From June – October 2012 PwC conducted a survey on behalf of PRI, which assessed trade buyers’ attitudes to evaluating ESG risks and opportunities in their M&A activities. The survey consisted of 16 interviews with corporate buyers from a range of sectors and involved a discussion around the following key topics: integration of ESG factors into the due diligence process; integration of ESG factors into M&A price, sale and purchase agreements (SPA); and integration of ESG factors in the post-acquisition period.
The majority of the companies included in the survey belong to the FTSE 350 and are highly engaged with the sustainability agenda. For most companies in our sample, the M&A team subcontracts consideration of ESG factors to sustainability specialists in the business. As a result, a high proportion of our interviewees (63%) have sustainability roles.
The companies involved in the survey are from a variety of sectors and are mainly headquartered in Europe, the US and Canada. However, the vast majority operate globally. Most of these companies have made between one and three acquisitions in the last two years, spread across a wide range of sectors. The locations of acquisitions are also diverse; however, there has been a focus on the US and some BRIC (Brazil, Russia, India and China) countries.
ESG factors can affect the likelihood of the deal occurring.
Two thirds of the interviewees said that poor performance on ESG factors had prevented a deal or affected their willingness to do a deal. On the other hand, good performance on ESG factors can increase motivation to do a deal, with a third of the companies stating that they believed good performance on ESG factors adds to the reputation and brand of the company.
Poor performance on ESG factors can have a significant negative impact on the valuation of a deal and can be used as a lever in negotiating the SPA.
Over half of the companies stated that they would expect a discount for poor performance on ESG factors. However, a number of companies also appreciated that good performance on ESG factors is usually integrated in the valuation of the company, although it was mentioned that this is difficult to quantify.
ESG factors are sometimes used by trade buyers as a lever in the SPA to negotiate downwards on price. The trade buyer may include draft ESG-related indemnities and warranties that the trade buyer knows ultimately cannot be delivered by a GP seller, who is keen to make a “clean” exit. These clauses are sometimes removed at the last minute in return for a reduction in price.
The cost and difficulty of bringing a target company up to the trade buyer’s standards with regards to managing ESG factors is a significant consideration in the deal process.
A large number of company representatives interviewed mentioned the ease of integrating the acquisition into their company (for example by standardising management controls, policies, procedures and operating systems) as a key factor in their willingness to do a deal. A number of companies stated that if it appears to be too difficult or expensive to integrate the target company and bring them up to their own internal standards on management of ESG factors, their willingness to do the deal would be seriously impacted.
A significant proportion of companies consider integration as an opportunity to increase the value and efficiency of the acquired company. In many cases these opportunities are realised through improving areas of poor performance on ESG factors. However, if the standard of ESG management is too low and this opportunity cannot be fully realised then the deal is likely to be impacted.
ESG factors are increasingly important in M&A activities.
The majority of companies consider that there has been an increase in the importance of ESG factors in M&A activities and that this trend will continue in the next three years. However, it was evident that the relative importance of ESG issues varies significantly depending on factors such as the sector and location of the deal.
Many companies are developing a more systematic approach to ESG due diligence.
Although the majority of companies consider their general approach to sustainability to be quite advanced, a significant proportion recognise that they have a less well developed approach to ESG due diligence. Overall, our survey found a general trend towards the standardisation and formalisation of the ESG due diligence process.
Increasingly, trade buyers are integrating ESG factors into their due diligence process but these factors are still not consistently applied to every project.
Although ESG due diligence has not been fully integrated in a large number of the companies, the process has generally become more centralised and co-ordinated by trade buyers. There is, however, variability in the extent to which ESG factors are incorporated into the due diligence process. This is affected by the size and location of the deal and the sector concerned.
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The integration of ESG issues in merger and acquisition transactions: Trade buyer survey results
Prepared by PwC with support from PRI
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