A combination of factors both timeless and timely is contributing to strong M&A activities as companies look to bolster their sustainability bona fides and adapt to new ways of doing business.
Sustainability is no longer an afterthought in the corporate world. It’s front and center on the minds of leaders looking to position their companies well for the future. It entails a rapid and wide-ranging shift in how big companies do business. A shift this drastic can sometimes be completed in-house with existing resources and capabilities. But sometimes, a big brand needs to look outside of its walls to improve its business model. This is where mergers and acquisitions, also known as M&A, come into play.
M&A activity involves two different companies combining in some form. A merger is when two similarly sized companies combine to form a new bigger entity. An acquisition is when one bigger company buys a smaller one. M&A is quite common in the corporate world, and the motives used to justify it are wide-ranging.
Sometimes, companies simply want to improve their efficiency. Many of a company’s costs can become unnecessary as a result of M&A activity. For example, two similarly sized companies might not need to keep their separate human resources departments, allowing them to cut costs without hurting their core business.
Other times, companies engage in M&A activity because they have excess cash lying around that they can deploy to make money. As such, M&A often proliferates when an industry is doing well or when an economy is doing well, both of which provide the conditions necessary to take bigger risks.
M&A is on the rise in the sustainability realm for some of these reasons. Some fast-growing companies want to be more efficient. Others want to take advantage of the cash they’ve earned to expand their impact. But right now, a combination of unique factors is presenting some other motivations for sustainability M&A activity.
In 1970, a famous economist named Milton Friedman wrote an article in the New York Times whose headline summarized Friedman’s key point: “The Social Responsibility Of Business Is to Increase Its Profits”. His article changed the business world. It led to a laser-like focus on maximizing profits for shareholders. Friedman’s views rested on the assumption that what’s good for shareholders is what’s good for society. In short, a rising tide lifts all boats.
This shareholder-centric view still holds wide sway across the corporate world, but a half-century later, the perception of the role of business is changing. No longer are businesses seen as solely tasked with growing profits for shareholders. Now, they are seen as agents of progress affecting their employees, suppliers, customers, communities, and the planet.
At its core, sustainability is the ability to sustain all of those things. Whereas the business community used to assume that thinking beyond profit maximization was a distraction that went against shareholders’ best interests, there’s growing recognition and proof that a sustainability focus helps rather than hurts a company’s ability to both do well by its shareholders and do good for the greater good.
Investors often use a set of criteria called ESG - which stands for environmental, social, and governance factors - to measure a company’s commitment to this stakeholder-centric vision of how a company should operate. It’s more broadly understood nowadays that a sustainability focus improves shareholder value by way of creating new business opportunities among other means. Plus, it’s easier than ever to precisely quantify that impact. Investors often screen companies by their ESG metrics, and the data shows that companies that perform better on ESG make more money for their shareholders.
For example, Rockefeller Asset Management and the NYU Stern Center for Sustainable Business collaborated to examine the relationship between ESG and financial performance in more than 1,000 research papers from 2015 to 2020. They found a positive relationship between ESG and financial performance for 58% of the “corporate” studies focused on operational metrics such as ROE (return on equity), ROA (return on assets), or stock price.
The investing community knows and cares about all of this too and knows how to measure each of these things better than ever before. Investors don’t care about the past; they care a good amount about the present and a whole lot about the future. And by virtue of physical necessity (i.e. the increasingly dire effects of the climate crisis) and changing perceptions of what businesses can and should do to make a positive impact, sustainability can no longer be ignored in earnings reports or shareholder meetings.
In sum, M&A allows companies to both bolster their sustainability bona fides and appear more attractive to investors. Investors in big companies care a lot about sustainability because they have to and because they know it’ll make them more money.
Many companies cannot thrive if their employees aren’t engaged in and excited about their mission. And nowadays, more and more of those employees want to feel like they are doing good beyond making money. For instance, more than 70% of 1,000 employees surveyed at large companies in 2019 said they were more likely to choose to work at a company with a strong environmental agenda.
While this trend is spreading across age groups, it’s most prevalent among younger people. The results of a global survey of 400 dealmakers conducted by Datasite show that around 82% of respondents look at a company’s ESG policies when they evaluate job opportunities, with under-40 respondents caring more than over-40 respondents. From the 2008 financial crisis to the ongoing climate crisis, millennials have felt the downsides of an excessive economy-wide focus on maximizing profit.
In contrast, most big companies - and their top C-suite executives - came of age in the Gordon Gekko days when sustainability was barely on anyone’s radar. Sustainability M&A allows companies to attract and retain top talent who care about sustainability.
In terms of attracting top talent, M&A can help in two main ways. First, by acquiring companies that have either grown or adapted to entirely new days of doing business, a more entrenched company can add experienced talent that can help accelerate a shift from a shareholder-centric business model to a stakeholder-centric one.
For the most part, big brands don’t lack talent. Their size and prestige allow them to find and hire top talent. Nonetheless, it can be hard to find proven sustainability talent and expertise given how recently most big brands (and educational institutions, upon whom big businesses ultimately depend to hire top talent) have even put sustainability on their radar.
Oftentimes, that talent is more prevalent at smaller, cutting edge companies that leverage their nimbleness and ingenuity to make breakthroughs in a space rife with opportunity. As the pace of change in this space threatens to overwhelm even the most dynamic big businesses, acquiring smaller businesses allows them to short-circuit the process of cultivating the talent that is usually needed to excel in new business lines or with new ways of doing business.
Along these lines, M&A can improve a brand’s sustainability reputation, which makes a company a more desirable place to work for young and aspiring professionals who care deeply about doing good. And in terms of retaining top talent, M&A can inspire a company’s existing employees by giving them new opportunities to make a positive impact. Likewise, it can help them feel better about where they work and thus feel more motivated to stay and be engaged in the company’s mission.
In the grand scheme of things, a healthy paycheck and a shiny business card are nice, but when your social media feed has dystopian images of raging wildfires and supercharged hurricanes and then those wildfires and hurricanes knock on your doorstep, it might not feel so good to work for an organization you don’t believe cares about the big world around you. For a big brand, folding a smaller firm into its operations is one way to kill two birds with one stone: show talented people that you care and allow that talent to positively transform the way business is done.
Another key driver of sustainability-focused M&A activity is a bit more timeless: the ability to combine the strengths of a bigger company with the strengths of a smaller one. Quite simply, big and small firms have complementary strong suits that apply to sustainability as well.
Smaller companies often have innovative technology, unique customer understanding, and sharp talent behind it all. Bigger companies know how to efficiently get goods and services to market and then market their wares by way of their reach and brand image. In sustainability, what fuels strong sales is not always what you’re selling but rather being able to convey your offerings in a way that resonates authentically with customers. Sometimes, being healthier to the planet is the appeal. Other times, that’s just a side note. No matter what, big companies usually have great leverage to bring innovative sustainability solutions to bigger markets, translating to more sales and more impact.
Furthermore, sustainability businesses often grow by being more in-tune with the needs and wants of those valuable and increasingly numerous customers who care about the businesses and causes they support. These upstarts lack the incumbency and brand positioning that a bigger firm can bank on to generate sales. They need to understand what customers want, whether those customers know it or not. And while those insights might be best developed before a company has the luxury of depending on its size, those insights are key in any business, big or small.
In October 2020, automakers BorgWarner and Delphi Technologies completed a $3 billion merger that symbolizes how two different companies can combine to complement each other’s strengths and create value. The new combined company expects to drive growth of hybrid and electric vehicle products, particularly in electrified propulsion systems, while maintaining some of its still-profitable legacy automotive lines.
Upon acquiring Delphi, BorgWarner said “Delphi Technologies brings industry leading power electronics technology and talent, with an established production, supply and customer base.” BorgWarner recognized that in order to capitalize on an existing growth trend in the electric vehicle industry, the technology and talent added by way of acquiring Delphi will prove invaluable.
Finally, it goes without saying that the ongoing COVID-19 pandemic has played a large part in these trends. Financially speaking, while economic activity froze at first, the pandemic’s aftermath created ripe conditions for M&A. Governments injected trillions of dollars in global economic recovery efforts, and cash that initially sat idle as companies big and small looked to protect themselves amidst a wave of uncertainty is now more available for dealmaking. Economic growth in the wake of the pandemic has also given investors and executives more confidence in general to engage in M&A activity.
But more importantly, the onset of the pandemic, which saw massive economic disruptions that particularly hit fragile supply chains, exposed the value of resiliency for businesses and the value of simply doing good by your stakeholders. Unpredictability and adversity became facts of doing business during the pandemic and led to a newfound corporate focus on agility and flexibility.
COVID also drove increased environmental awareness and concern, pushing companies across the economy to develop or sharpen greener visions. As city residents saw empty streets and cleaner skies while scientists documented sharp cuts to greenhouse gas emissions, the corporate world experienced an acceleration of sustainability’s journey to the forefront of boardrooms.
Overall, COVID has both spawned and coincided with a greater corporate emphasis on corporate social responsibility and sustainability. Just as the pandemic has inspired humanity to think about how much our individual decisions affect society at large, it has encouraged the business community to recognize the impact it has and can have around the world. M&A enables companies looking to further their impact along the so-called triple bottom line, a term that refers to a new three-pronged way to measure corporate performance: a company’s impact on profit, on people, and finally on the planet.
Big businesses can always run, but in the Information Age, they can’t hide. Accountability is not just a talking point anymore in a world dominated by social media. It’s easier than ever to claim you’re doing good, but it’s also easier than ever to verify that you’re walking the walk and not just talking the talk. Employees can do this, but so can customers. Sustainability is a key piece of a big company’s brand image as public perception changes and the availability of more environmentally-friendly offerings proliferates.
In essence, the general perception of the role of business is changing. Likewise, there’s a growing recognition that sustainability cannot be ignored or sidelined both literally (e.g. in the physical sense of vulnerability to climate change) and from a business perspective as it continues to gain importance and legitimacy. M&A might not be the end all be all solution that jumpstarts a company’s sustainability efforts, but it can transform a company’s ability to deliver shared value for all of its stakeholders.
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