The Role of ESG Performance in M&A Decisions : Evidence from Acquisition Premia

Abstract

Assuming the perspective of acquiring firms, this thesis explores the role of ESG performance in M&A decisions. The core of this thesis is to investigate the relationship between the ESG performance of target firms and acquisition premia in M&A transactions. In addition, the underlying rationale for integrating ESG characteristics in M&A decisions and particularly in the negotiation of purchase prices is examined. In this regard, the areas of value creation through ESG engagement, the integration of ESG characteristics into due diligence, and the development of the role of ESG performance in the M&A industry are addressed. The results of the mixed research approach, which combines quantitative analyses based on a sample of 600 M&A transactions announced between 2008 and 2019, with a qualitative analysis based on a guided interview approach, indicate that there is no clear linear relationship between ESG performance and acquisition premia. In this regard, the results of the qualitative analysis suggest that the ambiguous relationship between ESG performance and acquisition premia may be related to the intangible nature and limited quantifiability of ESG characteristics. However, the ESG performance of target firms seems to be a negotiation factor in acquisition price negotiations as acquiring firms demand acquisition price discounts for target firms with a particularly poor ESG performance. In general, the ESG engagement of target firms tends to be viewed as a value-enhancing instrument by acquiring firms, as it creates value by mitigating ESG related risks and creating opportunities that result from considering ESG issues in business decisions. Besides, the obtained results imply that the stakeholders involved in M&A decisions attribute informative value to ESG characteristics that is relevant for M&A decisions. Although the integration of ESG characteristics into due diligence is still in its infancy, it appears that ESG characteristics are increasingly assessed in due diligence. Hence, ESG performance is moving towards taking an increasingly central role in the M&A industry which can be expected to persist as regulatory bodies, investors, and the general public promote respective development.