This week, our members wanted to know about the impact of “Phase 2” and a recent report warning investors about the danger of cannabis stock. Make sure you don’t miss what we have to say…
We had another exciting week here at the National Institute for Cannabis Investors.
After the announcement of a massive deal that will marry the largest Canadian cannabis company with one of the largest U.S. multi-state cannabis operators, we determined that the industry has entered what we refer to as “Phase 2.”
Cannabis IPO Expert Danny Brody wrote in to give his thoughts on this transition. If you haven’t had a chance to see his report yet, I encourage you to see why he thinks this new era will be massively profitable.
With all this news about mergers and acquisitions, I wanted to take a moment to address some questions our members have about the impact of this new phase.
Darryl S. comments: “I’m not sure I understand what happens with the stock I own in a company when it gets acquired by another company. Do my shares roll into the company that just bought the smaller company? Or do they still trade under the same ticker?”
It depends on the deal, Darryl. Only rarely does the acquired company get to trade under its own ticker, but it happens, as we’ll see. Most often, when the company you own gets acquired, you get cash, shares in the acquiring company, or both.
Sometimes you’ll get something extra, too. For example, when iAnthus Holdings (CSE: IAN, OTC: ITHUF) bought MPX Bioceuticals, MPX shareholders got shares of iAnthus but they also got a “mini-company” of assets that MPX did not sell. So people who held MPX got two companies, one with the symbol IAN and one with the symbol MPXI.
The just-announced deal between Canopy Growth (NYSE: CGC) and Acreage Holdings (CSE: ACRG, OTC: ACRGF) is even more complex. Acreage shareholders will get some cash as soon as the deal is approved, and they will eventually get Canopy shares, but they’ll only receive the Canopy shares after cannabis is legal on a federal level in the United States.
That means shareholders will retain their Acreage shares for at least a few more months, but those shares will trade more closely with the fortunes of Canopy than with the fortunes of the company they actually own!
So what’s the right strategy? To answer that question, we can look at what Dave wrote in.
Dave N. says: “Whenever Canopy dips, I try to buy more. Just wondering if I should continue that or buy Acreage shares instead? Thanks for what you do!!!”
That’s an outstanding question, Dave. For our other readers, you know that Canopy has agreed to acquire Acreage Holdings at a fixed share ratio, meaning Acreage stock should trade in tandem with Canopy stock. And Acreage is currently trading at a discount to Canopy stock, which means that if you buy Acreage stock you should get both the movement of Canopy stock and the narrowing of that discount as the completion of the merger nears.
The answer, Dave, depends on your risk tolerance. I think the deal will close sooner than most people are projecting, but there is still some risk in holding Acreage stock. For example, what if something goes wrong at Acreage which allows Canopy to cancel the deal? If you think the risk of that is low, go ahead and start accumulating Acreage Holdings stock – it’s like buying Canopy at a big discount!
For our members, though, I’m going to stick with the lower-risk approach of continuing to recommend Canopy directly, in part because it’s a lot simpler for many of our newer investors.
Finally, one of our readers came across a report that deserves some attention.
Alma writes in to say: “E-Trade had a report saying that Marijuana investors are as oblivious to the litigation risks as the smokers are to the health risks from smoking. I am just interested in your response since yesterday they were up and today since that came out they are dropping fast.”
Thank you for bringing this story up, Alma. I saw that same report, and I’m happy to have the opportunity to write about it.
The risk of litigation exists in any industry, and it’s true that there is a lot not yet known about the long-term effects of cannabis use. We do know that some of the nastiest parts of tobacco, like “tar,” do not exist in the cannabis plant.
Ultimately, I think the risk of serious litigation on health-related matters is vanishingly small in the next decade or so. For one thing, an increasing number of people are consuming cannabis by methods other than smoking, like vaping and edibles. For another, the mental health risks the author of that report discusses are not well established among people who didn’t already have a mental health disorder. And with what we’re learning these days, it seems increasingly likely that cannabis could well turn out to be a treatment or cure for some of the very maladies that author describes as risks.
It is true that the cannabis market has been weak since that article, but I think that’s a coincidence. If you’ve been investing in this sector for a while, you’ll notice that the market has occasional weak patches with massive upswings between them.
I think we’re just in one of those soft spots, which means it’s a good time to accumulate cannabis stocks if you haven’t already. Make sure you know how .
Executive Director, National Institute for Cannabis Investors
One response to “Q&A: What Happens to My Stocks in an Acquisition?”
April 27 2019