We’ve recently seen quite a bit of M&A activity in the U.S. cannabis sector, which comes as no surprise following the consolidation that’s occurred in Canada. It makes sense that a growing industry fragmented by scarce institutional capital, varying state-by-state license structures and regulations specifically geared toward individual ownership would eventually mature towards a more familiar model with a handful of players making up the majority of the market. But the real question is: Who will emerge as the winners?
Back in April, Cresco Labs announced its agreement to acquire Origin House in what could be the largest public company acquisition in U.S. cannabis. Fast forward to June, and the potential transaction was delayed by the DOJ due to antitrust review. This isn’t uncommon in the cannabis industry. In fact, it appears this is becoming the norm. The DOJ has extended the HSR Act waiting period via a second request for other transactions as well—even prompting 4Front and Cannex to determine that their combination was not reportable under HSR and they therefore withdrew their filing with the FTC.
This goes to show that the hard part has only just begun. As exemplified above, closing isn’t always smooth sailing. Regulatory, market-related and general transactional hurdles can delay closing or even prevent an announced transaction from crossing the finish line. And that’s just the tip of the iceberg.
The biggest lift is integration.
There’s a laundry list of challenges that makes combining two companies difficult: consolidating different technology platforms, navigating inevitable cultural changes and homogenizing previously independent operations to name just a few of the unavoidable post-merger obstacles to overcome. There are no guarantees that the organization will survive the merger either. A cultural rift that runs too deep can kill a combined company long after closing.
While the consolidation that’s happening in the U.S. cannabis industry is great, companies need to be careful not to spend so much time and money on closing deals in which they haven’t allocated enough resources toward integration. It’s an easy mistake to make. All eyes are on you as you’re closing a headline-grabbing transaction—less so when you’re deciding which ERP software is best going forward for the new organization.
When I navigated the iAnthus acquisitions of both MPX and CBD For Life, planning for integration ahead of closing was critical to effectively and efficiently continue growing operations in the combined company. I frankly had no choice but to plan for a smooth transition since I was joining the iAnthus team as Chief Strategy Officer. However, not all deals have the same level of mutually aligned interests.
Issues can arise in many forms: Individual operators can have a tough time implementing changing standards, employees might find it difficult adjusting to new platforms, and then there’s the most precarious impediment to successful integration of all—the culture clash. Getting caught off guard with any of these can make the already onerous task of merging two independent businesses go from difficult to impossible.
So, one of the best first steps in planning for an array of potential challenges is to identify the likely pain points prior to closing the deal. It sounds simple, yet it’s not always done. Key members of the transition team need to be aware of these potential pitfalls in order to discuss the best ways to manage them. Being on the lookout ahead of time can mean the difference between a seamless integration and wishing you never did the deal in the first place.
The second step is communicating to your employees the areas that will change. Employees want to know their value is recognized by management. And while people can tell you how great it is to work for you, if you’re selling the company and fail to tell employees what they can expect a change in their day to day, the only thing you’re really telling them is their value is no longer recognized. It’s vitally important to include them in the process by proactively opening dialogue about what life will be like at the new organization. Again, this isn’t rocket science, but it’s often overlooked and can quickly lead to decreased productivity and high turnover.
The third step is to let the acquirer know what should not change. If someone is interested in buying your company in this industry, you’re likely doing a few things right. You need to carefully consider some of the practices that have made you so successful, and you should not be shy about them when it comes to the business combination. Navigating the politics that inevitably come with an acquisition can be tricky, but it’s imperative that early on you directly communicate the parts of your business that need to continue operating the same way.
The thing all these steps boil down to is communication. The dialogue needs to be open and honest with the transition team, employees, and acquirer. Sometimes this can be easier said than done, but failing to do so can hinder integration—resulting in delays and even decline. However, planning for change and openly communicating about it can minimize any hiccups and make the transition relatively uneventful.
The cannabis industry is rife with M&A activity. But big deal announcements offer no guarantee about the future of the proposed combined organization. The only thing guaranteed is consolidation, and the way companies integrate will determine which few players will be left at the end of it all.
Melissa Schiller
Beth Stavola
