Interconnection of CSR and M&A

As Senior Vice President of Keysight’s corporate services organization, my purview spans customer experience and quality, government affairs, mergers and acquisitions (M&A), and corporate social responsibility (CSR), among others. Traditionally disparate functions, the increasing connection between environmental, social and governance (ESG) performance — which is tracked within the scope of CSR — and business results has driven growing interconnectivity between these functions.

I have been particularly intrigued with the intersection of CSR and the M&A function. This is not to say that ESG topics never before came up in M&As, but recent societal and climate events have particularly raised the bar on environmental sustainability and social impact considerations throughout the M&A process. From stakeholder engagement and across phases of an M&A implementation, examination of ESG elements is critical to the process for both corporate buyers and sellers.

ESG expanding traditional stakeholder engagement for M&As:

Traditionally focused on the investment community and corporate executive interests, M&A practitioners are recognizing the need to expand stakeholder ESG considerations to more directly include:

• Customers with specific ESG expectations that may impact new market expansion and thus revenue opportunities. Ultimately customers want to maintain partnerships with suppliers that help them achieve their own ESG goals.
• Employees related to their expectations in the environmental and social justice spaces, which can make or break a successful integration if there is a perceived misalignment or shift in corporate values. This is particularly true in the highly competitive next-generation technology workforce, where employees want to work for a company that shares their values and enables them to contribute to building a better planet.
• Communities where companies do business and can be positively or negatively impacted by M&A actions. Perceived or real impacts drive brand perception and preference, while providing the opportunity to build prosperous local communities.

ESG’s increasing considerations for both corporate buyers and sellers

While M&A stakeholder engagement may lean more heavily on the corporate buyer impact in terms of future business implications, both the buyer and seller entities in an M&A engagement have a vested interest in ESG performance.

From a seller perspective, having proven ESG-related policies, processes, culture, and impact results make it a more attractive target. Often, they can connect their ESG efforts to business resilience, lower their risk profile, and exemplify the ability to more readily integrate with other well-performing companies with positive ESG profiles. As such, having solid performance in this space before considering an M&A engagement helps corporate sellers achieve a higher valuation while speeding negotiations and close activities. This is not only good for the traditional investor and executive stakeholders that will gain financial value from the divestiture, but also for other stakeholder groups that will benefit from continuity in business performance and a more natural alignment with other ESG-focused companies during transition.

From the buying entity’s perspective ensuring long-term acquisition success and business resilience is key in the ESG considerations space. In this case, it is critical across the M&A process to assess ESG risk and opportunities that could impact the operational model, brand perception, community engagement, and cultural alignment of the target and legacy companies.

Emerging ESG considerations across the M&A engagement process

While there are multiple ESG considerations throughout an M&A engagement, some recent developments have resulted in new considerations for M&A teams at different phases of the process.

• Early investigation phase — As the M&A strategy and value quantification process begins, buyers focus on the viability of the target company for acquisition success. In this phase, ESG policy and cultural synergy have gained importance as acquiring companies look to protect gains in areas such as workforce diversity and sustainable operations. In addition, with nationalistic ESG legislation, multi-national M&As need to consider regional norms both in culture and ESG requirements. Alignment of top-level ESG approaches at this phase can trigger early decisions for engagement abandonment or identify specific risk and opportunities for deeper investigation during the due diligence phase.
• Due Diligence — Business risk and valuation are key components of this phase. As such, the rise of greenhouse gas (GHG) emissions tracking, plans for net zero emissions, efforts in natural resource conservation and pollution prevention are critical aspects to characterize during site visits at acquisition target facilities. Key risk considerations are the target’s tracking systems, auditability, and operational or supply chain risks for climate impact and other such topics. Cyber security and data privacy are also hot topics to determine risk impact and alignment. In addition, this phase can also identify opportunities through the leverage of policies and expertise, or solutions alignment to traditional ESG markets such as eMobility, cyber security, alternative energy and social justice platforms.
• Transaction Execution & Deal Structuring, Integration – Devoted to operating model and integration planning with a focus on optimizing the combined companies, emerging topic areas focus on not just operational transition but workforce assimilation in the culture of the acquiring company. Workforce training, development, and engagement to align with acquiring company expectations and values has gained increasing focus as being critical to long-term business success. In today’s acquisitions, integration focus on employee inclusion strategies, diversity, and sustainability processes help support integration success and, ultimately, long-term business results.

ESG performance in M&A engagements is a win:win:win+

Today, the success of an M&A engagement is simply not possible without a clear ESG risk and opportunity assessment of the target company, valuation alignment, and planning across the integration process. The outcome builds a true win:win:win+ whereby buyers experience long-term success and business resilience, sellers gain value through ESG performance, customers maintain or gain ESG partnerships, workers engage in high-value development and purpose, and as a result, communities prosper.