With increasing stress on achieving carbon neutrality, M&A in the renewable energy sector is quickly emerging as a solution. Some of the biggest investment opportunities worth billions of dollars are now generating investor interest.
Larger corporations are keen on acquiring small startups and mid-size companies to leverage tech innovations. That’s how they hope to gain that edge over the competition, scale rapidly, and acquire a foothold in new markets.
Companies that are already profitable with well-known brand names consistently look for strategic acquisitions that will help them get new projects. Taking advantage of current favorable market conditions where the trend is leaning toward sustainable energy sources is the key.
Incidentally, the renewable energy sector is a part of a larger energy vertical that includes liquefied natural gas, and nuclear energy. Upstream, midstream, and downstream oil and gas, chemicals and petrochemicals, and utilities are also attracting interest from investors and private equity.
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Let’s Explore Some Statistics
M&A in the renewable energy sector has been ramping up since 2010. Close to 500 deals valued at almost $171B took place in the O&G industry between 2012 and 2022. The objective was to acquire clean energy assets and build a green energy presence.
Accordingly, acquisitions outpaced asset sales by $43 billion. Interestingly, 44% of the M&A deals since 2010 have focused on solar and wind assets.
This trend has been continuing in more recent times, with 26 deals transacted from 2020 to 2022. M&A deals in clean energy were valued at $32B in 2022. This figure makes up 15% of the total deal values in the O&G sector.
In recent times, biofuel-related assets have been gaining traction in investor interest, resulting in $26 billion worth of deals since 2020. In the year 2022, 1,241 M&A deals worth US$193.8 billion were concluded in the energy sector. This figure points to a record year, and experts estimate more to come.
For the year 2023, the EIA’s Short-Term Energy Outlook projects that renewable energy will account for more than 25% of the power generation across the US. This figure indicated a rise of 22% from 2022.
True to expectations, M&A deals increased by 15% in the second quarter of 2023. This figure is up from the first quarter, which saw a total of $22.1B worth of M&A transactions. The trend will continue into 2024 as investors inject huge amounts of capital into greenfield and brownfield projects.
M&A in the Renewable Energy Sector – How it Works
Mergers and acquisitions in the renewable energy sector work similar to other business verticals. Deals involve the consolidation or acquisition of two or more companies that pool their assets and projects within the industry.
These transactions play a valuable role in transforming the renewable energy ecosystem. They do this by enabling strategic partnerships that allow dealmakers to diversify their portfolios. As a result, they are able to expand their markets and customer base more effectively.
Not only can they stay compliant with new ESG principles and regulations. But, their brand value and mission statement are also more likely to appeal to eco-conscious customers. That, in turn, leads to brand loyalty and lower customer acquisition costs.
At the back end, companies can consolidate their positions in the market and lower costs because of economies of scale. Accessing innovative technologies and optimizing their operations for maximum efficiency are other key objectives.
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Adopting Sustainable Energy Solutions Has Become Indispensable
Sustainable energy solutions that ensure the security of energy supply are defining capital flows as more investors divert funding to M&As. To stay competitive and relevant, companies across the world must transform or entirely reinvent their business models.
That’s how they can hope to keep pace with changing geopolitical landscapes where decarbonization and digitalization prevail. Changing customer buying trends and preferences also influence company policies, and they are forced to adopt new, greener operational models.
As the business landscape continues to evolve, businesses must find the ideal middle ground to create a balance. They must balance short-term shareholder value and profitability with building the agility and resilience needed to stay relevant.
That’s how they can maintain a foothold in the low/no-carbon environment–by developing or adopting advanced technology. M&A transactions can make that happen–by transforming supply chains to source inventory and improving distribution and advertising.
On the flip side, M&A also triggers innovation because of the demand for advanced security of supply energy options. Renewable energy companies may focus on individual sources such as solar energy or wind energy. Others may focus on multiple sources, such as both wind and solar energy.
Mergers and acquisitions thus take place depending on the end goals of the participating businesses. Deals in the current economic landscape also occur to take advantage of cross-selling opportunities. Like, for instance, with companies in the conventional energy sectors providing household products.
Oil and gas or electricity and utilities are some examples of cross-sector M&A in the renewable energy sector. Risk diversification is another driver for companies that have few or minimal green initiatives. Partnering or merging with eco-conscious companies integrates the shortfalls.
Resultant Synergies When Two Companies Combine
Mergers and acquisitions play a constructive economic role depending on various factors like the size of the transaction. The type of M&A deal and the acquirer’s size also act as drivers influencing the resultant synergies.
When two companies combine, the impact of the merger is typically higher than the sum of their two values. Synergies can be of two types: operating synergy and financial synergy. Operational synergies are about achieving economies of scale in the production processes.
Alternatively, merged companies economize by sharing their common assets, including fixed capital assets, research and development facilities, and resources. As a result, they improve the firm’s efficiency. Reducing capital costs and raising more capital leads to financial synergies.
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Synergies in Homogenous Companies or Horizontal Mergers
Homogenous companies produce similar products and services and operate within the same vertical. Horizontal mergers between such companies result in operational synergy when the firms combine production processes and human resources.
Small startups and companies in the renewable energy sector are relatively more volatile. An M&A in the same sector offsets some of that volatility by stabilizing its cash flows and diversifying its risks. Financial synergy also occurs since the merger with a large firm makes financing more cost-effective.
Smaller companies can lower their floatation or transaction costs and acquire funding at favorable terms and conditions. Having the backing of a more stable firm and brand name adds to its viability as an investment opportunity.
Synergies in Heterogenous Companies
Heterogenous companies belong to the energy sector but produce different products and services in the conventional energy sector. Like, for instance, oil, gas, and other forms of fossil fuels. Financial synergy can occur as a result of the merger, thanks to the increase in market share.
Merging firms can expand their scale by sharing profits and developing an edge over the competition. Overtaking or eliminating the competition gives companies an added advantage when it comes to pricing their products. Higher pricing results in higher profits.
Compliance with ESG regulations is a significant benefit of merging with a company in the renewable energy sector. Merged firms can demonstrate that they are integrating sustainable solutions in their operations.
Portfolio and Risk Diversification with M&A in the Renewable Energy Sector
As mentioned in the earlier sections, the renewable energy sector is attracting significant infusions of capital from investors. Thanks to their backing, this vertical is experiencing the launch of several new startups with innovative concepts.
The efficient capital market assumption is that capital investment shifts from declining sectors to upcoming industries. As a result, companies can diversify risks and take advantage of the availability of funding.
In the case of a heterogeneous merger, a renewable energy startup can offset its volatility by combining efforts with other sectors. It can seek out firms in other renewable energy industries, not necessarily its own. Offering more diverse portfolios of products and services can ensure stability and scalability.
Further, companies dealing in non-renewable energy products may need solutions for the declining demand for their offerings. Expanding into alternative energy or opportunities with security of supply helps with portfolio diversification and, consequently, long-term sustainability.
Renewable portfolio standards (RPS) or renewable electricity standards (RES) require utility firms to offer greener options to customers. The policies have made it mandatory for power companies to provide a stated minimum share of electricity from eligible renewable resources.
Partnering with compliant companies raises their returns from diversification since the growth rate is exponential in this sector.
Other Factors Indicating the Influence of M&A in the Renewable Energy Sector
Research indicates initial public offerings (IPOs) and seasoned equity offerings (SEOs) of companies committed to a sustainable environment are more successful.
Corporate Social Responsibility (CSR) is the commitment a company makes to adopting ethical practices. These practices should contribute to the upliftment of society and reversing environmental damage. Firms and brands that can demonstrate this social responsibility have less market volatility in their stocks. They are also more successful in getting funding.
Since these brands represent green initiatives, companies not adopting these policies have a higher incentive to integrate them. That’s how they hope to remain competitive and attract investor interest.
Yet another incentive for established companies to acquire or merge with renewable energy startups is carbon emission requirements. The AB 32, the California Global Warming Solutions Act of 2006, requires businesses to reduce their GHG emissions to 1990 levels.
This reduction represents a 15% lower emissions requirement from companies than when they are conducting regular operations. Implementing AB 32 should lower the risks associated with climate change and improve energy efficiency.
The objective is also to expand the use of renewable energy by developing more sources, reducing waste, and promoting green transportation. Mergers with renewable energy startups enable all these goals while fostering knowledge exchange and partnering to address the sector’s challenges.
In the last decade and a half, we have noticed radical shifts in investor trends as more capital flows into the energy, utilities, and resources (EU&R) market. Experts estimate that this trend will continue in the coming years as new ESG regulations come into force.
Investors are keen on diverting funds to redevelop underused resources to extract their maximum potential. They are also focused on creating new projects for energy utilization, but by integrating greener methods as sustainable solutions.
M&A in the renewable energy sector has enabled partnerships in heterogeneous and homogeneous companies, allowing them to scale quickly. Strategic mergers are making it possible for the industry to transition into a sustainable future.
That’s how companies find new solutions to match the rising demand for cleaner energy, not reliant on diminishing fossil fuels. They can leverage more assets, talent, and skill sets to develop Intellectual Property and innovations and stay competitive.
The economic landscape is also transforming rapidly with more awareness of climate change and its effects on the future of commerce. The race is on to find solutions, and M&A could be the key.
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