Environmental, social, and governance (ESG) acquisitions: Deal structure and outcome

• Published in: Business strategy and the environment 2024-09, Vol.33 (6), p.6010-6028
• Main Authors: Gordano, Silvia, Bauer, Florian, King, David R.
• Format: Article
• Language: English
• Subjects: Acquisition; corporate social responsibility (CSR); Embeddedness; Environmental performance; environmental social and governance (ESG); ESG capabilities; Governance; mergers and acquisitions (M&As); socially responsible investment (SRI); Stakeholders; Target acquisition
• ISSN: 0964-4733; 1099-0836
• DOI: 10.1002/bse.3791

Environmental, social, and governance (ESG) expectations from stakeholders affect firm decisions. We investigate ESG acquisitions with a focus on how a pre‐deal ESG gap influences how acquirers' structure ESG deals strategically and their outcomes in terms of combined ESG performance post‐acquisition. Drawing on relative capabilities and signaling research, with an international sample of 340 ESG deals, we find that acquirers with a higher ESG score relative to the target (i.e., low‐ESG acquisitions) are more likely to target smaller firms, use cash as method of payment, and complete deals faster. We also show that low‐ESG deals lead to an average increase in the combined entity's ESG performance in the 3 years after the acquisition, thus indicating ESG corrective acquisitions as an opportunity for ESG capabilities transfer and improvement. However, effects are influenced by an acquirer's embeddedness in the European institutional context where ESG stakeholder expectations are more developed.