Deloitte Debates: Does Sustainability Add Value to M&A Deals?

Oct 23, 2010 | Corporate Member News

Can sustainability be a driver of value in M&A transactions, or is it mostly “nice to have”?

There’s a lot of talk these days about sustainability. Increased regulation, stakeholder activism and changing consumer behaviors have made companies realize that sustainability is more than just a public relations issue or marketing pitch. But when it comes to mergers and acquisitions, is sustainability really a critical deal issue? 

Here’s the debate:

  Point Counterpoint
  Shareholders, customers and employees care about sustainability and may steer clear of companies with poor operations or product track records. That makes sustainability issues an important value driver in any M&A deal. Everyone says they like the idea of being green, but at what cost? Investors expect a positive return that can be measured in months—not years or decades.

Go for green.

Sustainability affects business value. You have to factor it into your deals.

Regulators are paying attention to sustainability issues like never before. Companies should understand the potential impact of the evolving regulatory landscape before you commit to a deal. What’s considered “sustainable” changes by the day. Focus the company’s M&A strategy and execution on what’s required now — there will be time later to sort out any new requirements.
  Sustainability is a an important long-term strategic issue. Companies that find ways to make their products and services more sustainable will have a significant strategic advantage. That may be true for companies that sell solar panels, but tree-huggers aren’t my target market.
  Point Counterpoint

Hang back.

Sustainability issues are evolving. A wait-and-see approach is better.

Sustainability is a fad that comes at a real cost. It makes sense to do what’s required, but nothing more, especially in this economy. This too will pass. Regulators, customers, shareholders, employees and even lenders are demanding that companies address sustainability issues. This isn’t going away. Getting left behind could cost you dearly.
  There are plenty of solid reasons to do, or not do, a deal. Why venture into unknown territory? Strategic rationale for a deal must encompass all risks – including climate change and other sustainability issues. Understanding a target’s sustainability risk can be just as important as financial and commercial considerations.

My Take:

Kathryn Pavlovsky, Principal, Enterprise Sustainability, Deloitte Financial Advisory Services LLP

Kathryn Pavlovsky

Based on Deloitte’s experience, many companies are improving their processes for identifying and valuing environmental liabilities, in part so they are appropriately priced in an M&A deal. But fewer are strategically evaluating broader sustainability-related risks and opportunities. The reasons vary and may include factors such as sustainability definitions and scopes vary across companies and sectors and there’s no consensus on how to measure performance, particularly for sustainability-related areas that are not yet regulated. Even when the return on investment is quantifiable, the potential value added may be beyond the near-term horizon shareholders expect.

Forward-thinking companies carefully select sustainability strategies and initiatives that are aligned with their business priorities – which may encompass compliance management, risk reduction, or even competitive positioning. Their view is that sustainability is not a fad and that a structured and strategic approach is required to avoid unintended consequences. These companies focus on setting realistic expectations with their stakeholders and gaining agreement that the investment supports the company’s long-term business strategy.

One client I worked with was actively pursuing a growth strategy that entailed development in emerging markets when they discovered that energy sourcing and environmental compliance were subject to a regulatory and enforcement regime that was less predictable than those in developed countries. Even though operational costs were nearly 25 percent higher in the developed countries, the client opted to expand its operations where the cost of natural resource consumption and the environmental and social impacts of operations were more predictable.

Sustainability is a core business issue—one that’s here to stay. Beyond financial and legal risks, environmental issues can impact a company’s strategy and operations and overall competitiveness. With so much at stake, it pays to be proactive.

A view on M&A strategy:

Rod Millott, Partner, M&A Transaction Services, Deloitte & Touche LLP

It makes sense for companies to assess the risks and rewards related to M&A deals that they view as environmentally risky. But on the flip side, screening for targets that are leaders in embracing sustainability issues can be a smart offensive move. This is especially true if you view sustainability as a strategic imperative, but your organization is not where is should be. Finding the right match can provide a jumpstart on sustainability projects or products that could have a steep learning curve, long implementation timeline and slow payback if you did them on your own. You may also gain access to talent, supply chains and facilities that are sustainability-smart.

For example, a large consumer products company wanted access to the emerging, high-growth market segment for sustainable products. Rather than trying to adapt its traditional brands to attract this market, Deloitte helped the company acquire a personal care products company known for using natural ingredients and animal-free testing.

Likewise, if you are preparing to sell a business, it is important to anticipate emerging sustainability issues and address them now as part of improving the business’s potential value. A smart investment in sustainability may command a future premium.

A view from the Oil & Gas sector:

Trevear Thomas, Principal, M&A Consultative Services, Deloitte Consulting LLP

Following the recent oil spill, it’s hard to ignore the impact that sustainability-related issues can have on the oil and gas industry. To reduce potential liability, we’re helping one large client develop their divestiture strategy around high-risk assets. Our job is to help this client to evaluate the social, environmental, reputational and economic risks of these assets and develop a game plan for disposing of them over time.

Another client, a mining organization, recognizes that carbon-based regulations could have an impact on profits. We helped them develop an M&A strategy that focuses on an approach to buy alternative energy companies that complement their existing business. The client’s goal is to reduce their carbon footprint and provide sustainable ways of adding value to their customers.

While the business impact of sustainability evolves, executives are finding that M&A initiatives can be an effective tool to offset potential risk and maintain profits.

Related Content:

Library: Deloitte Debates 
Services: Consulting 
Overview: Strategy & Operations and M&A Consultative Services 
Industries: Oil & Gas 

About Deloitte:

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