Mergers & Acquisition Activity

Sustainability is no longer an afterthought in the corporate world. It’s front and center on the minds of leaders looking to position their companies well for the future. It entails a rapid and wide-ranging shift in how big companies do business. A shift this drastic can sometimes be completed in-house with existing resources and capabilities. But sometimes, a big brand needs to look outside of its walls to improve its business model. This is where mergers and acquisitions, also known as M&A, come into play.

M&A activity involves two different companies combining in some form. A merger is when two similarly sized companies combine to form a new bigger entity. An acquisition is when one bigger company buys a smaller one. M&A is quite common in the corporate world, and the motives used to justify it are wide-ranging.

Sometimes, companies simply want to improve their efficiency. Many of a company’s costs can become unnecessary as a result of M&A activity. For example, two similarly sized companies might not need to keep their separate human resources departments, allowing them to cut costs without hurting their core business.

Other times, companies engage in M&A activity because they have excess cash lying around that they can deploy to make money. As such, M&A often proliferates when an industry is doing well or when an economy is doing well, both of which provide the conditions necessary to take bigger risks.

M&A is on the rise in the sustainability realm for some of these reasons. Some fast-growing companies want to be more efficient. Others want to take advantage of the cash they’ve earned to expand their impact. But right now, a combination of unique factors is presenting some other motivations for sustainability M&A activity.

Investors

In 1970, a famous economist named Milton Friedman wrote an article in the New York Times whose headline summarized Friedman’s key point: “The Social Responsibility Of Business Is to Increase Its Profits”. His article changed the business world. It led to a laser-like focus on maximizing profits for shareholders. Friedman’s views rested on the assumption that what’s good for shareholders is what’s good for society. In short, a rising tide lifts all boats.

This shareholder-centric view still holds wide sway across the corporate world, but a half-century later, the perception of the role of business is changing. No longer are businesses seen as solely tasked with growing profits for shareholders. Now, they are seen as agents of progress affecting their employees, suppliers, customers, communities, and the planet.

At its core, sustainability is the ability to sustain all of those things. Whereas the business community used to assume that thinking beyond profit maximization was a distraction that went against shareholders’ best interests, there’s growing recognition and proof that a sustainability focus helps rather than hurts a company’s ability to both do well by its shareholders and do good for the greater good.

Investors often use a set of criteria called ESG - which stands for environmental, social, and governance factors - to measure a company’s commitment to this stakeholder-centric vision of how a company should operate. It’s more broadly understood nowadays that a sustainability focus improves shareholder value by way of creating new business opportunities among other means. Plus, it’s easier than ever to precisely quantify that impact. Investors often screen companies by their ESG metrics, and the data shows that companies that perform better on ESG make more money for their shareholders.

For example, Rockefeller Asset Management and the NYU Stern Center for Sustainable Business collaborated to examine the relationship between ESG and financial performance in more than 1,000 research papers from 2015 to 2020. They found a positive relationship between ESG and financial performance for 58% of the “corporate” studies focused on operational metrics such as ROE (return on equity), ROA (return on assets), or stock price.

The investing community knows and cares about all of this too and knows how to measure each of these things better than ever before. Investors don’t care about the past; they care a good amount about the present and a whole lot about the future. And by virtue of physical necessity (i.e. the increasingly dire effects of the climate crisis) and changing perceptions of what businesses can and should do to make a positive impact, sustainability can no longer be ignored in earnings reports or shareholder meetings.

In sum, M&A allows companies to both bolster their sustainability bona fides and appear more attractive to investors. Investors in big companies care a lot about sustainability because they have to and because they know it’ll make them more money.

Combining Strengths Of Big And Small Companies

Another key driver of sustainability-focused M&A activity is a bit more timeless: the ability to combine the strengths of a bigger company with the strengths of a smaller one. Quite simply, big and small firms have complementary strong suits that apply to sustainability as well.

Smaller companies often have innovative technology, unique customer understanding, and sharp talent behind it all. Bigger companies know how to efficiently get goods and services to market and then market their wares by way of their reach and brand image. In sustainability, what fuels strong sales is not always what you’re selling but rather being able to convey your offerings in a way that resonates authentically with customers. Sometimes, being healthier to the planet is the appeal. Other times, that’s just a side note. No matter what, big companies usually have great leverage to bring innovative sustainability solutions to bigger markets, translating to more sales and more impact.

Furthermore, sustainability businesses often grow by being more in-tune with the needs and wants of those valuable and increasingly numerous customers who care about the businesses and causes they support. These upstarts lack the incumbency and brand positioning that a bigger firm can bank on to generate sales. They need to understand what customers want, whether those customers know it or not. And while those insights might be best developed before a company has the luxury of depending on its size, those insights are key in any business, big or small.

In October 2020, automakers BorgWarner and Delphi Technologies completed a $3 billion merger that symbolizes how two different companies can combine to complement each other’s strengths and create value. The new combined company expects to drive growth of hybrid and electric vehicle products, particularly in electrified propulsion systems, while maintaining some of its still-profitable legacy automotive lines.

Upon acquiring Delphi, BorgWarner said “Delphi Technologies brings industry leading power electronics technology and talent, with an established production, supply and customer base.” BorgWarner recognized that in order to capitalize on an existing growth trend in the electric vehicle industry, the technology and talent added by way of acquiring Delphi will prove invaluable.