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ESG now equally important as financials in M&A due diligence, says Aon

Aon has published a report about value creation and risk in M&A, providing clear strategies for buy- and sell-side dealmakers to follow in light of the complex nature of M&A. 

Aon has published a report about value creation and risk in M&A, providing clear strategies for buy- and sell-side dealmakers to follow in light of the complex nature of M&A. 

The report identifies three features of due diligence unfamiliar to dealmakers just a few years ago, and provides advice on how to tackle each with enhanced insights:
  
The prominence of Environmental, Social and Governance (ESG) considerations;

The centrality of digital technology to most business models; and

New dynamics in public markets.

Based on interviews with 21 industry experts, the report highlights the rising influence of these complexities on M&A and how these factors require new ways of thinking about value creation and risk to shape better decisions. Please download the report here.

Alistair Lester, Global Co-CEO of M&A and Transaction Solutions at Aon, says: “Gone are the days of solely focusing on the P&L, cash flow and balance sheet to understand deal value – this report shows that traditional approaches to due diligence are no longer enough. Today, sellers and buyers must assess a business’ ESG practices, digital capabilities, technology and intellectual property just as closely as they scrutinise financials. Expert insight alongside public and client-specific data is necessary to help quantify and value assets, identify and mitigate risks and ensure proper disclosure.” 

The report calls for a new approach to ESG due diligence, which now goes far beyond box-ticking, requiring the same level of detail as financial considerations. Part of this includes understanding ESG risks that are difficult to measure and quantify as the market evolves and decision makers navigate new forms of volatility. 

Thinking about ESG in material terms is key, according to the report. This means embedding ESG targets within the business as with financial targets, so it becomes more than an abstract concept in the due diligence process. Adoption of taxonomies and regional directives that support sustainable investments, such as climate-based thresholds, are a big step forward in shaping the evolution of ESG diligence. 

With digitally enabled business models set to account for 70 percent of new value in the global economy in the next decade, the report explores the buy-side focus required on digital assets and capabilities of the target business. Obtaining a thorough analysis of the technology stack, digital KPIs and cyber risks will be critical in determining and achieving business forecasts as bidders assess whether to make an acquisition. 

The report outlines the importance of digital performance in understanding the potential for scale, as systems in place must be capable of handling greater activity as well as integrating future acquisitions. Understanding this rests upon scrutiny of the target’s existing infrastructure including servers, cloud footprint and use of open-source technologies. 

A recent surge in SPAC activity is presenting new risks for deal participants, according to the report. In addition, demands of activist shareholders are on the rise in areas such as ESG, impacting management decisions to sell or buy. The report outlines how dealmakers can navigate this complex landscape, understanding how corporate decisions and new dynamics in public markets are being shaped today.  

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