Most M&A buyers would pay 3% extra for a company with a good ESG profile

Dive Brief:

Eighty-three percent of M&A buyers would pay a 3% premium to acquire a company with solid environmental, social and governance performance, with 14% saying they would pay as much as 6% extra, Deloitte said Monday.
In turn, 67% of respondents to a global poll said they would seek at least a 3% discount if the ESG performance of a target company was weak, compared with 36% of those surveyed in 2022, Deloitte said.
“With stronger data analysis of targets’ ESG profiles, buyers are better able to understand the value that targets with strong ESG performance can lend,” Sarah Corrigan, Deloitte’s ESG leader for M&A, said Monday in an email response to questions.

Dive Insight:

Dealmaking quickened during the first quarter after a sluggish 2023, with the value of announced or completed transactions worldwide increasing to $549 billion, or 28% higher than in Q1 2023, according to S&P Global.

So-called megadeals — or those exceeding $10 billion — fueled much of the gain, with the total value of such transactions exceeding those of every quarter since Q2 2022, when the Federal Reserve began its most aggressive monetary tightening in four decades, S&P Global said.

Still, “recovery remained uneven,” S&P Global said, with the volume of deals falling 21% compared with Q1 2023. Also, “deal financing remains a challenge,” with leveraged buyout activity plunging 32% compared with the first quarter last year.

ESG is playing a bigger role in dealmaking than ever before, Deloitte said, “with a greater recognition among leaders that it is a lever for measuring, protecting and creating value.”

Dealmakers gauge sustainability with more precision than just a few years ago, Deloitte said.

“Better data gained through more sophisticated measurement processes is key to helping buyers and investors drive more confidence into their dealmaking decisions around ESG,” Corrigan said.

More than seven out of 10 of buyers (73%) said they scuttled a planned M&A because of findings during ESG due diligence, Deloitte found.

More than half of M&A buyers (57%) gauge ESG with clearly defined metrics compared with 39% in a 2022 poll, according to Deloitte.

Ninety-one percent of those firms say they have high or very high confidence that they can evaluate a target company’s adherence to sustainability standards, an increase of 17 percentage points since 2022, Deloitte said.

At the same time, only 12% of respondents said their company has defined a clear way to manage ESG factors during post-merger integration, according to Deloitte.

While vetting M&A targets with sustainability metrics, companies can better understand and achieve their own ESG goals, Deloitte said.

Nearly three in four companies (74%) said they have reviewed their portfolios or investments through an ESG lens when either seeking to buy a company during acquisition, according to Deloitte. In the same vein, 67% have done the same when creating their strategies for divestiture.

Deloitte in January surveyed 500 M&A leaders at companies with revenues of at least $500 million or private equity firms with at least $1 billion in assets.