M&A activity and valuations - going forward

Just like the market development curve, as explained in the market developments section, M&A activity in a new industry follows a certain pattern. In the first phase, a small group of disruptive companies enter the market. To benefit from a first-mover advantage, these companies usually focus on building scale, enlarging distribution power and creating a global footprint. This creates higher entry barriers that will better defend a market position. First-movers focus more on revenue than profit, working towards to a mass market share.

Top 10 trends

The development of leading cannabis companies in the past few years perfectly matches this picture. First acquisitions were geared towards capacity expansion and obtaining positions in various parts of the value chain in the Canadian market, which is the main market. After a successful first phase, the second phase entailed obtaining positions in other geographical markets (United States, followed by Europe and South America respectively), thereby becoming present in the most relevant countries. At the time, this was supported by the market as investors were valuing companies based on their production capacity. As shown by the recent decline in stock prices of listed cannabis companies, the industry is now in the middle of a reality check. The dust needs to settle, which is likely to result in lower M&A activity for a short period. This period lays the foundation for a more educated M&A wave. We’ve selected 10 M&A trends we expect to see in the cannabis market going forward.

Top 10 Trends for 2020

Improved M&A strategies

Consolidators are perfecting their acquisition skills and instead of jumping on every opportunity, they become more focused and more selective in their M&A strategy. This trend will likely be accompanied by an increased focus on post-deal integration and synergy


Clearer position in the

value chain

To increase distribution power, several cannabis companies have become integrated players as a result of acquisitions in various parts of the value chain. In better developed markets, companies have a clearer and more focused position in the value chain, for instance, concentrated only on growing, product development or wholesale. Ultimately, this will also be the case in the cannabis market, although it may take a while.

More focus on profit

Most heavyloss- making targets have been acquired based on a good story. Although the market is still in a development phase and many companies will, understandably, be making start-up losses, there are several companies that have a proven track record of realizing profits. Those companies will become very attractive.

Valuations rationalize

In the second half of 2019, some rationalization in valuations took place as market players did not meet expectations. In due course we expect more focus on actual profitability. In the mid to long term, valuations will become more profitbased.

More activity from traditional players

As became evident in the second half of 2019, becoming successful in a new market is harder than initially expected, due to reasons such as a lack of experience and professionalism.

We therefore expect more cannabis companies to enter a partnership with traditional companies in order to benefit from their long-term experience and proven capabilities. At the same time traditional companies see that the cannabis market is a market that’s here to stay. Together with the current ongoing reality check at most global cannabis companies, there is increasing momentum for traditional companies to step into the market. This will increase pressure on management teams to focus on profit, as can already be seen with the recent firing of Canopy Growth founder and CEO Bruce Linton by the company’s major shareholder, US-based alcohol giant Constellation Brands. The main reason cited for Constellation’s decision was that it was dissatisfied with financial results.

IP targets most appealing

Lots of M&A activity in the past few years has been in segments like cultivation and retail. In a typical value chain, in the medium to long term, the highest margins are made by the intellectual property (IP) and brand owners. In the end, those are the most attractive segments to be active in. However, the development of IP and brands takes time, which has led to limited M&A activity in those areas as the market is relatively young. Several years from now, he most appealing valuations are likely to take place in segments such as cannabis plant genetics, patented products, companies with brand equity, etc.

North American players remain most acquisitional

North American companies will remain the most acquisitional parties, backed by the continuation of very favorable valuation parameters on the stock exchanges. Of those companies, the ones with a strong balance sheet will have the upper hand for the next phase of consolidation.

More inbound acquisitions in Europe

Following on from the previous point, most knowhow about plants can be found in Europe. Acquiring IP-driven European companies is therefore considered to be the next logical step for North American cannabis companies, which can deploy this knowledge in North America. This not only applies to plant genetics and patented products, but also to equipment for cultivation, cultivation products and techniques, etc.

Failed processes

Due to a turbulent market, high price expectations, a large gray area in terms of the legal framework and poor information availability, many sale / acquisition processes will fail.


The reality phase often leads to a shakeout of market players. Several players that were riding the euphoric wave with a good story will not be able to fund their losses with new capital raisings. The fact that many companies rely on debt to fund their growth will further complicate the picture. Market observers were predicting a flood of insolvency in the Canadian cannabis sector throughout 2019. In December 2019, two Canadian cannabis companies, Wayland Group and AgMedica Bioscience, started insolvency proceedings. We’re waiting to see if these companies will be able to restart their operations, after reorganizing their debt, or if they ill have to sell or liquidate the companies.

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Defining a new chapter for growing cannabis market