A Finger on the Pulse of Cannabis Mergers and Acquisitions
Cannabis industry mergers and acquisitions take many shapes, sizes, and forms. The trends surrounding M&A activity are heavily influenced by investor sentiment, new market development, domestic and global political reforms, external economic pressures, and high-profile failures. While numerous groups look to deploy capital toward exciting opportunities with tremendous upside, others simply look to stay afloat.
Much of this is dictated by management teams – their viability, industry intelligence, short- and medium-term strategic planning, lack of proficiency thereof, or the inability to follow Wayne Gretzky’s advice: “Skate to where the puck is going, not where it has been.” Instead of chasing what’s already happened, try to get a step ahead. In large part, due to the lack of real-time context in this decentralized and fragmented industry, management teams have difficulty understanding the context of where the puck is right now, let alone, where legitimate trends and opportunities are taking it.
Our Cannabis Industry Group at Clark Hill has created various webinar content addressing what issues to be aware of for seamless post-M&A integration. We have detailed the tools available to distressed companies in the cannabis space. In particular, in the marijuana industry where traditional insolvency and bankruptcy protection are unavailable. Furthermore, we have detailed various industry-specific due diligence tools that can assist companies in assessing potential acquisitions and investment opportunities, and similar tools that can assist companies in obtaining a real-time snapshot of their financial and operational health. With our assistance, clients effectively leverage these legal and business tools on a regular basis and have sustained accordingly.
Yet, numerous cannabis industry entities appear to be in denial, or they are insistent on doing business the same old way. This industry is too dynamic and ever-changing to fall into the latter category. Leadership stubbornness, combined with the faux notion that this industry is just like any emerging market, has led many companies to financial ruin. Much of these vagaries were addressed in the recent Forbes issue, “Marijuana Meltdown” indicating that it is “Hard to Sell Legal Weed.”
All of these challenges are exacerbated by the fact that federal legislators in the U.S. have proposed various forms of legislation, such as the SAFE Baking Act and the CLIMB Act, which purport to address at least some of these issues, but have gone nowhere in Congress.
As a result of these challenges, the financial markets servicing the domestic and global cannabis industry have moved almost exclusively toward a debt financing model. For now, the days of wanton equity investment with enormous valuations seem to have passed. Even the days of convertible note structures appear to have waned.
There are, of course, exceptions to every trend. In new markets like New Jersey, equity investment remains strong, but the pool of investors tends to be state-specific and tied to the market in a deeper way than a simple investment –- local investment and local connectivity. In any event, with the investment sector having moved toward heavy debt financing, it begs the question of whether an industry-specific credit rating system, like the foundation of a Dun & Bradstreet, is needed. In turn, who is most aptly suited to develop the same?
As I have stated previously, these trends and challenges almost always represent opportunity, rather than ruin. It is only a matter of time until the next rapid industry change shuffles investor sentiment yet again, and many will have to adapt accordingly. Will the industry learn? Do industry participants see the patterns as clearly as they tend to develop? Will shifting global policy change it all in a millisecond? Only time will tell.