“In all aspects of business, fads and trends come and go. Those that remain will have struggled long and hard to make it into the mainstream business consciousness. But how can we judge when something has made the transition from flavor of the month to inescapable fact?
Well, I would suggest that being accepted by tough-talking M&A executives and investment bankers – a group not known to suffer fools lightly – is a sure indication that something is no longer a fad; it’s here to stay.
That’s what I believe has now happened with the sustainability agenda – and all of its component environmental, social, economic and ethical parts. In fact, it has now become a key factor against which a target business is assessed in the pre-deal due diligence process.
It has been a fairly startling rise for the ‘new kid on the block’ but sustainability concerns now sit comfortably alongside financial, strategic, operational and reputational concerns at the top of the dealmaker’s checklist. In fact, any business which fails to investigate a target business with regards to its sustainability profile is not just missing out on potential benefits; it could actually be putting itself at risk.
Quite simply, there is a huge amount of money being spent in this area so why wouldn’t you check that your target business’s aspirations or track record match your own? A business which has spent heavily on its sustainability initiatives but then purchases a company whose own record is – at best – patchy, risks undoing much of the good work it did previously. Hard-earned reputations can quickly dissolve by association with a less ‘worthy’ company.
The counterpoint to this is that a business not indulging in this sort of assessment could also be unaware of the potential benefits to emerge from buying into a business with a better grasp of the sustainability agenda. And a seller may miss out on the premium which could be added to the sale price if it just realized how valuable its sustainability work had become.
This is the point at which the bankers have become interested – because there is a very real value being ascribed to these activities. If the comparison between purchaser and acquirer shows the latter ‘in deficit’, i.e. its sustainability activities are far less advanced than the purchaser, then there is a cost which could be ascribed to bringing the target up to the purchaser’s standard. Environmental clean-ups or the instigation of social programs in line with that espoused by the purchaser all come with a price tag – and these can be factored into deal price negotiations.
If the comparison results are reversed, then this is more difficult to value. If the purchaser is going to benefit from the good works of its target, assigning a monetary value to the strategic importance of such initiatives can prove tricky. What value do you place on a nationwide community mentoring scheme for example – or a leading environmentally friendly energy strategy?
The difficulties likely to be encountered in the valuations area are not dissuading M&A executives from paying significant attention to the sustainability agenda though. While they cannot yet be described as deal-breakers, due diligence sustainability concerns are firing the imagination of many a dealmaker – and the actual impact they are having on deal prices can be seen clearly.
Anyone thinking that this is still a temporary fad may be in for a rude awakening when they step up to the negotiating table.”
Eric Collard is an Advisory partner with KPMG in Luxembourg