Creating value from green M&A

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The worldwide transition to net-zero greenhouse gas emissions will require shifting more than $100 trillion in corporate assets to low-emissions models. This reallocation is already spurring significant M&A activity. Today, across the globe and industries, companies increasingly see sustainability-linked (green) M&A as a way to catalyze their strategies, stimulate growth, and improve operations while raising their environmental, social, and governance (ESG) profiles. Consequently, they are pursuing deals linked to elements of the broad global energy transition, such as decarbonization from new technologies for power generation, mobility, heating, energy storage, sustainable feedstocks, and circular business models (for example, recycling, reducing, reusing).

Acquirers that incorporate green deals in a programmatic approach on average outperform their peers in excess total shareholder return.

McKinsey data shows that acquirers that incorporate green deals as part of a programmatic M&A approach on average outperform their peers in excess total shareholder return (TSR). However, similar to broader M&A trends, the performance of individual green deals varies widely. This emphasizes the need for a tailored M&A strategy and execution. For instance, before embarking on a due diligence journey, companies need to articulate a clear deal rationale based on a consistent corporate strategy. Potential rationales include tailored versions of participating in end markets with sustainability tailwinds, using greener product production methods, or incorporating green feedstock. These deals may also need an enhanced integration approach including, for example, focusing on maximizing top-line synergies, keeping the target company operations separate for longer, making an extra effort to retain critical talent, and bridging potential cultural differences.

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Sustainability is now a strategic objective for many, with M&A as a key accelerator

Leading companies no longer see sustainability only as an obligation to manage risk and improve their reputations. They actively seek to outperform their competitors by embedding sustainability in their corporate strategies. Decision makers increasingly recognize that value creation and sustainability go hand-in-hand. Sustainability accelerates growth, leads to higher ROIC, improves operational efficiency, increases talent retention and employee engagement, and can even lower the cost of capital. We recently published our perspectives on the link between profitable growth and advancing sustainability goals and ESG more broadly. Our analysis showed that companies that achieve better growth and profitability than their peers while improving sustainability and ESG delivered two percentage points of annual TSR above companies that outperformed only on financial metrics.

M&A can complement these strategies by accelerating the sustainability transformation—something an increasing number of companies realize. Our proprietary analysis shows that the share of green M&A deals valued at over $100 million has increased by 66 percent, from 5.3 percent to 8.9 percent (in terms of deal volume) since 2013 (Exhibit 1). A similar trend holds for the value of deals, which increased from 3.9 percent to 6.7 percent. (Due to some non-sustainability-linked mega deals, 2023 deal value was down from 2022.)

Both the value and volume of green deals have increased since 2013.

The past ten years show a rising share of green deals in many sectors, albeit from different starting positions. The trend toward green M&A is observed most frequently in sectors related to energy and materials, such as electric power and chemicals, but other sectors—such as automotive, construction, consumer electronics, food, and financial institutions—are increasingly participating as well. For example, in the utility and energy sector, the share (in terms of deal volume) rose from 27 percent to 35 percent. In automotive, it rose from 8 percent to 14 percent.

This increase is also happening across regions, but with different industries predominating in different regions. In EMEA, for example, the increase was strongest in automotive, utilities, and energy (excluding oil and gas), and construction. The average share of green deals was five to six percentage points higher than in 2013 to 2015.

Green M&A can help companies outperform the market, if done right

McKinsey research has shown that the most valuable M&A strategy is programmatic M&A. It outperforms all other strategies, with the highest excess TSR and lowest volatility. In a programmatic approach, companies carefully choreograph a series of deals based on a specific business case or M&A theme, rather than relying on single large transactions, selective deals, or pure organic growth.

Our latest research shows that, since 2013, programmatic acquirers that included at least one green deal above $100 million in value performed even better, on average (Exhibit 2).

Taking a programmatic approach to green deals yields better outcomes than taking other M&A approaches, on average.

Across all categories, the TSR outperformance is driven by a combination of higher revenue growth and resulting multiple expansion; margin growth is similar.

Importantly, the variation in performance remains high, and conducting green deals is not a winning recipe by itself. In fact, some programmatic green deals destroy value. Even though they show lower TSR volatility than other deals, the standard deviation for programmatic acquirers with a focus on sustainability is still around 8 percent. For all M&A strategies, the standard deviation is significantly higher than the median returns. Therefore, programmatic green deals need to go hand in hand with a variety of factors, such as acquisition price paid, market environment and cycle in the target industry, operational excellence capabilities, and many more. At the very least, companies pursuing this strategy need to have a compelling deal rationale aligned with a winning corporate strategy, candid due diligence, and a top-notch integration approach tailored to the rationale.

A clear deal rationale is a critical component of green deals

In green M&A, creating value often relies on using a deal to truly transform the core business, or at least deliver significant revenue synergies. In creating their deal rationale, acquirers should be explicit in what they believe the deal will bring—and this could be quite different from other types of M&A. They will also need to be rigorous in examining what downside risks they need to address. Since the target may be in a completely different business, the acquirer may need to acquire new expertise for the due diligence process. For example, a conventional power company seeking to acquire a renewable project developer will need specific capabilities to assess the value of the pipeline. This could also include expertise in land selection, permitting, procurement, and other areas.

Since the target may be in a completely different business, the acquirer may need to gain new expertise for the due diligence process.

Across sectors, we have seen five broad categories of deal rationales that acquirers can define according to their specific needs, given their various contexts, such as their company, industry, value chain, or geography.

  1. Increase exposure to sustainable end markets. This is an often-cited strategy that directly affects a company’s growth prospects and valuation. Prior McKinsey research on specific sectors, such as chemicals, showed that companies with higher exposure to sustainability tailwinds, such as decarbonization and circularity, showed higher growth and shareholder returns. Examples of such deals could be a basic materials company shifting towards mining lithium to power electric vehicles, or a construction company acquiring a competitor focused on increasing energy efficiency in buildings.
  2. Pivot toward lower carbon-intensive production technologies by divesting non-core, high-emission assets, or acquiring a player with advanced operational capabilities and processes. In a world of high energy and feedstock cost differences across regions, this pivot is increasingly critical for energy-intensive industries, such as steel, other metals, paper, and chemicals.
  3. Secure advantageous green feedstock. Examples might include a chemical company acquiring bio-based feedstock, or an industrial company acquiring access to green hydrogen sources instead of gray sources.
  4. Inorganically build a reliable and green energy supply. We have seen selected manufacturing companies go beyond purchase and offtake agreements with energy suppliers and instead directly acquire electricity generation assets for their major sites.
  5. Enhance circularity of the product portfolio. This means acquiring recycling or carbon-capture capabilities inorganically, limiting downstream emissions. Recyclable plastics provide an opportunity, among many others.

Integration in green M&A requires a differentiated approach

The best strategy is meaningless without rigorous execution. McKinsey has previously outlined general best practices of merger integration success, and these generally also apply in green deals. However, these deals require some additional considerations.

For instance, in green M&A—especially in the acquirer’s first large green deal—we frequently see an approach that does not seek to fully integrate the target into the acquirer right away, but keeps it at arm’s length—even into the mid-term time horizon. This approach can include how the target is represented to the external world, and also its internal ways of working. Acquirers take time to align the operations and cultures of the businesses.

One reason acquirers do this is to retain critical talent in the target company, which may be active in a field where the acquirer does not yet possess distinctive expertise. Indeed, the acquirer’s future success may rely more on the target’s personnel than in other growth acquisitions. A combustion-engine technology player that was acquiring a developer of vehicle battery technology actively addressed talent risk by building targeted growth plans for key people in the acquired company from day one. This highlighted the importance of the acquired business and its people to the new overall corporate strategy.

Beyond the operational integration, value creation in green deals often depends on driving synergetic top-line growth in a new business line or ensuring that a more sustainable product outgrows a less sustainable alternative. While in many acquisitions, cost synergies are a critical part of the business case, in green deals, we have typically seen that transformational top-line synergies have higher relative importance.

Finally, cultures in green deals may differ more than in typical industry consolidation deals, requiring more active integration efforts. When a fossil-feedstock player acquired a plastics recycling company, their mission and vision statements were far from aligned. To begin the integration, it was critical to resolve these fundamental issues within the top team. Beyond that, cultural differences more often arise from differences in the day-to-day management practices and ways of working. For example, the plastics recycling company made decisions more swiftly because it was used to a smaller decision circle than the larger player, which had a heavy asset base. In this case, a successful integration required raising awareness of the combined company’s culture and converging the previous cultures into it.

Cultures in green deals may differ more than in typical industry consolidation deals, requiring more active integration efforts.

Of course, companies need to tailor their integration approach to the deal rationale and strategic context. While the integration governance of these deals does not fundamentally differ from others, we often see companies spending more time on mutual discovery of business models, placing additional emphasis on revenue creation, and putting a sharp focus on talent selection and retention, as well as culture.

Sustainability-linked green M&A can be an important enabler for companies seeking to be at the forefront of long-term value creation in their industries. To maximize the chances of success, leaders develop and implement programmatic M&A strategies leading to precise deal rationales. Later in the process, companies need tailored integration planning and execution that caters to the specific themes of green deals.

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