Getting a read on mergers and acquisitions (M&A) in any emerging business ecosystem is always interesting. It allows you to see the madness of early-stage growth markets and the many ups and downs that are experienced before reaching market maturity. The cannabis industry has definitely experienced significant fluctuations in terms of M&A activity, as should be expected in an emerging industry.
Cannabiz Media closely monitors cannabis M&A activity and summarizes this activity in a variety of dashboards and reports. Their dataset includes M&A activity in both the U.S. and Canada for licensed cannabis businesses and ancillary cannabis companies, as well as equivalent companies in the hemp industry.
At the CannaTech Group, we serve as advisors on cannabis technology, which puts us at the intersection of two industries—the emerging cannabis industry as well as the more-established technology industry. From that vantage point, we saw an interesting connection between the two industries through the lens of the Gartner Hype Cycle.
The idea of the Hype Cycle is to describe five distinct phases by which emerging technologies reach maturity. The big takeaway is that technologies do not mature in a steady, linear fashion but experience highs and lows along the way.
The Hype Cycle & Cannabis
Our insight we had was that Hype Cycle phases map well to the highs and lows of M&A activity in the cannabis industry. Below, we list the five phases of the Hype Cycle, adding our own thoughts for each phase visà-vis the cannabis category.
1 THE INNOVATION TRIGGER. The
“madness” of early states commercializing medical cannabis and then legalizing adult-use in Colorado and Washington spurs a wave of cannabis entrepreneurship and innovation.
2THE PEAK OF INFLATED EXPECTATIONS.
A wave of new investors fund questionable business models amid optimism about federal legalization. Much of the merger activity is the consolidation of existing cannabis companies seeking to strategically achieve scale across multiple states.
3THE TROUGH OF DISILLUSIONMENT.
This is the down round we are currently experiencing in the cannabis space. From an M&A perspective, this trough creates another potential wave of buy/sell opportunities with investors looking to acquire distressed cannabis assets.
4THE SLOPE OF ENLIGHTENMENT.
This will likely occur in 12- to 24-months as cannabis markets and broader financial markets adjust and more states come online for adult-use.
5THE PLATEAU OF PRODUCTIVITY.
Reflecting market maturity, this phase is likely many years away and will happen after adult-use is made federally legal in the U.S. and anational cannabis market is created.
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Familiar Challenges
Alan Brochstein is the founding partner of New Cannabis Ventures. He outlines three big hurdles we must overcome to get to the more mature phases of the Hype Cycle:
FEDERAL LEGALIZATION. The election of President Joe Biden led to optimism that his administration would legalize cannabis or at least lower it from a Schedule I to a Schedule II controlled substance. So far, that hasn’t happened
LISTINGS ON THE NYSE AND NASDAQ. It’s legal for public cannabis companies to trade on U.S. stock exchanges but the two biggest don’t allow listings by U.S.-based firms due to the plant’s federal legal status.
THE 280E TAX CODE. This regulation prevents businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances—making profitability tougher for cannabis companies and impacting M&A.
The Numbers Don’t Lie
There are different ways to slice, dice and view M&A data. Instead of a single snapshot in time, looking at M&A activity over time is more interesting. Cannabiz Media has tracked eight years of quarterly cannabis M&A activity that show the number of tracked transactions as well as the total deal value.
From modest activity starting in 2016, Q1 2019 and Q1 2020 were both particularly active quarters, and the peak of M&A dealmaking was reached over a few quarters in 2021 in the midst of COVID.
In Q4 2021, there were 41 closed M&A deals that totaled $3.26 billion! But the M&A window for cannabis closed rapidly in 2022, remains stagnant and likely will remain so for a year or more.
Which organizations were still active in M&A in 2022? Sundial Growers acquired the most cannabis facilities (67), TerrAscend had the greatest deal value ($573.5 million) and PharmaCann acquired the most licenses (122).
Hype Cycle Takeaways
Whereas cannabis M&A activity in 2019 and 2020 was mostly driven by industry optimism and an influx of new capital entering the cannabis space, activity in 2023 and into 2024 will be driven by
distressed, cash-poor companies being acquired by opportunistic buyers who have deeper pockets or who have done a better job of preserving cash during the Trough of Disillusionment.
The long-term outlook for the cannabis industry is still bright. But with additional time needed for new East Coast adult-use markets to reach full operation and changes to U.S. federal laws, including the tax code, necessary for a more favorable environment for cannabis, the Slope of Enlightenment and Plateau of Productivity are still years away.
This column was originally published at Cannabizmedia.com and can be read in its entirety with accompanying charts and graphs at: www.cannabiz.media/blog/cannabis-m-a-and-the-gartner-hype-cycle
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