Perhaps the biggest M&A news in the fall of 2019 was the abrupt termination of MedMen and PharmaCann’s $682 million all-stock acquisition proposal. The news landed with a thud after a steady stream of blockbuster M&A announcements throughout the industry. But a lot can happen in a short amount of time in this business, and industry observers were left wondering what went awry between the two companies.

We haven’t heard much in the way of an answer.

“In sum, the circumstances that led us to make the deal with MedMen a year ago are no longer present today,” Jeremy Unruh, a spokesman for PharmaCann, told Cannabis Business Times.

Here’s one circumstance that had shifted notably: From the time the two companies’ definitive agreement was reached in December 2018 until its public dissolution in early October, MedMen’s stock price slipped from $2.65 to $1.49. That’s a 43% drop in the value of what MedMen would be putting up to buy PharmaCann’s assets.

As with so much in the cannabis business, time is a crucial factor in these corporate transactions.

Regulatory Hurdles

Another reason why we’ve seen a slowdown in deals and an uptick in agreements falling through is the Hart-Scott-Rodino (HSR) Antitrust Improvements Act, a 1976 law that’s making itself at home in the fragmented U.S. cannabis industry. The HSR Act requires companies involved in mergers and acquisitions to notify the Federal Trade Commission and the U.S. Department of Justice Antitrust Division of their intent. In short, the law gives the federal government a window of time to review deals and decide whether a transaction will impact competition in a given market. It’s a consumer protection policy. During that 30-day window, the parties can’t close.

An HSR review is triggered by a complicated formula that includes the size of the deal and the size of the parties. Larger deals, suffice it to say, trigger these reviews. And the cannabis industry has seen bigger companies cutting bigger deals.

Cannabis remains federally illegal, so why would federal antitrust regulators stick their noses into this business? Sander Zagzebski, corporate and business practice partner at Greenspoon Marder, says that antitrust regulators in the DOJ couldn’t ignore the growth and consolidation of the cannabis industry.

“Nobody thought … that the federal regulators would look at cannabis deals,” Zagzebski says. “And then, lo and behold, they looked at all of them. Everybody got these [filings] at the same time, and it put a halt to everything.”

After a busy season of deals from August 2018 to the spring of 2019, the major headline deals started to slow down. Antitrust regulators started flagging certain deals for HSR reviews.

Antitrust Act Fallout

In June, Cresco Labs came out as the first major cannabis company to openly discuss the review.

“Consistent with other pending transactions in the cannabis industry, we have received a request for additional information from the Department of Justice regarding our acquisition of Origin House,” Cresco Labs CEO Charlie Bachtell said in a public statement.

This hurdle posed a question of time and federal oversight.

“It took the market a little bit of time to figure out how they wanted to approach it—how they should be disclosing it to investors, that sort of thing,” Zagzebski says.

An HSR review might worry investors, as it will naturally extend the amount of time between announcing a deal and closing a deal.

“You don't have to reveal any secrets to accept the fact that when all these deals were being announced, the stocks were trading at very high valuations,” Zagzebski says. “Now that the shares have come back down, one of two things are happening: Somebody in a transaction will generally have to take the market risk of what happened to the stock between signing the deal and closing the deal.

“If the market risk is on the seller, then all of a sudden they're getting paid a whole lot less than they thought they were getting paid for their company,” he says. “And if the market risk is on the buyer, then they're suddenly suffering a lot more dilution than they bargained for when they signed up to the deal. In either one of those situations, the dramatic change in the trading price will put pressure on the transaction.”

Hope on the Horizon

In the case of PharmaCann and MedMen, the companies have not gone into detail publicly about why the deal fell apart. But the stock dynamics and the emergence of antitrust regulations in the U.S. are having an impact on deals writ large.

And following the review period for Cresco’s major deal, the company announced that it had lowered the cost of its acquisition by 16% per share. As of Nov. 13, the deal had not yet closed.

Just as market consolidation on face value is seen as a natural process of a maturing industry, so too does this antitrust review signal a turn toward normalized relations with government. Cannabis is coming into its own, growing pains and all.

“From a long-term perspective of cannabis, it's actually really encouraging to see the regulators looking at it from the perspective of, ‘Hey, this might be legal some day, and we want to make sure other legal issues that affect the industry are being addressed,’” Zagzebski says. “So, the antitrust regulators actually stayed in their lane, as far as we can tell, and reviewed it from an antitrust perspective, which is actually a really positive thing. It means that some people in Washington are starting to treat cannabis companies like adults.”

Eric Sandy is the digital editor for Cannabis Business Times and Cannabis Dispensary.