Cannabis M&A and the Gartner Hype Cycle

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By Harry Brelsford and Dr. Paul Seaborn

Following mergers and acquisitions (M&A) in any burgeoning 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 seen significant volatility in terms of M&A activity, as is to be expected in a burgeoning industry.

Luckily, Cannabiz Media closely monitors cannabis M&A activity and aggregates that activity into a variety of dashboards and reports. Their dataset includes M&A activity in both the United States and Canada for licensed cannabis companies, cannabis ancillary companies, and equivalent companies in the hemp industry.

At CannaTech Group, we act as a cannabis technology consultant, which positions us at the intersection of two industries – the emerging cannabis industry and the more established technology industry. From this vantage point, we saw an interesting connection between the two – the Gartner Hype Cycle.

The idea of ​​the hype cycle is to describe five different phases in which new technologies reach maturity. The big finding is that technologies do not mature steadily and linearly, but experience ups and downs on their way.

Mapping Gartner’s Hype Cycle Stages to Cannabis Industry Mergers and Acquisitions

Our takeaway was that the phases of the hype cycle corresponded fairly well to the ups and downs of M&A activity in the cannabis industry. Below we’ve listed the five stages of the hype cycle, adding our own thoughts on the cannabis category to each stage.

innovation trigger

The “madness” in which California, Colorado, and other early states commercialized medicinal cannabis, and then legalized adult use in Colorado and Washington, sparked a wave of cannabis entrepreneurship and innovation.

Interestingly, the first documented M&A transaction in Cannabiz Media’s dataset took place in California in 2016, when Terra Tech Corp. Blum acquired Oakland, a retail medicinal cannabis dispensary, for $21 million (Figure 1).

Figure 1: TerraTech acquired Blum Oakland in 2016

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culmination of inflated expectations

Think of 2019 and 2020 as a wave of new cannabis investors funding shady business models and optimism about the likelihood of federal cannabis legalization. Much of the merger activity at the time was the consolidation of existing cannabis companies that strategically sought multi-state scale.

One of the biggest deals of this era was completed on February 3, 2020 with the acquisition of Cura Partners by Curaleaf, a well-known East Coast multi-state operator (MSO). The $949 million deal gave Curaleaf control of the Select brand, three facilities and 12 licenses on the US West Coast. The deal helped Curaleaf get closer to its 2023 national licensing footprint, shown in the map in Figure 2, also taken from Cannabiz Media’s database.

Figure 2: Curaleaf cannabis license card as of 2023

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low point of disillusionment

This is the downturn we are currently witnessing in the cannabis space: established US state cannabis markets are no longer growing, new states for adult use are growing much slower than expected, and there is no progress on state legalization.

From an M&A perspective, this bottom leads to another potential wave of buy/sell opportunities. We are currently speaking to investors looking to acquire distressed cannabis companies and assets through acquisitions and debt. Probably no one wants to be called a bottom feeder, but it’s one thing!

slope of enlightenment

This is likely to happen in 12 to 24 months as the cannabis markets and broader financial markets adjust and more states offer internet for adult use.

plateau of productivity

Based on market maturity, this phase is likely many years away and will come after adult use is federally legalized in the US and a true national cannabis market is established.

Another landscape view

Alan Brochstein, CFA, is a founding partner of New Cannabis Ventures, a respected cannabis investor website. He offered the following insights, which align closely with the early stages of the Gartner Hype Cycle.

“I feel like investors, companies and all media were particularly overjoyed when Biden and Harris were elected. Immediately afterwards, cannabis stocks shot to a new high in February 2021 and people were expecting big things, even though big things weren’t very likely to happen and what they were counting on might not have mattered that much. From my point of view, we are in a terrible business climate in terms of price competition. And we can address the reasons, many reasons, including some things that are not common in other industries, like the illicit market.”

Brochstein concluded with two important points.

• Will cannabis companies that grow, process or sell cannabis ever be able to trade on the New York Stock Exchange or NASDAQ? It’s not illegal right now, but these exchanges don’t allow it if they’re American [companies] because of federal law.
• More importantly, 280E is currently causing a big problem. It was created by the IRS in the Nixon administration to punish cocaine dealers. And the idea was: if you make money illegally, your tax rate would not be on your profits, but on your gross profits. As a result, your business expenses are no longer deductible. Well, I don’t think cannabis should be viewed that way, but it’s a Schedule I drug. A lot could happen if they downgrade from Schedule I to something lower, some of it is good, some of it is bad, but the 280E tax eats up cash or makes cash really hard to come by. Yes – changes in 280E will certainly impact M&A and valuations.

The numbers don’t lie

There are several ways to slice and view M&A data. Rather than a single snapshot, it’s more interesting to look at M&A activity over time. In Figure 3 below, you can see eight years of quarterly cannabis M&A activity, showing the number of deals tracked and the total value of the deal.

Figure 3: Quarterly M&A activity

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From the modest activity starting in 2016, Q1 2019 and Q1 2020 were each particularly active quarters, and the peak of M&A deals came in 2021 amid multi-quarter COVID. In the fourth quarter of 2021 there were 41 closed M&A deals with a total value of $3.26 billion! Then you can visually see how quickly the M&A window has closed in 2022 and beyond.

Which organizations will remain active in M&A in 2022? The table in Figure 4 provides the answer: Sundial Growers Inc. acquires the most cannabis assets (67), TerrAscend Corp. has the highest deal value ($573.5 million) and PharmaCann acquires the most licenses (122).

Figure 4: Leading cannabis dealmakers in 2022

Diploma

While M&A activity in the cannabis space in 2019 and 2020 was primarily driven by industry optimism and an influx of new capital into the cannabis space, activity in 2023 and into 2024 will be driven by distressed, cash-strapped companies driven by opportunistic buyers with greater financial resources or who were better able to preserve cash during the trough of disillusionment.

The long-term prospects for the cannabis industry are still rosy, but with more time needed for the new East Coast adult-use markets to become fully operational and US federal cannabis laws to become more favorable, this is the Slope of Enlightenment and the “Plateau of Productivity”. still years away.

About the authors

Harry Brelsford is Principal Analyst at The CannaTech Group, and Paul Seaborn is an Assistant Professor at the University of Virginia’s McIntire School of Commerce.