Successful M&A deals contribute to firms’ environmental performance

A new study from the Mergers and Acquisitions (M&A) Research Centre at Cass Business School has found that a firm’s environmental performance improves after a successful M&A deal and this, in turn, generates a positive outcome for wider society.

Green Business: The Environmental Impact of M&A examines the environmental impact of firms involved in acquisition deals – important corporate actions that may lead to structural changes in the acquirer’s business and operations.  The study explores if environmental performance changes before and after a deal and if this change contributes to an improvement in the environmental standard of the firm.

The researchers used a sample of acquisition deals at US public companies from the Thomson Reuters Securities Data Company (SDC). The sample included completed deals with transaction values greater than $1 million during the period of 1996 to 2013 and which involved a change of control.

They found that:

• Prior to the deal announcement, acquirers on average exhibit higher environmental standard than targets.
• Acquirers generally have an improvement in their performance in the post-deal period compared to their respective pre-deal standard.
• Better post-deal acquirer financial performance contributes positively to changes in environmental scores, demonstrating the importance of having economic resources for making environmental commitments.
• Acquirers with prior deal experience have a better ability to manage and improve a firm’s environmental performance after deal completion.

Lead author Dr Zhenyi Huang said the report comes at a time of increasing awareness from both government and society about the importance of environmental issues including climate change, global warming and pollution and therefore the study has important implications for firms involved in M&A deals.

“Although many deals fail to deliver the expected gains due to problems such as integration obstacles, if they do manage to overcome such challenges and successfully generate values, the economic resources created can be utilised to boost a firm’s environmental standard and have further benefits for society,” she said.

Dr Huang said firms and managers planning M&A deals should now examine the environmental standards and practice for both acquirers and targets from the very early stages of the deal process.

“Deal managers should make an effort to learn the skills required to deliver effective allocation and utilisation of pooled resources so any financial values created can contribute more efficiently to a firm’s environmental performance.

“Our study also recommends that firms should manage their environmental policies more effectively alongside other corporate and financial decisions, such as debt policy and cash holdings, because those factors do influence each other,” she said.

Read the report

Read Green Business: The Environmental Impact of M&A here.  The authors are Professor Scott Moeller and Dr Zhenyi Huang of the M&A Research Centre at Cass Business School.

Case study

One of the firms used as a case study in the report includes Pfizer Inc’s $68 billion acquisition of Wyeth.

Based on the Environmental Social Governance (ESG) scores reported by the MSCI ESG KLD STATS database, prior to the deal, Pfizer had an environmental score of two, and an overall ESG score of two. Within the scope of environmental practice, Pfizer has a score of one in its climate change policies and a score of two in its overall environmental management system. These positive scores indicate that strengths outweigh concerns in these areas.  Pfizer rated minus one in its environmental regulation score prior to the deal, indicating a concern of the company in this area.

Three years after the deal completion, with a superior financial performance, Pfizer had a boost on environmental standard to the score of 4, and with an overall ESG score of 8. This improvement in Pfizer’s environmental and overall ESG scores was also consistent with their internal corporate social responsibility policies that put the management of their ESG standard as one of the major corporate goals, as discussed in their Annual Report.