Merger Mania (Cannabis Style)
You’ve read in these pages about the tidal wave of IPOs hitting Wall Street.
This includes rare “unicorn” deals like ride-sharing giant Lyft.
But IPOs aren’t the only deals keeping Wall Street bankers burning the midnight oil these days.
Merger-and-Acquisition (M&A) Activity Is Red-Hot
In 2018 alone, there were $3.6 trillion in merger and acquisition (M&A) deals done in North America and Europe.
That’s a 6.3% jump over the year before and a whopping 214% increase over the past nine years since the bull market began back in 2009!
In the last five years alone there’s been a grand total of $17 TRILLION worth of M&A activity. That’s a staggering dollar amount, nearly as large as the entire U.S. economy!
The M&A trend is significant right now, but perhaps nowhere more significant than in the cannabis industry.
Pot M&As Could Power Massive Gains
The pot industry is still in its early innings. But as the space matures we will witness a number of shifts in industry trends.
One of the biggest we’re seeing right now is a massive uptick in mergers and acquisitions.
Over the past year we’ve seen a number of M&As in the pot space. This includes major deals struck between Constellation Brands (NYSE: STZ) and Canopy Growth Corp. (NYSE: CGC) as well as between Molson Coors (NYSE: TAP) and Hexo Corp. (NYSE: HEXO).
More recently, Altria Group’s (NYSE: MO) $1.8 billion deal with Cronos Group (NASDAQ: CRON) strong-armed headlines.
Altria’s move, agreeing to take a 45% stake in Cronos worth $1.8 billion, is even more proof the M&A trend will be a big one moving forward. The mainstream interest in pot plays continues to build.
And I’m not the only one who sees the writing on the wall. Late last year I had the chance to sit in on a private talk with Terra Tech CEO Derek Peterson.
Peterson notes there’s currently a major shift by big marijuana toward vertical acquisitions.
This means pot companies are looking to purchase stakes in companies that could facilitate their own processes more efficiently.
A large flower (pot) producer wants to buy an edible business. A major dispensary wants to buy a distribution or flower grower, as does a CBD-maker.
Vertical acquisitions represent smart business by pot companies. And they’re the ones you want to target as an investor.
Horizontal M&As, on the other hand, are when a company acquires another in the same industry and same production stage.
That’s one flower producer buying another. One retailer merging with another dispensary group, etc.
There’s promise in some of those too, but we’ll tackle that another day.
What to Look for in a Good Vertical Acquisition
Peterson also notes there are a few other things you need to look for in a good vertical acquisition. These factors can make or break your bet.
We’ve mentioned it a few times, but Peterson confirms it. Traditional fundamentals matter a lot more today than five years ago in pot. And in five years they will matter even more.
You have to look at EBITDA, the cash burn, all the quantitative data. If a target passes this round, great, it’s on to the qualitative analysis.
Companies must have strong governance. Strong boards, strong checks and balances and, perhaps most important… a good company culture.
If the target passes this round of assessments, then it’s time to do a legal analysis. Do they operate in accordance with the regulatory bodies? The last thing you want to do is get in bed with a Sweet Leaf.
Another key factor is where the acquisition target is located, both geographically and in the production chain.
Bottom Line: A good M&A capitalizes on tapping an underserved market, be it on the consumer side or production side.
This means a new dispensary in an underserved retail market. Or creating solutions to increase efficiency and reduce cost along the production chain for other companies in the industry.
And for us, if a deal passes all these eye tests, you could have yourself a golden moneymaking opportunity.
For Technology Profits Daily,
Chief Technology Expert, Technology Profits Daily