Diversity in acquisition strategy

May 2023  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

May 2023 Issue

Diversity and inclusion (D&I) has cemented its position on the boardroom agenda in recent years. According to Aon, 46 percent of companies are placing an increased emphasis on D&I in UK boardrooms – a trend being replicated across other jurisdictions.

As stakeholder expectations evolve, companies are focusing on aspects of D&I important to employees, customers, investors and regulators. A number of factors, such as new regulations, the coronavirus (COVID-19) pandemic and growth in social media, have made environmental, social and governance (ESG) factors a growing concern. There is a belief that companies should be purpose-led organisations, with clear objectives on the environment, sustainability and communities, and this includes a commitment to diversity, equity and inclusion.

D&I considerations during M&A

When companies are pursuing M&A deals, sufficient focus should be placed on D&I issues during the due diligence phase. Acquiring companies should review the target’s workplace culture, evaluate its approach to D&I to ensure it shares compatible values, assess how its D&I framework may be integrated into the acquirer’s own D&I journey, and explore what it can learn from the target.

Due diligence focused on culture and D&I is especially important for companies pursuing cross-border deals. For instance, the target may be in a jurisdiction where there are no requirements for companies to adopt D&I principles, meet certain thresholds or report on their progress, such as providing ethnicity or gender data. In such cases, buyers will need to delve into the company directly, reviewing its culture to ascertain what D&I means to the target.

Failure to properly address D&I issues can have a detrimental impact on dealmaking. According to a Datasite survey of 600 global M&A professionals across the US, UK, Canada, France, Germany and Australia, 22 percent of respondents reported seeing a deal fall apart due to D&I-related issues.

Unlocking benefits

A committed approach to D&I is believed to help companies meet their financial targets and achieve their strategic objectives. This applies to dealmaking. There is ample evidence to suggest that diverse groups perform better, and from a dealmaking perspective, embracing diversity in a talent pool can unlock a company’s competitive edge in the market and maximise value in a deal.

According to McKinsey, companies with more inclusive cultures and more diverse workforces are likely to achieve higher financial returns than companies less focused on D&I. It found ethnically diverse businesses are 35 percent more likely to outperform their less diverse rivals, while gender-diverse businesses are 25 percent more likely to outperform.

Equally, companies with greater diversity are not only likely to be more innovative, but also more profitable, notes the Harvard Business Review. Progressive companies are seeing D&I lead to higher profits, better customer service and greater employee engagement. As many organisations are discovering, D&I can have a positive effect on companies and their bottom line.

Though they are often harder to quantify, there are non-financial advantages to increasing D&I within companies, as it can positively impact corporate culture. There are benefits to staff morale, with inclusive workplaces providing an enhanced working environment compared to more homogenous workplaces.

Integration and implementation

Acquirers should also set out a path for achieving their D&I objectives post-close. By prioritising D&I early in the dealmaking process, it becomes easier to smooth out integration once the deal is done.

It is important that companies avoid seeing D&I as a ‘box ticking’ exercise, delegated to the HR function and driven by compliance, focused simply on filling recruitment or promotion quotas. Whether it is racial, gender, socioeconomic class or another form of diversity, D&I should be placed at the heart of company strategy, including acquisition strategy, with moves to boost metrics for women and minorities, as well as a push toward diversity of thought.

Increasingly, companies are looking to spread D&I initiatives across their entire operations. This reflects an understanding of its importance to both to the bottom line and the ability to recruit talent in a competitive, challenging business landscape. Training programmes are being used to help employees understand the importance of D&I, as well as to identify and mitigate potential unconscious bias.

In the longer term, fully embracing D&I means building diverse talent pipelines and innovative teams, creating equitable development and succession paths. Acquirers that incorporate clear D&I plans into their M&A strategies will be well positioned to reap the benefits.

© Financier Worldwide

BY

Richard Summerfield