Strategy & Organisational Change
MERGERS AND ACQUISITIONS
W hen seeking a partner for life, a wide range of other qualities. They might look for someone with integrity and compassion who shares their own outlook. The same is true in business, especially cross-border mergers and acquisitions (M&A). Target companies often prefer a ‘worthy’ suitor, not simply any buyer who meets their price. Businesses that aim to complete M&A deals in other countries would do well to bear this in mind. Many cross-border deals are not people are seldom guided by finances alone; they usually consider completed because they involve firms with too many cultural and institutional differences. Others are subject to extended negotiations and increased costs. Ultimately, many fail to meet the buyer’s expectations. This can be costly for both the acquirer and the target, highlighting the importance of choosing the right suitor. As with human relationships, some suitors are deemed more worthy than others. This helps them to maintain a better record when it comes to M&A. Key indications of worth in this context are environmental, social, and governance (ESG) scores. We compared these scores with the likelihood of a cross-border M&A deal being completed and how long it took to complete. We found a clear correlation: buyers with high ESG scores were more successful at acquiring other firms and deals took less time to complete. There appear to be several reasons for this. Often an obstacle to deal progression is the willingness of the target company to be taken over.
SOUL M&ATES How ESG scores can ease corporate takeovers
They may be concerned about the fate of the workforce. If suitors have high ESG scores, they might be expected to treat employees in the target company well. This can reduce the need for tough negotiations, creating a smoother transaction and integration process. Prioritising ESG can improve a company’s ethical standards and transparency, increasing the target company’s trust in their potential suitor. There is also a perception that a company that places more emphasis on ESG is more forward thinking, reassuring targets that the deal will leave them better placed to meet evolving environmental or geopolitical challenges. “Many deals fail because they have too many Finally, we found ESG scores strengthened local stakeholder trust, mitigating the liability of an acquiring firm’s foreign status (often a major obstacle in international transactions). While we found that a high ESG score improved a target’s view of their suitor, this only held true among similar cultures and regulatory structures. In countries that were less favourable to ESG, a high score had a weaker impact on M&A deals. However, multinationals operate across numerous countries and cultures. Therefore, they cultural and institutional differences’’
must remain sensitive to ESG issues even if they dip out of favour in some countries, as they have in the US recently. Some US companies may have retreated from their commitments on sustainability and inclusion in the face of a backlash from President Donald Trump and his support base. But they would be well advised to maintain high ESG scores if they want to be accepted as a worthy suitor by target firms in other parts of the world, especially Europe. When cultural differences occur, other factors such as profitability may be decisive. Even then, ESG scores can be an indicator of quality in other areas, such as a firm’s approach to risk management, transparency, and its capability for innovation. For example, Unilever uses ESG to manage supply chain risks, leading to cost savings and stronger brand value. Meanwhile, 3M drives innovation by aligning its environmental goals with employee-driven creativity and stakeholder collaboration. The scores awarded for the three factors – environment, social and governance – appear to influence M&A outcomes in different ways. High social scores are associated with a reduction in the deal duration. Overall, ESG performance and high environmental and governance scores are all positively associated with deal completion. Target firms may believe
by Irina Surdu, Jeongsun Park & Hossam Zeitoun
an acquirer with strong governance is more likely to manage them well and adopt cutting-edge practices that create value and opportunities. They may also assume a suitor with high ethical standards
Warwick Business School | wbs.ac.uk
wbs.ac.uk | Warwick Business School
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