis M&A?
The cannabis market is not protected by the same bankruptcy and insolvency laws as other industries. Additionally, proposed legislation forms, like the SAFE Banking Act, are yet to pass in Congress. Therefore, many willing investors would rather wait than spend money on M&A.
Is there hope for cannabis M&A?
Yes. Companies like Verano Holdings and Cresco Labs are already on the verge of acquiring cannabis businesses for millions of dollars, which indicates that the cannabis M&A has a bright future.