Walking your talk in ESG is harder than you think, but you must keep trying: An example in Merger & Acquisitions …

In our last article, we talked about the need to become excellent at reading the landscape in order to inform a forward-looking development strategy in the Wealth and Asset Management industry[1]. The benefits of doing so are the differentiation from being just a good company to being a great one – but what happens if you don’t adopt this new reading strategy? As a way of illustration, we want to reflect on a story currently developing in a different industry than ours, that however offers in our mind an opportunity to draw some valuable lessons our industry can benefit from.

A gripping saga is unfolding in France right now, where two of the largest water and waste management companies, Veolia and Suez, are engaged in merger conversations. There are four players in this drama. Veolia has launched a takeover on Suez, which is planned as follows: Purchase from Engie, another large French energy player, the shares they own in Suez; and then, sell Suez’s water management activity to an infrastructure management fund, Meridiam. Veolia’s merger rationale is to create a powerful conglomerate, fit to compete on the global scene; they have also talked about safeguarding the integrity of the Suez group, which has plans to disinvest from some of their current activities. From the viewpoint of Engie, this is a golden opportunity to generate much needed cash, and from Meridiam’s viewpoint, an opportunity to add valuable assets to their investment portfolio. On paper this appears to be a win-win scenario but not when you scratch the surface.

Most interestingly, Suez is protesting the merger and fighting it tooth and nail. They question Veolia’s merger rationale and claim the transaction would result in the loss of 10,000 out of 90,000 Suez jobs. The question is asked in Veolia’s camp: How dare Suez be so ungrateful to Veolia, which proposes to share their crown once this merger settles?

Whatever the outcome of these conversations, what is striking is that this transaction seems to be motivated only by financial interests and as a result, is labelled all over the French press as a “hostile” take-over. This does not match with the image and profile that both Veolia and Suez have cultivated and forged over the last decade. As the leaders in industries such as water and waste management, they have built a very strong narrative around sustainability and environment. In addition, the Meridiam funds have built a reputation as a solid ESG investor. But there we go, as soon as a merger conversation emerges, and power and financial interests are at stake, all the hard-built sustainable façade crumbles, and we see the old school aggressive behaviour take center stage. Hence the “hostile” label given by the French press.

We are not sitting in the strategy and board rooms where these merger conversations are taking place, therefore can only reflect on what we can observe from the outside. Furthermore, we certainly do not intend to question any of the arguments or rationales presented by the parties, let alone take side. Nevertheless, in an environment where ESG and sustainability principles increasingly guide and dominate all conversations, behaviours and decisions, we cannot but help ask a few questions, which could probably not be escaped nowadays in the Wealth and Asset Management industry. We would group them under three headings: Stakeholder management; culture fit and governance process.

• Stakeholder management: Did you get everyone’s buy-in?

Veolia seems to have a firm idea and vision on how their future conglomerate should look like, in size, shape and form. Notwithstanding the financial [and confidentiality] questions, have these ideas and vision been discussed, shared and developed further internally, inside and outside the boardroom? Have the key constituencies of the Veolia ecosystem i.e. their personnel, clients, providers, regulators, shareholders and so forth, been consulted and given a chance to contribute to the vision of their future in an inclusive way? If not, why would they not be qualified to so contribute? Furthermore, why not extend this approach by consulting the other key stakeholder in this transaction, i.e. Suez? Again, we don’t know whether this happened, but we are asking the question under an ESG and sustainable angle, which all parties claim to be adhering to.

• Culture fit: Does everyone identify with your vision?

One would assume two companies operating in the same space would share similar vision, values and purpose but is this truly the case? Has time been spent with all stakeholders of both parties to understand where their respective cultures intersect and can be strengthened by each other’s contribution? Is the resulting culture seen as a strong support to the development and deployment of the shared strategic vision developed during the stakeholder management process? How do they intend to bring along all stakeholders to provide credence and further substance and depth to the emerging joint culture?

• Governance process: Who is making the decision?

Judging by the press reports we have read, all decisions on this merger are driven by strong-willed CEOs, supported by the respective board of directors. Aside from the reputational risk and the consequences of negative media coverage, we are asking ourselves, has a process been put in place allowing all stakeholders to voice their opinions, and why not cast their votes? Furthermore, should this transaction be judged only – as it seems to be – using financial criteria? How about judging this transaction based on the support it gets from stakeholder, and the greater impact it has on the firms’ ecosystems, once again, following the spirit of ESG and sustainability?

Walking the talk

We don’t claim to know how best to conduct and execute a merger transaction. However, we dare to suggest that the approach outlined above can be an example of how to avoid turning a merger transaction into a so-called “hostile” raid when operating from an ESG perspective. It does not call into question the need for a sound financial due diligence review ahead of the transaction, but it proposes to augment the merger process by enlarging the review landscape and the inclusion opportunities. Finally, it calls for flexibility and creativity, as it offers the opportunity the rewrite the playbook of a merger process and take into account the interest of all stakeholders of the ecosystems impacted.

“Hostile takeover” does not sound very ESG-friendly. Far from it. But executing a merger in a way no longer compatible with the landscape you operate in exposes you to the risks of falling through the cracks. It is true in the water and waste management industry; it certainly is also true in the Wealth and Asset Management industry.

[1] “The path to great during uncertainty in Asset and Wealth Management,” by Luuk Jacobs, September 17^th, 2020