Open Access

Thomas Pfeifle

• Conducting a due diligence is an integral part of M&A transactions. Its objective is to audit the targeted company with proper accuracy, in order to expose risks and opportunities and allow a profound decision on whether to acquire the company and which price to pay. An essential part of the due diligence is the environmental due diligence, which examines all environmental related liability risks, identifies costs and mitigation potentials. Up to now, little is known about the impact of environmental due diligence on company valuations in M&A transactions. The objective of this work is to get to the core of this influence with the help of interviews with several environmental consultants. The qualitative research shows that three main environmental risks bear an impact. The three main environmental risks are permissions, contamination on site and climate-related risks. Furthermore, it was discovered that the influence of these environmental risks on the company valuation is dependent on several factors. The influence depends on whether the investor is a strategic or a financial investor and to which extent the materiality limits are applied. Thereby four possibilities could be identified as possible effects on the company valuation: there is a dealbreaker, the environmental related costs are directly deducted from the purchase price, the deal size is changed, or the future cash flows of the target firm are being affected. Regarding the latter, an exemplary discounted cash flow calculation is used to demonstrate the negative impact of environmental risks on the target’s value. The findings of this qualitative research may be useful for industry experts, environmental researchers and companies planning M&A to consider environmental risks in their business valuations.