Record-Breaking M&A Surge Shows an Emphasis on ESG

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A recent survey of merger and acquisition (M&A) professionals has found that dealmakers are optimistic the rise of M&A deals will continue despite challenges posed by regulation and the ongoing pandemic.

Most notably, 68% say they expect deal volume to continue to rise over the first half of 2022, furthering a record-breaking year for M&A activity. The survey, conducted by Grant Thornton, polled 156 dealmakers from companies with revenues from $250 million to more than $5 billion also found that M&A professionals are looking beyond borders: Almost two-thirds (65%) of respondents expect an uptick in cross-border deal activity.

When asked in which industries they expect the most deal activity, respondents most frequently pointed to technology (53%), healthcare and life sciences (43%) and services (33%). Elliot Findlay, Grant Thornton’s national managing principal of mergers and acquisitions, said he sees many companies acquiring technology companies from outside the technology industry.

“The pandemic accelerated the transition from brick and mortar to digital for a wide range of businesses, so many companies are trying to catch up on digital transformation,” said Findlay. “Plus, with interest rates still low, buyers are more willing to pay for strong assets. We’ll just have to see where the ceiling for dealmaking is, but the height of that ceiling may depend on whether valuations continue to rise.”

According to the survey, just over half of dealmakers polled (53%) believe valuations will increase. Still, Eric Burgess, a partner in Grant Thornton’s Strategy and Transactions practice, notes that valuations are already at unprecedented levels.

“Companies are more eager to diversify their revenue streams than perhaps ever before,” Burgess says, “but it remains to be seen if valuations can get much higher. We’ve already reached a record level of dealmaking, and an increase in valuations will put us even deeper into brand-new territory.” ESG is top-of-mind

The M&A survey also found that environmental, social and governance (ESG) metrics are top-of-mind for dealmakers.

Almost all dealmakers surveyed (97%) say a target’s ESG program and reporting capabilities are important considerations in any deal. These findings are consistent with a 2021 Q3 CFO Survey, in which 87% of respondents said ESG is a significant consideration when it comes to corporate decision-making. This amplified attention toward ESG reflects both the need for top talent and shifting corporate priorities.

“Given the workforce issues confronting a lot of employers right now, how well a company treats its people can make a critical difference for a buyer,” said Findlay. “Most buyers don’t have a formal ESG due diligence process in place, but companies are moving in that direction.”

Carlos Ferreira, Grant Thornton’s national managing partner of private equity, said that private equity firms have a major role to play when it comes to ESG.

“Large private equity firms know their targets won’t have very mature ESG programs compared to larger organizations,” said Ferreira. “But those firms can help their targets create effective ESG programs in a way that private companies cannot.” Meanwhile, experts say the focus on ESG makes it more critical than ever to demystify what can be a complex space.

“Companies are getting feedback from a lot of constituencies -- their employees, customers, investors, even the public,” noted Jim Burton, a partner and leader of Grant Thornton’s ESG and Sustainability services.

“It’s important to remember you don’t have to address everything at once. Rather, an incremental approach to ESG will better position your organization for the long run. Do an assessment, find out what matters most to your key constituencies, and make sure you have the information and tools in place to set goals and measure against those metrics.”

Resiliency amidst supply chain challenges M&A professionals and Grant Thornton leaders both believe the effects of the ongoing pandemic will continue to impact dealmaking. Specifically, supply chain shortages created by COVID-19 remain a major concern.

“Sellers want to forecast what their results will be when they get their supply chains sorted out, but buyers aren’t taking that on faith,” said Burgess. “As a result, supply chain shortages are a major driver for earnouts right now.”

Yet concerns about the virus itself appear to be subsiding - at least for some dealmakers. Seventy-three percent of the private equity investors surveyed say they expect little to no disruption on dealmaking due to coronavirus cases in the U.S.

Ultimately, the M&A survey highlights the challenges dealmakers are anticipating as they emerge from a record-breaking year.

“M&A professionals have been adept at navigating everything COVID has thrown at them thus far,” concluded Findlay. “As businesses contend with a new COVID variant plus labor and supply chain shortages, it will be interesting to see how long the current dealmaking surge will last.

“On the other hand, we could see even more records being broken.”