C-Suite Series: Mergers & Acquisitions
UK M&A: two essentials for a successful buy or sell
Aon’s Jane Kielty – Chief Commercial Officer, and Charlie Garrood – Head of M&A and Transaction Solutions UK, look at how understanding ESG standards in the supply chain, and workforce resilience are both key for UK businesses looking to buy or sell in 2022
ESG within the supply chain
The second theme currently having an increasing impact on deal value, relates to staff resilience and retention. In a deal context, acquirers will be looking at how well a target has been able to retain their talent. If a company has a poor track record of holding on to their best people, or is spending a lot of money having to replace talent, that impacts the bottom line and limits the future growth ambitions of the business. It’s why the development of a resilient workforce is so critical. M&A processes can themselves be disruptive for a company’s workforce; the more resilient the workforce then the less impact the process will have on the business.
As Aon’s Rising Resilient report finds: “Organisations that take a proactive approach to creating resilience through meaningful health and wellbeing initiatives outperform their peers in terms of productivity, quality of work, talent acquisition and retention.” That means businesses need to look at creating a fundamental sense of security at work; a strong sense of belonging with the employer; and the adaptability and motivation employees need to reach their full potential. This is why areas like workforce analysis and cultural alignment are becoming a normal aspect of due diligence that buyers undertake when looking to acquire or merge with another business.
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The deal market boomed in 2021 according to Private Equity Wire which reported a 54% year-on-year jump in UK M&A deals in 2020/21, with deal values totalling c£290 billion.
That means more UK corporates will either be on the acquisition trail or looking to divest as they reshape the size and scopes of their activities to align with the rapidly evolving economies. While they will need to perform the usual due diligence, there is an increasing need to look outside the target’s immediate operating parameters and consider how the ESG (environmental, social and governance) performance of a target’s wider supply chain will impact the transaction. In addition, given the white-hot market for talent, reviewing how well a target has been able to retain its top employees will be key given how that can have a direct impact on value and is a factor attracting more attention from dealmakers.
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Aviva Investors’ 2022 annual letter sent to the chairs of all investee companies is explicit in its support for ESG stating that, ”the most meaningful and direct impact we can achieve comes from our commitment to fully integrate environmental, social and governance factors across investment strategies, and the targeting of ‘real world’ positive outcomes…”. In addition, it makes it clear that the ESG related actions of a business must extend beyond the business itself: “We will invest in companies that mitigate their environmental impacts while investing in their people, customers, suppliers and communities with a view to delivering sustainable long-term returns.”
The message reflects an increasing focus from institutional investors, including those putting capital to work through private equity firms, that they now require strong ESG standards including throughout the entire supply chain of organisations. Aon’s most recent C-Series report on Mergers & Acquisitions highlights the need for better visibility throughout companies’ supply chains, and advises potential sellers to get a handle on this well before they start thinking about exit: “Your tier-two suppliers and their network will start to drive the ratings you get … If you haven't thought about it by the time you come to exit, you could be saddled with a supplier’s environmental issue.”
Cyber has emerged as a critical ESG risk and there is a growing trend of companies being targeted through their third-party supply chains. Businesses who have onboarded new suppliers without completing comprehensive third-party due diligence are exposing themselves to an ever increasing risk. Ransomware, typically introduced via phishing attacks, is a common method used, but hackers are also exploiting insecure network protocols, unprotected servers, and unsafe coding practices. From a seller’s perspective if cyber risk is not properly mitigated it can go to value and in some instances entirely derail a transaction when identified through buy side due diligence. From a buyer’s perspective failure to gain adequate assurance can leave exposure to financial loss and potential regulatory fines, especially where data breaches fall foul of GDPR regulations, and this is on top of the potential reputational fallout.
Whichever way ESG risk manifests itself the conclusion is clear: it is critical for both vendors and buyers to extend the scope of their diligence beyond the target itself to scrutinise specific ESG subsets including supply chain. A failure to address ESG factors within that supply chain – whether related to the environment, social issues like working and safety conditions, or governance problems like cyber – will affect the ability to close a deal or realise full value from a transaction.
Going beyond the usual due diligence
Any business involved in the M&A process – whether buying or selling – must take every opportunity to maximise the value in the deal. There is of course standard due diligence to undertake across finance and legal issues for example, but the real winners will be the ones who go a step further to truly understand the ESG risks including in the supply chain, as well as workforce resilience. Failure to do so could be costly both in terms of realising the value from a transaction, or even a deal failing to get over the line.
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If your business is considering buying or selling, contact your Aon account executive to discuss how we can help your organisation maximise value and minimise risk from the M&A process.
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C-Suite Series: Mergers & Acquisitions
Better decisions for deal value
Access More M&A Insights
Contact Us
Legal
Privacy
Cookie Notice
Explore aon.com
Explore the Full Interactive Report >
Aviva Investors’ 2022 annual letter sent to the chairs of all investee companies is explicit in its support for ESG stating that, ”the most meaningful and direct impact we can achieve comes from our commitment to fully integrate environmental, social and governance factors across investment strategies, and the targeting of ‘real world’ positive outcomes…”. In addition, it makes it clear that the ESG related actions of a business must extend beyond the business itself: “We will invest in companies that mitigate their environmental impacts while investing in their people, customers, suppliers and communities with a view to delivering sustainable long-term returns.”
The message reflects an increasing focus from institutional investors, including those putting capital to work through private equity firms, that they now require strong ESG standards including throughout the entire supply chain of organisations. Aon’s most recent C-Series report on Mergers & Acquisitions highlights the need for better visibility throughout companies’ supply chains, and advises potential sellers to get a handle on this well before they start thinking about exit: “Your tier-two suppliers and their network will start to drive the ratings you get … If you haven't thought about it by the time you come to exit, you could be saddled with a supplier’s environmental issue.”
Cyber has emerged as a critical ESG risk and there is a growing trend of companies being targeted through their third-party supply chains. Businesses who have onboarded new suppliers without completing comprehensive third-party due diligence are exposing themselves to an ever increasing risk. Ransomware, typically introduced via phishing attacks, is a common method used, but hackers are also exploiting insecure network protocols, unprotected servers, and unsafe coding practices. From a seller’s perspective if cyber risk is not properly mitigated it can go to value and in some instances entirely derail a transaction when identified through buy side due diligence. From a buyer’s perspective failure to gain adequate assurance can leave exposure to financial loss and potential regulatory fines, especially where data breaches fall foul of GDPR regulations, and this is on top of the potential reputational fallout.
Whichever way ESG risk manifests itself the conclusion is clear: it is critical for both vendors and buyers to extend the scope of their diligence beyond the target itself to scrutinise specific ESG subsets including supply chain. A failure to address ESG factors within that supply chain – whether related to the environment, social issues like working and safety conditions, or governance problems like cyber – will affect the ability to close a deal or realise full value from a transaction.
ESG within the supply chain
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