Impact Investing and M&A

Today’s mailbox brings a meandering article on the above subject from the Law360 news service.  Impact investing is the practice of making investments for profit which also foster some societal benefit, typically related to the target’s business.  Private Equity, obviously a big M&A acquiring cohort, is reported as having a growing interest in societal impact which, if accurate, is by definition admirable.

While the article predictably advises that deal structure thus should focus on management composition and compensation, and business planning, post-acquisition, the article also suggests that impact investing will affect deal diligence.  As to that proposition, there is only sparse discussion.  One commentator is cited as suggesting that representations “are likely going to get tailored to the mission and receive greater emphasis in due diligence.”  What changes in our M&A practice can we expect?  Will an acquirer, having gone so far as diligence, then want to delve into past practices in terms of societal impact?  What new is to be asked?  Awareness of disregard for society?  Negligent disregard?  Pursuit of maximum profit, regardless?

Let us assume an M&A target which manufactures widgets.  Standard current reps will ask about labor practices, payroll practices, environmental history, claims made for defective widgets, litigation and governmental actions relating everything.  Asking for an express representation concerning the company’s view of its social impact could be taken as vague, judgmental, not pro-deal.  An acquirer interested in making social impact should be looking to the future.

And assume for a moment that, in fact, the target has manufactured widgets harmful to users while dumping pollutants by action of an underpaid staff chosen based on discriminatory policies, all of which facts are elicited through diligence, and assume further that the diligence questions had been  tweaked with mission in mind to highlight such facts.  Might we want to consider how offended target management will feel about having its practices not just reported in normal course of diligence but also at having their noses rubbed in it by broad policy-related questions.

Seems to me that target past failure is, in the context of doing social good, great news for the acquirer.  The acquirer wants to do social good.  It has a prospective program to do so. It will do greater good by putting better practices in place at a company that until then was terrible on these mission metrics.  Acquirer gets its social return by definition.

And as to companies acquiring targets without a PE involvement, I have not seen sensitivity to social mission beyond that implicit in fixing the issues uncovered by normal due diligence; and, after the deal, the acquirer is in control and calling social benefit shots as it wishes.

Let me know if I am missing something here.

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