Small environmental firms with good products and services are proving tempting targets for larger companies in that universe intent on expansion.
Up for grabs increasingly are small and mid-sized firms in alternative energy, water treatment and waste management, especially those with a focus on Europe and North America, according to Impax Asset Management, sub-advisor to the Pax World Global Green Fund.
And some acquirers, sitting on piles of cash, are paying rich valuations to acquire firms in these sectors -- sometimes at 30% to 50% premiums and even higher, Impax says.
Investors only stand to benefit. Down markets with many stock prices depressed are typically a good time for such acquisitions, said Ian Simm, CEO of Impax, based in England. Simm believes green M&A activity will continue. “These markets are growing pretty rapidly,” said Simm. “Our analysis suggests they’re growing, on average, at double-digit rates per annum.”
Nearly 1,500 companies are active in green markets around the world and quoted on stock exchanges. Of these, approximately 600 are large caps and 900 are small- and mid-caps, Simm said.
“The smaller companies quite often have very compelling products and services suited to these markets,” he said, “and become very attractive targets for larger companies looking to expand their operations.”
“The rationale for the acquisitions is that larger companies can offer international distribution for products and services that need to be sold in one country or region. Quite often there are synergies and cost savings, which partly explains why the acquisitions are conducted at a premium to the immediate share price.”
For example, he cited a recent transaction involving Schneider Electric, based in France, a global specialist in energy management with $26 billion in sales and operations in more than 100 countries, including the U.S., and Telvent Git SA.
Schneider recently purchased Telvent, an IT solutions and business information services provider with a footprint in Spain and the U.S., serving various sustainability markets. That $1.4 billion deal took place at a 36% premium to the average share price over three months last summer, Simm noted.
Another transaction involved Nalco Holding, a water treatment company in St. Paul, Minn., acquired by Ecolab, based in Naperville, Ill. The $5.4-billion cash and stock deal was conducted at a 34% premium to Nalco’s share price at the time.
Impax has pursued a bottoms-up, company-by-company approach in managing the Pax World Global Green Fund since its 2008 inception. The fund, which has $36 million in assets, invests primarily in equity securities. Around 40% of its net assets are in non-U.S. issues.
Impax is free to invest across all sectors within green markets worldwide. The advantage of active fund management in such a diverse market, said Simm, is that Impax can orient or right the portfolio in those areas that have lower risks and better growth prospects.
In 1971, Pax World was the first U.S. mutual fund company to apply social screens in a sustainable investment approach.
Simm sees good prospects ahead for the green sector. It is likely to benefit, he said, from high fossil-fuel prices, and from investments around the world to improve the quality of water supplies.