Part two: What dealmakers value
While the M&A triarchy of talent, tech and trade is driving buyers to fill strategic gaps within their organizations, our research also examines the other side of the M&A equation: revealing the attributes of potential acquisition targets that business leaders desire. These factors are, in turn, driving up a target’s value and differentiating the most sought-after deal targets.
M&A remains key in the race for growth, and seven in ten business leaders believe that deals are being boosted by high levels of liquidity. However, two-thirds (67%) of business leaders identified a lack of suitable target companies – a challenge that is being exacerbated as targets are revalued due to inflation, reducing shareholders’ drive to sell and buyers’ willingness to commit to previous valuations. This is likely to encourage an increase in earnout clauses in order to mitigate the impact of price/value fluctuations.
When market conditions are difficult, companies on the sell side of transactions can leverage key attributes in order to maximize their value in the eyes of investors. Our research revealed that traditional core criteria – financial performance, IP and increased market share, for example, continue to create value, but it is brand and reputation that is currently at the front of business leaders’ minds.
Talent attraction, new technologies and supply chain integration are all valued by more than two-thirds of business leaders, emphasizing how critical the M&A triarchy is for organizations seeking growth. Environmental, social and governance (ESG) considerations are also rising up the ranks: sustainability and diversity, equity and inclusion strategies now feature in the top ten most important attributes in a target.
The top 10 attributes that business leaders value in a target
1. Brand and reputation
2. Increased market share
3. Intellectual property
4. Specialist skilled talent
5. Strong financial performance
7. Information security
8. Supply chain integration
9. New technologies
10. Diversity, equity and inclusion strategy
Brand and reputation: Impressions count
Brand and reputation is now the most valuable attribute for dealmakers across all sectors. Not only did 77% of business leaders identify it as something they value in a target – making it the number one factor under consideration – but over two-thirds (68%) of business leaders said brand and reputation would increase what they would pay for a target. A strong brand is seen as a solid investment and positive brand awareness is commanding a premium.
In an era of transparency, it’s clear that the importance of reputation is no longer solely the domain of consumer goods. Across every sector, corporates realize the value that can come from an established reputation, as well as the potential damage caused by exposure to reputational risk – and how quickly negative news can spread via activism, social media and global news. In times of adversity, familiar brands have our trust and lend their credibility to their associated supply chains and partner organizations. Brand and reputation becomes a precious intangible asset that corporates are willing to pay for.
Proportion of business leaders who say brand and reputation is something that their organization values in an acquisition target
Catherine Detalle, Partner: “Counterparty and reputational risk makes it essential for companies to have a clear understanding of their targets, which is why due diligence is key in the transaction process. Compliance and constraints are increasingly important as they become stricter around the world.”
“Brand and reputation is essential. When assessing a target, you need to ensure the organization you are acquiring is going to add economic value, of course, but also positively contribute to your brand and reputation.”
Ran Oren | Group Chief Executive Officer | ALTRAD
Ted Cominos, Partner: “Reputational risk is particularly critical to publicly traded acquirers. Even unsubstantiated claims or rumors can have a significant and rapid impact on market caps, given the rapidity at which information is spread (particularly through social media). Extensive up-front due diligence, as costly as it can be at times, is money well spent – particularly when compared to the fiscal and reputational damage an undiscovered issue can bring in one day of trading.
A newer risk that is gathering momentum is related to ESG. Institutional investors are understandably sensitive to the issues underscoring ESG investment guidelines – pollution, child labor, diversity, etc. – especially as information about any misdeeds can move quickly through social media. We’re seeing deals where if modern ESG policies are not in place for a particular target, they are promptly required to be implemented as part of concluding an acquisition process. Strategic acquirers are quickly realizing that if they fail to conduct proper due diligence in this space, they can finds themselves facing a significant impact on their reputation (and market cap)."
“ESG is only going to become bigger and more important, especially when looking at a target company and understanding its ESG compliance and culture. When you’re ascertaining whether a target will be a good fit, ESG will become a part of that – it will become a meaningful and measurable core element. It already is in some ways; it just isn’t quite quantified yet – but it will be.”
Jason Baab | Senior Vice President | Oshkosh
M&A and ESG
Environmental, social and governance (ESG) concerns are increasingly garnering public attention, impacting consumer attitudes and driving corporate decision making. Over the coming years, ESG considerations are likely to become a more important factor in M&A decision making as legislation and regulations mature and organizations strive to meet targets.
Already, ESG and sustainability concerns are having an impact. Over two-thirds (67%) of business leaders believe that net-zero supply chains are dramatically increasing in value, and more than three in five (64%) believe that acquiring sustainability skills through M&A is crucial to succeeding in the future. This point is validated by the results of the Climate Change and the People Factor report we published in 2021, which found that, as companies mature their thinking around their climate strategy, the process will uncover the lack of suitable talent in the market. Almost two-thirds (65%) of business leaders said that M&A activist campaigns are on the rise in response to the global climate emergency.
Currently, sustainability places sixth among the top ten priorities when assessing M&A targets, with 72% of business leaders identifying it as a priority. We expect this proportion to increase over the coming years as it continues to climb up the business agenda and companies come under increasing pressure to improve their ESG performance. But it is not just environmental concerns that business leaders are focusing on; the “S” in ESG is increasingly important, with a target’s diversity, equity and inclusion strategy seen as an important attribute by 68% of business leaders.
Acquirers’ increasing focus on ESG issues such as sustainability performance and diversity and inclusion policies also links to the emphasis on brand and reputation: While ESG might not be the driving force behind every deal, business leaders are mindful of reputational pollution and ESG performance bleeds into reputational considerations.
Herbert Short, (US) International Partner and Global Co-Lead of ESG: “There are countless stories in the news that validate that ESG and sustainability are driving M&A activity: global oil and gas companies acquiring clean energy and electric vehicle assets as they pivot their strategy to align with the energy transition; the world’s largest private equity firms bolstering their sustainable solutions funds to acquire and expand their green portfolios; and companies looking for forest land assets to acquire and trade for carbon offsets.
“Additionally, much of brand and reputation, which ranked at the top of the list, is built on ESG factors. Brand and reputation may speak to a target’s reputation for training and retaining its employees, giving back to the local community, having a diverse board, engaging in climate-positive activities, sourcing sustainable raw materials, or having a governance structure that commits to narrowing pay gaps between genders and between executives and employees. All these factors, and many more, go toward a company’s brand and reputation – and all of them are ESG issues.”