Ten trends that define the cannabis industry in 2020
M&A activity and valuations - going forward
The global cannabis market is growing quickly and has all the ingredients to be a large and sustainable market in the long-run. However, excessive growth processes generally don't come without hurdles. We can see this in the cannabis market, where several companies and sub-segments are in the middle of a reality check. In recent years euphoria in the sector resulted in increased M&A activity and extraordinary valuations. During the second half of 2019 a drastic change occurred.
With listed companies lagging behind on budgets, stock prices tumbled, which negatively impacted the number of fundraisings, acquisitions and valuations. When the dust settles, we expect a more educated M&A wave geared at, among other factors, clearer positioning in the value chain, obtaining intellectual property, getting skills of traditional companies in-house and increasing profitability.
Usually, 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.
With this report we offer our clients an insight into the changing merger and acquisition dynamics in the growing cannabis market. Our integrated cannabis specialist team provides deep industry knowledge and can identify and contact the right strategic and financial partners for any company within the cannabis industry and beyond.