What Size Returns Do Investors Want?

What Size Returns Do Investors Want?

Management teams, advisors, and bankers often ask me, “what size returns do investors want?”

I always find this to be a strange question because, like most investors, I want the highest return possible with the least risk. Finding that balance is more of an art than a science. To help answer this question, I thought I would share some stats from the Pepperdine University’s 2017 Private Capital Markets Report.

The chart below shows required annual Internal Rate of Return (IRR) by investment type and size (or risk). As you can see below, bank loans usually require the smallest IRR (4-6%) and that is because they are very selective in their underwriting and thus (relatively) low risk. On the other end of the spectrum, seed stage angels require a 60% IRR because their investments are much, much riskier.

Returns.PNG

Remember, investors have a cost of capital too! Investors can have real costs (a return the investor’s investors are expecting), opportunity costs (the cost of having money locked into a deal that can’t be used for other higher return opportunities), and, usually, both.

So, depending on the risk profile of the deal (and thus the type of investor you are speaking with), the required IRR will vary. My advice to those seeking funding is to put yourself in the shoes of an investor and ask: “How likely is it that an investor will meet their required IRR with an investment in my company (under a conservative success scenario)?”

For 127 pages of amazing information on M&A and private direct investing check out Pepperdine University’s 2017 Private Capital Markets Report.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
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The Journey From Public “Shell” to World’s Largest Ad Agency – 8 Business Lessons.

One of my favorite microcap success stories is that of WPP – a British multinational advertising and PR company that grew from public shell to the world’s largest advertising agency through an aggressive acquisition strategy. 

WPP stands for “Wire and Plastic Products”, a public company founded in 1971 as a manufacturer of wire shopping baskets.

In 1985, “With help from a stockbroker“, Martin Sorrell (founder and current CEO of WPP) “looked for a small, publicly traded business that [he] could take over as a shell company and grow by acquisitions into a major global marketing organization.” The company they decided on was Wire and Plastic Products and “It was worth about $1.3 million at the time.

Sir Martin Sorrell
Sir Martin Sorrell

In 1986, Sorrell took over WPP and made 18 acquisitions in his first 2 years as CEO. Sorrell’s acquisition strategy focused on firms specializing in, what are known in the industry as, “below the line” marketing functions.

After the first 18 acquisitions, WPP went on to make more acquisitions including the acquisitions of  J. Walter Thompson (for $566m in 1987), Ogilvy Group (for $864m in 1989), Young & Rubicam (for $5.7 billion in 2000), and  AKQA (for $540 million in 2012).

Today, WPP is worth about $30 billion and does over $10 billion in annual revenues. Sorrell continues to serve as CEO of the company. He was also knighted in 2000 and, in 2007, Sorrell was awarded the Harvard Business School’s highest honor, the Alumni Achievement Award.

The Sorrell and WPP story provides a lot of great insights for entrepreneurs and especially for microcap management teams. Below are 8 business lessons I learned from studying WPP and Martin Sorrell. 

1. Build Your Reputation – Sorrell says “My father had always told me that I needed to build a reputation in an industry before going out on my own. By 1985 I was 40 years old, I had a $2 million stake in Saatchi & Saatchi, and I had built the reputation I needed.” When Sorrell was Saatchi’s group finance director (from 1977 to 1984) he designed and carried out many of Saatchi’s agency acquisitions.

2. Put Your Money Where Your Mouth Is –  Sorrell leveraged his stake in Saatchi to get a loan to purchase his initial stake in Wire and Plastic Products. Sorrell says in his HBR pieceWhen I first invested in this company, I took a gamble with my $325,000… The only time I ever sold shares was to fund my divorce, so all my wealth is tied up in WPP. That’s the way I like it.

3. Boring Can Be Profitable – In Sorrell’s first two years as CEO, WPP made 18 acquisitions. These first acquisitions focused on firms specializing in what are called ‘below the line’ marketing functions. Sorrell describes ‘below the line’ as “the unfancy, unsexy stuff—packaging, design, promotions. Below-the-line agencies never get much attention, but they can be good businesses.” Not only did WPP’s revenues and market share grow but its market cap did too. Sorrell says, “The stock market liked our strategy, and our market cap kept growing.

4. Use Stock For Acquisitions – WPP’s first 18 acquisitions included 15 UK and 3 US companies to become the largest ‘below the line’ business on either side of the Atlantic. Sorrell says they completed those first 18 acquisitions “using mostly our shares as financing“. After the first 18 acquisitions, WPP was worth about $250 million. They then purchased  JWT for $566M (half cash, half stock) and two years later they acquired Ogilvy & Mather in adeal worth $850 million (half in cash, half in convertible preferred stock).

5. It’s Better To Have a Small Piece of a Big Pie – Today, WPP is worth $30 billion and Sorrell owns 2% of it. Sorrell’s use of stock to complete acquisitions often diluted his ownership but increased the value of his smaller stake. For example, when WPP was worth about $250 million, he acquired JWT for $566M, half cash, half stock – in this instance Sorrell gave up nearly half of his company but increase the value of the company by more than 3x. 2% of a $30 billion company ($600M) is worth a lot more than 100% of the $1.3M shell!   

6. Invest In Your People – As the parent company of all of these acquired businesses, WPP was always looking to add value as a parent. One of the top ways WPP does this is by investing in their people.  WPP invests in their people a number of ways including; a fellowship program that “is regarded as the industry’s gold standard and is harder to get into than Harvard Business School“, the Leadership Equity Acquisition Plan (“LEAP”) in which top operating and parent company executives are offered an opportunity to invest their own money in WPP shares and are “paid out a multiple of that investment over a number of years—if WPP’s share price outperforms its peer group“, and more!

7. Embrace Change – As a result of a recession immediately following the Ogilvy & Mather acquisitions, Sorrell had what he calls his “come-to-Jesus moment” that forced him to reconsider what WPP needed to do to fuel growth. Some of those changes WPP made to fuel growth include early entrance into BRIC countries a focus on digital earlier than their competitors. In 2000 about 12% of WPP revenue was coming from Brazil, Russia, India, and China and today nearly 1/3 comes from ‘fast-growth economies’. Digital accounts for as much as 40% of WPP revenue today and Sorrell says that “someday that will probably be 100%.

8. Dream Big – When Sorrell took control of a public shell worth  $1.3M he had no clear idea how big the firm would become, he says, but knew he wanted to do something of size. “I didn’t want, forgive the phrase, a Mickey Mouse kind of thing: I wanted to do something of scale. Putting it grandly, from an intellectual point of view, I thought it interesting.

 

If you want to learn more about WPP/Sorrell’journey from public shell to world’s largest marketing agency, Sorrell penned his own piece in the Harvard Business Review titled; “WPP’s CEO on Turning a Portfolio of Companies Into a Growth Machine” and The Guardian has a great piece titled; “Sir Martin Sorrell: advertising man who made the industry’s biggest pitch“.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

HIGH Cannabis Company Valuations.

HIGH Cannabis Company Valuations.

The other day, I read a post on Axial about “5 Predictions for Cannabis Investing in 2017“.

One of the predictions was that “Valuation multiples may be on the rise” in the cannabis space. The below chart of price to sales ratios for cannabis companies was included in the post.

0117_CannabisChart_03.png

At first glance, I thought an average valuation of 16.4X sales was very HIGH. I then realized that these are public (mostly microcap) cannabis company valuations. As many of you know, the majority of these companies have market caps of $10 to $50 million despite little or no sales.

I understand that two things factor into these high valuations; 1. Cannabis is a very high growth and relatively untouched industry and 2. public cannabis companies have inflated valuations because they are the only way for the masses to participate in this blossoming industry.

What I don’t understand is how “investors” plan on making a return on investment at these valuations!

I think very few of these investors will make a return for two reasons:

1. Most Cannabis Companies Will Fail. 

Unfortunately, the vast majority of startups and early stage businesses fail. Due to the age of the legal cannabis industry, virtually every cannabis company is early stage. Cannabis companies are even more likely to fail because there are a number of untested unknowns including significant legal gray area.

2. Institutional Investors Can’t Justify These Valuations. 

The exit for every investor is either repayment from a company’s cash flow or selling a position to another buyer.

Repayment from cash flow is highly unlikely since you are already buying unprofitable businesses at 16X revenue! Assuming 20% margins at scale, the company’s revenues would need to grow 8,000% to generate enough cash to return your investment.

Your other option is to find someone else to buy your position. Looking at the chart above, valuations are already falling which would make it hard to find a buyer for your position at a higher (profitable) valuation. If the company does grow to the size where institutional investors become interested, institutions will usually not be interested acquiring companies (or taking a position) at 16X sales (primarily for the reasons above).

In short, I think the cannabis industry is a very exciting space but it’s also a very risky space. Becuase of the risk/reward balance, I think the best way to value a small cannabis business is the same way you value any small business. Based on my previous posts on small businesses valuation and general M&A multiples, it’s clear to me that public cannabis company valuations are just too high.

What do you think? Am I missing something? How can a sub $1M revenue cannabis company justify a 16X sales valuation?  Let’s discuss in the comments below or email me.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

 

Penny Stock State of Mind.

Have you ever seen a microcap stock go from unknown and illiquid to a 10X price jump and a 1,000X liquidity increase? I know I have and, if you have been around the microcap space for more than a few hours, you probably have too!

Just the idea of buying a stock for pennies and becoming a millionaire overnight is enough to drive countless retail investors to buy microcap stocks every day. Unfortunately, that “get rich quick” mentality is killing the microcap space! Not only are high school kids, trading on their lunch periods, enchanted by the idea of fast cash but more and more microcap CEOs are too.

In my opinion, microcap CEOs can be split into 3 buckets;

1. CEOs who are trying to build businesses with real value,

2. CEOs who are trying to build a market for their stock,

3. a combination of both.

In my experience, 1s have the highest chance of success, 3s can succeed, and 2s are destined to live the life of penny stock hustler (unless they change). 

1s and 3s usually understand that they need to build value in their company and, eventually, their stock’s value will follow. 2s usually think the opposite.  For 2s, they need to have a $100 million market cap and trade $1 million a day so that they can raise millions of dollars to build their business.

Unfortunately for 2s, it’s nearly impossible to create a liquid, high-priced stock with no underlying business value. If a 2 somehow manages to do it, there are very few investors looking to invest significant capital in a company with little tangible value.

Now it isn’t necessarily the 2s faults. Many CEOs went public thinking a public stock was a license to print money.  When they find out it isn’t, many end up believing market cap and liquidity will turn on the money machine. While liquidity and market cap can help generate funding, it is usually smaller amounts, less company-friendly, and short-lived (not to mention, generating liquidity and market value without tangible value is expensive!).

In short, don’t be a microcap CEO who is chasing the quick money and don’t let others divert your focus. Build a business with real value and eventually, the market will realize that value and reward you!

 

What do you think? Do you know any 1s or 2s? Have you ever seen a 2 succeed?


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Where Did The OTC Graduates Go?

otc-uplists-by-year

Last week, Acquis published the 2016 OTC Markets’ Graduate Review and the data was very interesting.

According to the report, 35 companies uplisted from the OTC markets to the NASDAQ, NYSE, or NYSE Mkt in 2016. That’s a huge drop from 2015 (60 uplists) and an even bigger drop from the average (80 uplists) of the five previous years!

I don’t have a definitive explanation for large decrease in graduates but I do have two theories;

1. More Private Capital – Private capital providers like venture capital, private equity, and angel investors have seen huge growth in the last few years. Even more traditional investors are getting in on private company investing. With tons of capital available to private companies, that wasn’t available 10 years ago, private companies have more funding options than ever before. More private capital means higher valuations, larger funding rounds, and access to a diverse pool of investors – all things that where once reserved for public companies. 

2. Improved OTC – A lot has changed at the OTC Markets in the last few years. The OTC Markets Group has increase the quality of their OTCQB and OTCQX by providing more support to QB and QX issuers and holding those issuers to a overall higher standard. With all of the improvements at the OTC, many issuers are choosing to stick around rather than take on the increased cost and complexity associated with senior exchanges.

The two trends above seem to have a direct correlation to the decrease in OTC graduates.

So, why the drop in OTC graduates? In short, as the OTC Markets improve, less companies want to leave and, as more capital becomes available privately, fewer companies need to go public to raise growth capital.

Click to view the “2016 OTC Markets’ Graduate Review

What do you think? Why did we see such a huge drop in uplists this year?  Share in the comments or tweet at me @Benjamin_Kotch


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

 

Where Do M&A Valuations Come From?

Where Do M&A Valuations Come From?

When speaking with acquirers I often ask, “how did you determine the purchase price?” Answers range from “that’s what the seller was asking” to complex valuation models and analysis.

I see a lot of M&A transactions. More often than you might think, I come across very similar deals with very different valuations. For example, two acquirers can be looking at manufacturing companies with nearly identical financials and business models but one buyer is valuing a target at 10 times the other. How is it that two nearly identical companies can have extremely different valuations?

Sometimes the higher valuation is derived from the value of future synergies or growth potential but more often the higher valuation is a result of an underqualified buyer.

In previous posts, I have discussed how to properly value acquisitions with a focus on smaller M&A transactions. For those of you working on larger acquisitions (or looking for more detail), I want to share the Pepperdine University Private Capital Markets Project.

“The Pepperdine private cost of capital (PCOC) survey was originally launched in 2007 and is the first comprehensive and simultaneous investigation of the major private capital market segments. This year’s survey deployed in January 2016, specifically examined the behavior of senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately-held businesses, investment bankers, business brokers, limited partners, and business appraisers.”

While the 2016 report has a lot of great information, the parts I find most interesting are the sections where industry professionals are surveyed about valuation. Private equity firms and public companies usually acquire private companies and do so with the help of investment bankers, lenders, business brokers, and others, all of whom were surveyed.

So, according to the dealmakers of 2016, where do M&A valuations come from?

Well, investment bankers say the average EBITDA multiple for companies with $1MM to $4.9 MM in EBITDA is 5.3X,

Average M&A EBITDA multiples.

adjusted EBITDA is the preferred multiple for private equity buyers when valuing targets,

Private Equity Acquisition Multiples.

and revenue multiple is the preferred multiple valuation method of venture capitalists.

Venture Capital Valuation Methods

That’s just a quick glimpse of the treasure trove of information included in the 125-page report. With all kinds of great information for companies growing through M&A or raising capital, I suggest most of my readers check it out.

You can download the full report HERE.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Tech M&A Mania Hits Waltham.

Tech M&A Mania Hits Waltham.

Yesterday, Cisco announced it would acquire Waltham-based CloudLock Inc. for $293 million. Having graduated from  Bentley University, I have a special connection with Waltham. Waltham has become a hub outside “the hub” for tech companies. Home to companies like Constant Contact, Actifico, Carbon Black, Cryptzone, and Boston Dynamics watch city could consider tech city as its new nickname.

Since 2008 CloudLock has raised $35 million, the latest round being $6.7 million in Nov. 2014. With $35 million raised and a $293 million sale price, this acquisition should provide great returns to investors.

When compared to Microsoft’s  $26 billion LinkedIn acquisition and SalesForce acquiring Demandware for $2.8 billion, Cisco’s acquisition of Cloudlock is just a blip on the radar for recent tech M&A.

With tech M&A heating up and big ticket prices being paid for tech companies, many in Silicon Valley are beginning to feel better about their unicorn bets. I still see it being a difficult road out of Silicon Valley for unicorns but, at least, the recent tech M&A frenzy proves there are plenty of buyers looking for tech companies with “reasonable” valuations and modest financing histories.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Pros & Cons Of Converting Micro-Cap Debt To Equity.

Pros & Cons Of Converting Micro-Cap Debt To Equity.

It seems like more and more small investment firms in the micro-cap space are looking to convert third party debt of micro-cap public companies into equity. Most micro-cap CEOs probably get calls every day with offers to “restructure their debt”, “clean up their balance sheet”, “convert their old debt to equity”, “eliminate liabilities”, etc.

Using  rule 144 and/or the exemptions available under Section 3(a)(9) or 3(a)(10) of the Securities Act, investors usually create free trading stock quickly by eliminating an issuer’s debt. While there are instances where converting debt to equity can be truly beneficial for an issuer, the majority of micro-cap debt to equity conversions leave issuers worse off than before the restructure.

So when does converting micro-cap debt to equity make sense?  In my opinion, debt restructures are most helpful for revenue generating companies who can use cash, that would have been used to pay debt, to fuel growth. For pre-revenue companies,  a debt restructure tends to be a much riskier proposition.

Below, I break down the Pros & Cons Of Converting Micro-Cap Debt To Equity.

PROS:

1. Repurpose Cash Flows – Revenue generating companies can repurpose cash flow to fuel growth. Income that would have been slated to pay liabilities can be used for other purposes. By reducing or eliminating payables for things like inventory, marketing, R&D, and general admin, a company can temporarily increase available cash flows from operations and use those cash flows to fund growth.

2. Maintain Creditor Relationships – Converting liabilities into equity allow issuers to maintain a strong relationship with creditors. Meeting obligations to creditors (including investors, lenders, suppliers, and service providers) allow for continued access to those credit sources.

3. Speed – When creditors need to be satisfied quickly, converting debt to equity tends to be one the fastest options. With no registration statements, no extensive underwriting or due diligence, and “boilerplate” legal documentation, investors in these transactions can fund in as little as a few days with minimal upfront costs to the issuer.

CONS:

1. Little Value Creation – Debt to equity conversions usually do little in the way of creating traditional value for micro-cap issuers and their shareholders. Maintaining a strong relationship with a key creditor or supplier can be important and beneficial but the costs often outweigh the benefits.

2. Poor Reception – Investors usually view these transactions as a last ditch effort by management. Some of the standard debt to equity terms can be discouraging to market investors and future direct equity investors. With little value creation and less than ideal terms, market support for newly issued (primarily free trading) equity tends to be limited.

3. Temporary Solution – These transactions usually don’t solve long-term cash flow and/or financing problems. Rather, they tend to hamper an issuer’s ability to raise future funding and don’t provide a path to satisfying the same creditors in the future. Additionally, satisfying older liabilities, that may not have required immediate payment, only increases short-term dilution without solving the issuer’s short-term business or financing needs.

In short, converting debt to equity can be a useful tool but it is often used in the wrong situations, by the wrong companies, for the wrong reasons. In my opinion, these types of transaction best serve revenue producing companies and do more harm than good for pre-revenue micro-cap issuers.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

NASDAQ Sending Mixed Signals On Cannabis.

NASDAQ Sending Mixed Signals On Cannabis.

On May 23, MassRoots received word that its application to list on the NASDAQ had been denied. It is understood that MassRoots’ application was “denied by the exchange on the grounds that MassRoots may be deemed to be aiding and abetting the distribution of an illegal substance“.

For those of you not familiar with MassRoots, the company is “one of the largest and most active social networks for the cannabis community with 6255,000 users.” As the FaceBook of cannabis, MassRoots does not ‘touch’ actual cannabis.

While there are a number of cannabis related biotech issuers listed on the NASDAQ, the exchange seemed to make it clear that; “as long as marijuana is federally illegal, neither NASDAQ or the New York Stock Exchange is going to list a company related to recreational marijuana.” Or it was clear, until Microsoft, one of the largest companies listed on the NASDAQ, announced Thursday that they were entering the cannabis business!

Microsoft is teaming up with Kind Financial to “acquire government-facing contracts for seed to sale tracking“.  Seed to sale technology is designed to track cannabis from cultivation (seed) to final purchase by the end user (sale).

seed to sale
BioTrackTHC “The Seed-To-Sale Tracking System”
This news obviously doesn’t make Microsoft a “marijuana company” but it certainly puts it into the cannabis business. For an exchange concerned about “aiding and abetting the distribution of an illegal substance”, I would say having one of its largest issuers tracking the cultivation, harvest, production, and sale of cannabis may be considered aiding and abetting. 

As of now, MassRoots is appealing the NASDAQ’s decision and has requested a written explanation of the denial.The National Cannabis Industry Association and ArcView Group also submitted a pretty interesting  “Statement of Support of MassRoots’ Appeal” to NASDAQ.  

In the written appeal, NCIA and ArcView point out that the standard of aiding and abetting the distribution of an illegal substance is very vague. They go on to ask;

Is every power company that provides electricity to marijuana cultivation operations aiding and abetting? What about Google that shows people where to buy marijuana? Is Facebook liable for the tens of thousands of illegal drug transactions that likely occur over its network on a regular basis? The Denver Post and New York Times have publicly accepted advertising dollars from the cannabis industry – are the owners of those publications also banned from listing on Nasdaq? Several local and national banks traded on national exchanges have accepted regulated cannabis businesses as clients and conduct marijuana-related transactions on their behalf, could those banks also be perceived as aiding and abetting?

We probably won’t have a clear understanding of why MassRoots’ application was denied until we see the written response from the NASDAQ. It is also possible that MassRoots was denied for not meeting the NASDAQ listing requirements. In the meantime, cannabis companies looking to list their securities are welcome on the OTC Markets and Canadian Exchanges. I wonder if the NCIA will amend their letter to add tech giant Microsoft to its list of NASDAQ companies aiding and abetting the cannabis industry…

What do you think?

Will Microsoft’s new venture will help with MassRoots’ appeal? Is it unfair that NASDAQ is turning away tech startups in the cannabis space while allowing tech giants to remain listed and enter the industry?  Feel free to share and comment.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

In M&A, You Get What You Give.

In M&A, You Get What You Give.

A piece in the June 2016 issue of the Harvard Business Review titled – “M&A: The One Thing You Need to Get Right” states that;

“Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.”

The author, Roger L. Martin, uses examples of large companies using “acquisition[s] to enter an attractive market” stating that they are “generally in “take” mode” and thus fail. Prof. Martin points out that, acquisitions made by companies in “take mode”usually fail to earn a return because “the seller can elevate its price to extract all the cumulative future value from the transaction”.

So how exactly does and acquirer “give” to an acquisition? The author highlights four ways an acquirer can “give” or “improve its target’s competitiveness”.

1. Be a Smarter Provider of Growth Capital – Martin provides three examples of ways acquirers can be better providers of growth capital. 1. By acquiring smaller companies and funding their growth in a way that the capital markets don’t (good in less developed capital markets), 2. By bringing intellectual capital and growth resources, and 3. “facilitate the roll-up of a fragmented industry in the pursuit of scale economies“.

2. Provide Better Managerial Oversight – Another way to “give” is “to provide [a target] with better strategic direction, organization, and process disciplines“. He highlights examples of acquirers who have struggled and succeeded noting that “Better management is more likely to result from PE buyouts“.

3. Transfer Valuable Skills – The third way to “give” in an acquisition is “by transferring a specific—often functional—skill, asset, or capability to it directly, possibly through the redeployment of specific personnel.” Martin uses the example of PepsiCo acquiring Frito-Lay and transferring “the skills for running a direct store delivery (DSD) logistics system—a key to competitive success in the snack category”.

4. Share Valuable Capabilities – Rather than transfer skills as discussed above, the fourth way to “give” is to share. A good example is Procter & Gamble who shares its customer team, media buying capabilities, and even its powerful brand in some instances.

In my experience, acquirers often look at targets thinking; how will they help me enter a new market, access new customers, scale my technology, etc. Those acquirers tend to accept higher valuations from sellers, thus overpaying for future value that the target is going to add (or might add) to the business.

When I work with acquirers who have plans to improve the target (not use the target to improve the acquirer), they tend to negotiate better deals and have greater long-term success with less pressure for the acquisition to be a game changer for the acquirer’s business.

Are you and acquirer? How do you plan to improve your targets? 

 

Read the full article, “M&A: The One Thing You Need to Get Right“, on HBR.org; HERE .


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

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