After a solid year for dealmaking with the global value of mergers and acquisitions reaching highs not seen since 2015 despite a dip in volume, middle-market companies are starting to get antsy and plotting their moves for the months ahead.
According to a survey of 350 U.S. mid-market companies ($50 million to $500 million in annual revenues), sixty-eight percent say they plan to engage in M&A activity in the coming six to 24 months.
While last year was dominated by blockbuster deals in the healthcare sector, where there were 255 announcements in the second quarter alone according to PricewaterhouseCoopers, and the media sector, where Walt Disney Co. reached a $71.3 billion deal with Twenty-First Century Fox Inc., 2019 is a whole new calendar year.
Here are some of the mid-market sectors primed for M&A dealmaking in the coming year.
Merger Munchies in the Cannabis Sector
When we first predicted an M&A boom in the legal marijuana sector back in 2016, cannabis was only legal in three U.S. states. Now it’s legal for recreational use in 10 states with medical marijuana legalized in 33. While still illegal at the federal level, cannabis entered the publicly-traded big leagues last year, with The Cronos Group making its trading debut on Nasdaq and Canopy Growth Corp. listing on the NYSE a few months later.
So why does this signal a potential spike in dealmaking action for mid-market cannabis companies? As it currently stands, marijuana is a mom and pop industry, with growing, processing, and selling dominated by independently-held companies. Since cannabis can’t be taken across state lines, companies either need to rebuild infrastructure from scratch in a new state or form a partnership with incumbent cannabis companies to expand.
With big tobacco, pharma, and food giants starting to see through the clearing smoke of regulatory concerns, some are predicting an acquisition battle between multi-state cannabis companies looking to expand and giant multinationals with the merger munchies.
“While 2018 marked the first stage of some pioneering companies in traditional industries entering the cannabis market, the coming years will involve more partnerships, mergers, and acquisitions between cannabis operators and major companies from other industries,” wrote Kris Krane, co-founder of 4Front, a leading investment and management firm in the cannabis industry, in an op-ed for Forbes.
He also highlights ancillary services including delivery and point-of-sale tech players like Eaze and Meadow, and cannabis industry data aggregators like BDS Analytics New Frontier as particularly attractive acquisition targets for “large-scale, point-of-sale companies from other industries.”
Big Media Goes Little
The trickle-down effect of mega deals in the telecom and media industry including AT&T $85 billion deal for Time Warner and $1.6 billion-plus purchase of ad platform AppNexus; Disney $71.3 billion acquisition of some of 21st Century Fox’s assets; and Comcast’s $40 billion takeover of UK broadcaster Sky will start to be felt in 2019.
“If 2018 was the year where they focused on their future income statement, 2019 has to be the year where they focus on their balance sheet and make sure that they’re strong enough to go compete against companies like the big tech platforms who live and die by their ability to acquire customers and integrate them into some kind of platform structure,” Todd Klein, a partner at the venture-capital firm Revolution, told Business Insider.
Klein says the media and telecom industry is apt to have “fewer independent niche content players at the end of 2019 than at the beginning.”
Cheddar, the so-called CNBC for millennials, acquired ratemyprofessor.com back in 2018. But the post-cable new services, which broadcast from the trading floor of the New York Stock Exchange, the Sprint Store in the Flatiron Building, WeWork in Los Angeles, and the White House, could become an acquisition target in the new year. It’s already wheeled investments from Lightspeed Venture Partners, Comcast Ventures, AT&T, and Amazon among other big names.
Roku, a digital media player, and LiveRamp, a data onboarding platform, have also been pegged as potential acquisition targets, according to Forrester Research. “In our predictions for the media industry for 2019, Forrester anticipates two more acquisitions: AT&T will buy Roku, and Google will win a bidding war for LiveRamp,” they write. “While these deals aren’t likely to escalate into 11-figure territory, they will significantly add to the acquirers’ offerings and better position AT&T and Google in the big fight for advertising dollars — media’s battleground for 2019.”
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Ethically Acquired Beauty
By 2026, the global Natural and Organic Personal Care Product Market is expected to reach $26.7 billion representing a compound annual growth rate of more than 11 percent from 2018 to 2026, according to Capstone Headwaters research.
As consumers continue the trend of paying a premium for ethically-conscious goods, large beauty and cosmetics companies are hungry for market share, putting vegan and fair trade beauty products in their crosshairs.
In 2018, Marc Anthony Cosmetics acquired Canadian cruelty-free cosmetics company Cake Beauty. Procter and Gamble paid around $250 million for First Aid Beauty, which manufactures cruelty-free beauty and skincare products, and Snowberry New Zealand, which focuses on premium, natural anti-aging skincare products. And L’Oréal acquired German vegan beauty firm Logocos Naturkosmetik.
The S&P Global’s top trends for 2019 gave the nod to the role of new brands and their abilities to disrupt both from a technology innovation standpoint and from a nimbleness in product offering.
“The low barriers to entry because of broader customer access through online advertising and fast-changing customer behavior creates a favorable setting for a large number of small, indie brands to enter the beauty market and create disruption in the industry,” says the S&P. These smaller brands are leveraging social media and influencers to boost visibility with very little marketing spend.
“Although they have not materially eroded the branded players’ share, there are a large number of them,” according to the report. “And as a group, they are taking growth away from branded players, who are responding by increasing business diversification, acquiring smaller and fast-growing innovative companies.”
The Year Ahead
With expectations of a similarly robust year for dealmaking in 2019, it’s a reasonable prediction that the middle market is apt to benefit from the mega deal consolidation that went on this past year.
“In 2019, we expect businesses to ask fewer questions about ‘whether’ to pursue inorganic growth and more questions of ‘when’ and ‘how,’ wrote the authors of EY’s recent outlook for M&A in the US. “Enterprise technology, the lodestar for dealmaking, continues to remake business models, blur lines across sectors, and widen the field of merger and acquisition possibilities – we are seeing M&A become the fastest route to reinvention in today’s digital economy.”
Illustration by Christy Lundy