Green M&A deals as possible drivers for value creation

Green M&A deals as possible drivers for value creation

The majority of researchers agree that fossil and non-renewable resources will not be sufficient to satisfy the global energy needs in the future. A transition to natural and renewable resources is necessary to preserve the environment, due to the scarcity of traditional sources. In this context, green economy can be considered a viable alternative paradigm that preserves growth expectations while protecting the earth’s ecosystems.

Climate change and scarcity of resources are among them raising an increasing concern because of their impact on all three fields. These issues have taken global dimensions and posed new challenges for governments and public or private institutions all over the world. A commonly shared idea is that a transition to natural and renewable resources, which would allow preserving the earth’s ecosystem and potentially become drivers of economic growth, is essential in the reference historical period.

In the natural and renewable resources sector, M&A deals are increasing worldwide in recent years. The growing significance of the environmental problem may be one, but not necessarily the exclusive, reason for green M&A transactions increasing; it could be interesting to investigate if firms perform these transactions just for a moral aim, to improve their CSR degree or in order to achieve financial goals, too.

The available literature confirms that M&A transactions produce a positive effect on target firms and it is empirically demonstrated that they create value.

Instead, there is no unequivocal opinion about the effects of M&A transactions on bidder firms, especially the impact of acquisitions on their performance and stock price. The dominant opinion in the available literature is that M&A transactions cause a reduction of value for the bidding firms in contrast with an increase of value for the target firms, because market allocates synergistic gains to the latter.

We tried to investigate share price reactions to M&A deals in the renewable energy sector. Our attention was mainly focused on the impact on acquirer.

Regarding our sample of deals, announced or completed, between January 2000 and December 2014, there is (weak) evidence of value creation for bidders caused by the deals, given that the CAAR[1] are positive and statistically significant and this finding is in accordance with several studies performed in the green M&A field.

There is no evidence that such deals destroy value for acquirers as the majority of authors sustain. Thus, we could interpret the latter as a weak, but important, positive indication to shareholders and investors concerning the sustainability of returns in this sector, fundamental to encourage the transition from fossil to renewable energy that the world is facing trying to attract private investments.

Empirical evidence demonstrates that firms characterized by a high CRS level realize positive stock returns, while firms characterized by a weak or absent environmental management present negative stock returns. This could be another important reason why M&A in renewable industry are rising yearly.

[1] CAAR: Cumulative Average Abnormal Return, obtained using the Event study method. 

Author: LUM University