Higher costs – but greater ESG authenticity
The new rules will have a double-edged impact on the value of EU-based acquisitions. The extra costs will tend to depress the value, but the enhanced environmental, social, and governance (ESG) credentials may make the complying companies more attractive to ESG-sensitive investors.
The impact will not be the same for EU-based and non-EU-based acquirers. European buyers will have to apply the new rules in any case. For non-EU firms, buying an EU-based target will bring new reporting requirements.
In short, the new regulations are likely to lead non-EU companies to re-evaluate the strategic value of acquiring EU companies, considering the costs associated with CSRD compliance. This can impact the perceived value of deals and may lead to a preference for targets not subject to the CSRD.
These challenges may prompt a more cautious approach to M&A activities in the EU, potentially slowing down transactions or leading to more divestitures as companies reassess the implications of compliance for their business operations and strategic objectives.
The outlook is not all negative: due to the extra costs, it is possible that EU-based assets might have a lower valuation, making the region more attractive for bargain hunting in the eyes of non-EU companies. Here, the notion of competitive advantage comes into play. More stringent reporting requirements make the target assets worth less to potential acquirers, but what matters is the relative change. Firms that are particularly adept at navigating ESG reporting may find new opportunities among EU targets.