According to statistics from Viridian Capital Advisors, a data analytics and investment banking firm based in New York, there was a 33% drop in the value of mergers and acquisitions (M&A) from the $1.74bn in 2023 to the $1.16bn registered last year. Frank Colombo, the MD of Viridian discussed a number of factors that could explain this trend.
Colombo explains that the cash situation within the marijuana industry is very tight. He adds that many M&A deals have tanked because firms have been trying to conserve cash during the recent two years.
He explains that the motivation behind marijuana M&A activity has also changed. Previously, companies were in a race to buy out every business they could find in states with legal marijuana markets. However, that “land grab” soon taught companies that it wasn’t profitable to have a presence everywhere. Having just a pair of retail outlets in a state proved to be untenable. Emphasis has now shifted to consolidating a company’s footprint with a specific market rather than being spread out thin all over the place.
Colombo cites the example of Acreage Holdings that went into a frenzy buying up every small marijuana business that was on sale. Their approach failed to bring in profits, and Acreage itself was acquired by Canopy Growth.
Another reason he cites for declining M&A activity is the current decline in cannabis stock prices. Many M&A deals are completed using stock or cash. Given that cash is tight and stock prices aren’t at their best, it is hard for companies to negotiate mergers and acquisitions based on stock since shares aren’t as attractive in this current environment as they once were. Since firms are reluctant to get further into debt and stocks aren’t a good option, companies have decided to scale down or halt M&A activity.
Colombo also points out that there are a number of challenges involved in integrating businesses, not just in the cannabis industry but in all industries, after a merger or acquisition. For example, the different businesses have their own financial systems and cultures and it becomes difficult to merge those elements.
He points out that M&A activity is likely to stay down for a while given the existing market conditions. However, consolidation within markets is bound to continue as businesses invest in deepening their presence in specific markets. Markets will continue to have a few big firms dominating that area and there will be many small players also trying to make their mark. Those that fail will still end up being acquired by the larger and more successful players, and the trend will continue.
It remains to be seen how companies like Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) will navigate these market conditions and leverage available opportunities to cement their presence in their chosen markets.
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