Cannabis industry a case study in applied negotiation
By AdvocateDaily.com Staff
In January, Alberta-based producer Aurora Cannabis purchased CanniMed Therapeutics Inc., a Saskatchewan-based rival, for just over $1 billion, the CBC reports.
The deal valued CanniMed’s shares around $43 each, despite the fact they were trading for about $10 as recently as last September. In November, Aurora’s first attempt to buy CanniMed amounted to an offer of about $24 per share.
“These types of deals are fascinating to anyone studying business or negotiation theory,” says Morrow, the principal of the full-service dispute resolution firm Morrow Mediation.
While he is not an expert in the cannabis sector specifically, Morrow explains that one of the key criteria for determining a fair deal in any applied negotiation, which includes mediation, is the objective data used to measure it.
For example, in a real estate transaction, he says one party may set the asking price for their house at $1 million.
“You don’t just pick a number out of a hat. You discuss the basis for coming up with that number,” Morrow says. “Maybe as a buyer, you think $850,000 is a more reasonable price, based on the sale value of other comparable houses in the neighbourhood. But to negotiate a deal, you need to have some ability to understand the objective criteria that will be relied upon.”
Similarly, when considering the purchase and sale of a business, there is a range of methods used to determine its value, says Morrow, including “the assets, revenue and the valuations of comparable competing businesses."
He says the nascence of the cannabis sector makes it more challenging to establish that shared understanding.
“It appears that objective standards of valuation have gone out the window as players in the industry clamour for position in a hot market without regard for objective measuring sticks,” Morrow says.
The fast-changing regulatory environment as Canada moves towards legalization of marijuana for recreational use has also contributed to the volatile nature of the market, Morrow says.
“This has ramped up very quickly. None of these companies have generated much revenue at this point, so there are wide-ranging projections about what they will be worth in the future, and companies are scrambling to get their hands on smaller producers and companies with specialized expertise to ensure they’re well-positioned to compete as other big players emerge," he says.
“I don’t think we’ve seen this kind of behaviour since the dot-com era at the turn of the century, and I’m not sure where objective criteria comes into play in establishing valuations,” Morrow adds.