M&A Pros: Cannabis Dealmakers Have 'Learned Their Lessons' And Will Shift Focus

M&A activity in the cannabis industry is down, but may see an uptick as dealmakers have shifted focus and learned from past mistakes.

Scott Hammon, a partner at MGO and leader of the MGO | ELLO National Cannabis Practice, highlighted a fact prominently featured in its M&A field guide: "In 2019, a combination of decreases in valuations, regulatory issues, and corporate governance issues, resulted in 95 cannabis industry M&A deals, worth more than $2.4 billion, being canceled or unwound.”

"Markets were slower to roll-out and come online than expected, and regulatory, financial and operational obstacles suppressed profitability," said Hammon.

Volume in 2020 is also down. However, after the peak concerns of the COVID-19 pandemic, Reuters reported that companies will likely want to find their way into more niche sectors of the space and all-stock deals are “expected to be the trend.”

Matt Hawkins, founder and managing partner at Entourage Effect, highlighted how the pre-COVID capital crunch distressed the market, but stronger companies emerged.

"Learning from those lessons, we can expect this year's M&A transactions to be evaluated based on profitability, scalability, leadership and future vision," he said. "Companies that have demonstrated the ability to scale or plans to scale will be the winners in this round of M&A deals."

See Also: Data: Cannabis Capital Raises And M&A Slowing Down Sharply

A More Mature Market

Cannabis professionals have grown smarter after facing significant setbacks, according to Medical Marijuana Inc. MJNA CEO Dr. Stuart Titus. Recent M&A plays, he says, are more strategic and better thought out.

"Some deals are now getting more scrutiny and/or not getting done at all,” he said.

Industry pros will likely avoid past mistakes.

"From top-to-bottom, including PE and VC firms and operators of all sizes, we are hearing that lessons have been learned, and everyone is focused on fundamentals," MGO's Hammon says, calling the industry a “marathon” as opposed to a sprint.

On the sell side, companies are working to improve “operational, financial and regulatory efficiency,” he explained.

"Companies that came through the market declines with stronger valuations and liquidity are really in the driver's seat at this point, as they are often best positioned to drive M&A through cash or equity deals,” Hammon added.

A Focus On Fundamentals

"Companies are a good deal leaner and consumer products are, for the most part, improved in terms of quality, consistency and in their testing standards/lab reports," stated Dr. Titus. "In view of future regulation being forced upon us, the industry has self-regulated quite well during 2020."

Hawkins also believes that those in the space must monitor the shift from an illegal market to its current standing.

"Cannabis went from illegal to essentially legal fairly quickly this year," said Hawkins. “As a result, the investor perspective has evolved vastly from last year, and this shift has presented many opportunities for cannabis companies that didn't exist last year or weren't as sought after."

Companies should set sights on scalability, cash access and strategic growth in legal markets, he added.

"The focus is on fundamentals, long-term performance, and near-term revenue and profitability," Hawkins said. "These parties will remain concentrated on these types of metrics. Ultimately, going through this difficult growing phase will have positive, lasting benefits for the industry as a whole."