By Lindsey Galloway
No company would consider doing an acquisition or merger without thoroughly examining the target company's P&L, balance sheet, and cash flow statements. But all too often, a company's diversity metrics have been glossed over or left out completely during the due diligence process. But that's starting to change. According to a Deloitte survey, 96% of CEOs now recognize diversity, equity, and inclusion (DEI) as a strategic priority, and many are taking that mindset to mergers and acquisitions, ensuring that any acquisition helps, rather than hurts, their overall goals and initiatives.
"In today's M&A market, business leaders face greater pressure to examine how a transaction will impact stakeholders and their interests such as climate change and diversity," says Eloner Habtezghi, Managing Director of M&A Strategic Advisory at investment bank Siebert Williams Shank.
Acquirers and investors are looking more closely than ever at target companies' environmental, social, and governance (ESG) track record — which includes diversity, says Habtezghi. By considering these factors during an acquisition process, leaders can mitigate their investment risk, maintain their company's reputation, and ensure their ability to attract new and future talent.
Designing the Diligence Process
To ensure DEI is truly a priority throughout a transaction, acquirers need to set the metrics they're looking to identify at the beginning of the process. Evaluating something as pervasive — and elusive — as DEI requires looking at numerous touchpoints throughout the organization, such as in recruitment to identify any talent acquisition biases, or in management to see how leaders create and enforce an inclusive culture, and even up to how discrimination reports are handled.
There can also be a disconnect between how diverse a leadership team believes itself to be and the on-the-ground perception by its employees, so it's worth having interviews at different levels to uncover any potential issues. The resulting information can also be used post-acquisition to implement leadership training and other mitigation measures.
One thing to keep in mind is that acquirers don't always have this skill set to unearth DEI issues, so specialized experts can help. "Evaluating a company's DEI credentials can lead to a more layered due diligence process that requires skills that corporate teams may not necessarily have," says Habtezghi. Companies shouldn't be afraid to hire ESG advisors or DEI specialists who can help during the deal process.
Using AI for Better M&A
Deploying the right technology during diligence can also uncover helpful metrics. "AI assessment tools can give much greater insight into the target's culture and highlight areas of DEI-related risk or misalignment," says Trevear Thomas, Principal at Deloitte Consulting and U.S. Leader for Mergers & Acquisitions.
There might be bias in the talent process or a mismatch between the makeup of the workforce and that of the customer base — for example, is the team made up of mostly men, but serving a large base of women customers? "By first assessing a target's DEI profile, you might determine it's not a good fit and call off the deal or you may decide it's worth building out a mitigation plan," says Thomas.
Target companies that have done a good job in this area can expect it to pay off. "A target's DEI profile is a factor in its valuation, and having a strong profile usually results in an incremental increase in value," says Thomas.
After Closing the Deal
Due diligence is just the beginning of the process, as companies need to stay aligned after a deal closes and as integration begins. Despite all the work put into the diligence stage, those efforts can quickly evaporate without the right long-term commitment in place. "Too often we've seen companies close the deal but then not continue to measure and track against their goals during and after the integration," Thomas says. "This can negatively impact the value of that acquisition."
Implementing tracking indicators can keep a company continually focused on those efforts. And having those metrics on-hand is becoming a must-have versus a nice-to-have. "In recent years, institutional investors and other stakeholders have emphasized ESG performance disclosures from companies," says Habtezghi. "Having these tracking systems that focus on DEI performance would not only ensure these goals are measured and achieved but can also create better transparency and engagement with investors and stakeholders."
The close of a deal also gives companies a timely opportunity to restate and recommit to their DEI initiatives. This might look like appointing new diverse board members, reworking the brand toward a more inclusive identity, and reaffirming a long-term commitment to both customers and employees.
Successful mergers and acquisitions lead to lasting value and a competitive edge. So in a world where equity practices impact the bottom line more than ever, any deal needs to be done with diversity in mind. This outlook will allow leaders to not only bring an inclusive mindset to the resulting corporation but also unlock the full value of the transaction.