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M&A research still fails to reach target

EUROPE - A lack of investment research on mergers and acquisitions is hampering European pension funds' ability to assess whether deals carry any risks on non-financial grounds, according to a study.

Details of a report produced for the Enhanced Analytics Initiative (EAI) suggest investment research into M&As is still limited mainly to the financial fundamentals of any deal, so pension funds and their asset managers are unable to assess whether factors such as corporate culture, employment standards, the role of management and their impact on environmental liabilities, for example, would hamper the growth potential of a company post-merger.

The EAI was created two years ago by European pension funds and asset management firms in a bid to improve the research delivered by firms on aspects other than financial fundamentals - information which might be used in sustainable investment strategies.

Since starting the initiative, pension funds such as ABP, PGGM and Universities Superannuation Scheme (USS) have joined the group, along with associate members such as the London Pensions Fund Authority (LPFA) and the BT Pension scheme to try and improve the quality of investment research available to pension schemes.

In this latest report, produced for the EAI by investment consultancy onValues, one of the key discoveries is where research services do look at "extra-financial issues" on M&As it is rare to see any analysis of the environmental and social issues on a company's "value creation".

In contrast, the aspect research houses do tend to look at is corporate governance, as this is often a key factor in whether an organisation or company should consider a shareholding.

But the main finding is "the overall volume of enhanced M&A research is low" according to the EAI report.

More specifically, the report suggested research providers were often unable to provide the information required because their companies tended to be directly involved in the M&As or might be involved in future transactions.

That said, research recently seen on the Boots Alliance/Unichem deal indicates there are firms able to provide "good examples of long-term, transparent financial modelling".

A spokeswoman for the initiative explained research providers whose reports are found to meet a certain number of criteria, and therefore considered to show a good level of research, are subsequently "commended" at six-monthly evaluations as recognised research providers to receive a portion of an incentivising fund for the improvements they make to their studies.

The fund last year attained €10-12m to be distributed to commended research providers and the 26 organisations contributed to the fund by setting aside 5% of their trading commissions to be used as EAI incentives.

But substantially more work is still needed to help pension funds assess whether they should support the proposed merger of companies, because so little non-financial data is included in research.

"The research doesn't necessarily fulfil what we need for long-term issues. But in the two years since EAI was created we have been getting more and more signatories, as well as getting a good response from the research houses and how they address the extra financial risks of anything other than the financial status of the company," she said.

"This [report] took a cross-section of research providers to find out how they capture the longer-term financial issues on M&A transactions. Whilst there is some research which is starting to address some of the issues raised, there is still a long way to go to truly understand whether all factors are being taken into account when mergers come up. But we have seen the incentives really work and are encouraging a response," she added.

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