As M&A Activity Slows, ESG Deals Buck The Trend With Plug And ChargePoint Commanding Huge Premiums

Due to the difficult macroeconomic headwinds, the merger and acquisition (M&A) sector has cooled down compared to 2021.

What Happened: According to the Boston Consulting Group, during the first seven months of 2022, there were more than 22,000 deals announced, totaling $1.85 trillion in value.

That's in line with pre-pandemic averages, but compared to the dealmaking frenzy in 2021, deal volume in 2022 has declined by 13% and deal value has fallen by 32%. Per the report, companies in the environmental, societal, and governance (ESG) space will lead the way in the next wave of dealmaking.

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The report found 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.

Despite unfavorable macroeconomic conditions, dealmakers are realizing the potential future value of these firms.

“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," BCG global head of M&A Jens Kengelbach says.

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Why It Matters: There's a clear upward trend in ESG-related deals over the past decade, as the strongest acceleration occurred in 2021 since deal volumes jumped by 35%.

Additionally, the volume of these green deals increased by 22% from 2019 to 2021, which indicates that green deal-making is gaining momentum as a strategic lever for environmental transformation, as reported by Boston Consulting Group.

According to the report, the energy and utilities industry had the highest share and largest increase in green M&A deals, seeing its share of green deals grow from 20% in 2011 to almost 40% in 2021.

Daniel Friedman, a BCG managing director, notes how green deals often command a substantial premium, as high as 20% to 30% in certain industries.

According to BCG's research, "in many cases, the price is justified," he says.

Although prices for green deals exceed the market average of roughly 7% over the past three years, green deals generally create more value than non-green deals when announced and over the upcoming two years.

ESG-Focused Names With M&A Prospects: As carbon-emitting energy firms look to become carbon neutral, the justification for acquiring renewable energy names to add value is heating up.

Recently, BP BP acquired renewable natural gas player Archaea Energy LFG for a total deal value of $4.1 billion, including about $800 million of net debt.

Electric vehicle charging system infrastructure and cloud-based services that enable consumers to locate, reserve, and authenticate EV charging such as ChargePoint Holdings CHPT and Blink Charging BLNK could be prime acquisition targets for top automobile makers such as Ford Motor F or General Motors GM.

The big three automakers are transitioning their fleets to focus more on electric vehicle production to meet the changing societal demands and government policy, which could lead to the need for more charging infrastructure.

Additionally, Plug Power PLUG is building an end-to-end green hydrogen ecosystem from production, storage and delivery to energy generation. On Oct. 13, 2021, Plug and Phillips 66 PSX announced a memorandum of understanding to collaborate on the development of low-carbon hydrogen business opportunities.

As large oil and gas firms rake in record levels of revenue due to volatile commodity prices and supply crunches, purchasing solar technology and green energy service providers like SunPower SPWR or Sunrun RUN, could be future prospects for firms with plenty of capital.