• Deal Volume in 2022 Declines 13% and Deal Value Falls 32% Versus 2021
• New Report from BCG Forecasts That ESG Considerations Will Motivate an Increasing Number of Deals in the Face of Challenging Macroeconomic Conditions

The global M&A market has cooled relative to 2021’s frenzied pace of dealmaking, with challenging macroeconomic conditions putting an end to the buying spree that followed the easing of COVID-19 restrictions. In the first seven months of 2022, companies announced more than 22,000 deals, with a total value of $1.85 trillion—a level of M&A activity more in line with pre-pandemic averages than with the previous year—according to a new report by Boston Consulting Group in collaboration with Professor Sönke Sievers of Paderborn University.

BCG’s 19th annual analysis, titled “The 2022 M&A Report,” forecasts that environmental, societal, and governance (ESG) considerations will motivate an increasing number of deals, despite unfavorable macroeconomic conditions. The report finds that the global number of ESG-related deals rose from about 5,700 in 2011 to an all-time high of about 9,200 in 2021—a 60% increase. The volume of these deals as a share of all M&A activity rose from 12% in 2001 to 17% in 2011 and then rose further to 22% in 2021, suggesting that more dealmakers are recognizing the value-creating potential of these transactions.

“M&A activity in 2022 has slowed relative to 2021, with deal volume and deal value down 13% and 32%, respectively,” said Jens Kengelbach, BCG’s global head of M&A and a coauthor of the report. “However, even in today’s environment of high inflation, rising interest rates, and slowing economic growth, we see longer-term trends that are conducive to deal activity. The number of ESG-focused deals has been steadily rising for 20 years, and the number of environmental-related deals has doubled. Beyond the traditional motivations, sustainability is gaining importance as a reason to acquire or divest businesses.”

Green Deals Are Gaining Traction

BCG’s analysis revealed a clear upward trend in ESG-related deals over the past decade, with the strongest acceleration occurring in 2021, when deal volumes jumped by 35% following two softer years for broader M&A activity and ESG transactions.

Although environmental-related deals (that is, “green deals”) account for only a small fraction of all M&A transactions, they have increased in recent years— rising to 6% in 2021 after hovering at 5% from 2011 through 2019. The 20% increase from 2019 to 2021 indicates that green dealmaking is gaining traction as a strategic lever for environmental transformation.

See related article: A Fifth of Retail Banks Plan to Significantly Increase Spending on ESG

Green M&A has been growing particularly quickly in industries that are at the forefront of the energy transition and in emerging markets. Over the past ten years, the energy and utilities industry had the highest share of green M&A and the largest increase, seeing its share of green deals grow from 20% in 2011 to almost 40% in 2021. According to the report, the region with the highest level of green M&A activity in 2021 was the Middle East. More than 10% of deals in that region in 2021 were environmental-related, following a steady share of around 3% to 5% since 2014. Asia-Pacific (especially China) was the second-most active region, with a green deal share of approximately 8% in 2021.

Do Green Deals Create Value?

As green deals become more popular, they are becoming more expensive. Average acquisition prices for these deals exceeded the overall market average by approximately 7% over the past three years, with premiums of 20% to 30% in certain industries.

Nevertheless, BCG’s analysis disclosed that despite the substantial premium they often command, green deals generally create more value than nongreen deals upon announcement and over the ensuing two years. By analyzing cumulative abnormal return (CAR) for three-day periods before and after a deal announcement, BCG found that the median CAR of environmental-related transactions (1.0%) is significantly higher than that of nongreen deals (0.6%). The report also determined that the median two-year relative total shareholder return (rTSR) of green deals (0.6%) exceeds that of nongreen deals (0.4%).

“Green deals often command a substantial premium—as high as 20% to 30% in certain industries—but our research shows that, in many cases, the price is justified,” said Daniel Friedman, a BCG managing director and partner and a coauthor of the report. “In both the short term and the longer term, the message is clear: companies that use the right approach to green dealmaking generate higher returns.”

Source: Boston Consulting Group