Specialties Are In The Crosshairs As Chemical Firms Turn To Acquisitions To Piece Together New Businesses

At the end of 2011, BASF’s leaders told investors that they had a plan to increase sales 6% per year, every year, through 2020. The executives said they expected to post $150 billion in annual sales by 2020, compared with $85 billion in 2010. The heads of other big chemical firms made similar promises.

But it turns out that the customers of U.S. and European chemical companies are not increasing purchases by anywhere near 6% each year. Growth in chemical production has slowed to around 1% in the U.S. and dipped to a loss in Europe. Many firms’ sales and earnings in both regions in 2012 were close to flat or even negative.

BASF now says it has two main strategies to combat sagging demand for chemicals. It will grow the size of its businesses in developing economies, and it will capture more value per sale by investing in innovative specialties businesses that are closer to the end user.

The rest of the chemical industry is following a similar blueprint. Indeed, boosting specialties sales was the main objective of two headline-grabbing chemical deals in recent years: Dow Chemical buying Rohm and Haas in 2009 and Ashland’s purchase of International Specialty Products in 2011.

Megamergers can be compelling ways to expand, but they are risky and comparatively rare. Instead, many chemical makers are creating growth in a different way—by buying small companies in adjacent markets or geographies. Rather than tack on an entirely new enterprise, these firms are carefully piecing together businesses that, aided by in-house capabilities and executive talent, can help meet lofty corporate goals for growth.

The acquisitions are helping the new owners transform themselves into major suppliers of battery materials, personal care and food ingredients, and advanced composites. The buyers in a series of deals examined by C&EN—BASF, Air Products & Chemicals, Air Liquide, FMC, Cytec Industries, and PolyOne—say their sales will accelerate when they can charge more for ingredients that make their customers’ products stand out.

“You see a lot of divesting on the low end and investing on the high end. It’s like a conga line up the value chain,” says Mike Shannon, global head for chemicals and performance technologies at consulting firm KPMG.

Acquisitions are only one way to shift into an adjacent market and are often part of a larger strategy that includes technology licensing and internal R&D. But being able to gain expertise, manufacturing assets, and key customer relationships right away is an attractive option for meeting growth targets.

A recent flurry of deals by chemical giant BASF in battery materials illustrates how a company with both research heft and money to spend on acquisitions can piece together an entirely new business.

BASF decided in 2007 to move into materials for advanced batteries because it saw a growth opportunity in electric transportation, says Phillip Hanefeld, BASF’s head of strategy and new business development for battery materials. Hanefeld and his colleagues knew BASF’s pigments manufacturing assets would adapt well to the making of cathode materials, so as a first step they embarked on a search for cathode technology.

The search brought them to Argonne National Laboratory where they found a nickel cobalt manganese cathode material to license. It was the right kind of technology to use in advanced lithium-ion batteries for electric vehicles. Now, six years later, Hanefeld reports that the growth the company anticipated has started.

“The battery industry is in an interesting transition,” Hanefeld says. “There is a lot of activity now, and growth rates in the next couple of years will be pretty high. You can see that as our customers are announcing expansions.” He says demand for battery chemicals is growing at twice the rate of the overall economy. BASF forecasts a $26 billion global market for transportation batteries by 2020 and says it hopes to lay claim to a $650 million portion.

After years of in-house development on the cathode material, BASF started making plans to open a manufacturing plant in Elyria, Ohio, at a site previously used to make pigments. The next part of the plan for the battery materials business was to be able to sell additional key performance chemicals such as electrolytes to the same battery customers.

To add electrolytes, BASF turned to acquisitions. “We already know how to make high-purity materials,” a must for electrolytes, Hanefeld says. “But strategically what we needed was more R&D pipeline. We had not done research on electrolytes like we had on the cathode materials. We wanted to acquire some know-how and the intellectual property portfolio.”

The result was BASF’s purchase of Merck KGaA’s electrolyte business early in 2012 and the acquisition of U.S.-based Novolyte a couple of months later. With production at the Elyria plant set to come on-line in late 2012, business managers wanted to have both cathode and electrolyte product lines ready at the same time.

Technology is not the only motive behind BASF’s acquisitions, however. Another strong draw is customer relationships. After enduring long qualification processes, Novolyte’s products were already being used by advanced battery makers. And relationships with battery makers were behind BASF’s purchase of Ovonic Battery, a major supplier of nickel-metal hydride batteries, from its parent company Energy Conversion Devices after it filed for bankruptcy. NiMH batteries are used in a variety of hybrid-electric cars.

BASF has painted its strategic map for battery materials on a large canvas, Hanefeld says, and it is still filling in details. It has licensed additional cathode chemistry, lithium iron phosphate, from the Swiss consortium LiFePO4+C Licensing. And it is looking to the future with an investment in the U.S. start-up Sion Power, which is developing lithium sulfur technology. Hanefeld says BASF will continue to invest in and expand its offerings of materials that increase the energy density of advanced batteries.

Like BASF, Air Products first jumped into its new market, personal care ingredients, with a licensing agreement. The company turned to Landec for an ingredient technology that became a line of heat-triggered alkyl acrylate polymers. The products, sold as Deposilk, debuted in 2011. In early 2012, Air Products bought its first company in that market, Rovi Cosmetics, a small German firm that focused on delivery systems for personal care active ingredients.

Air Products is best known for industrial gases, but it also has a coatings ingredients business. Air Products’ global business manager for personal care and specialty additives, Solomon Lemma, recalls that it required only one strategic insight to make the leap from coatings to wrinkle creams.

That insight came in 2004, when Air Products executives were developing their performance materials growth strategy and came across a report about the sources of innovation in personal care products. It showed that 40% of new product technologies came out of the industrial coatings world.

“One might say that for personal care, skin is another kind of substrate. When you put a cosmetic on skin or hair, it is a coating that you are applying,” Lemma says. The company hired outside consultants who understood the personal care market to help test the fit. They confirmed that it would be an appropriate adjacent market for Air Products.

The personal care market, Lemma adds, is one of the fastest-growing specialty areas thanks to demographic changes in emerging economies. “It is a growth market that is looking for technologically differentiated solutions,” he says. “Those solutions are like the ones that we deploy into our industrial markets.”

Air Products’ core chemistries—particularly urethanes, acrylics, and specialty amines—fit the performance requirements for personal care ingredients, Lemma argues. “We’ve been able to leverage our core platforms for skin-tightening applications and hair fixatives.”

Still, to be a major player in a new market requires finding open areas where a company can establish technology dominance. That was one reason for the Rovi acquisition. “Certainly, intellectual property is critical,” Lemma says. Company researchers are now working to invent delivery systems that increase the bio­availability of active ingredients, he adds.

Later this month, Air Products executives will head to Paris to attend the In-cosmetics cosmetic ingredients trade show. It will be unveiling another new ingredient, which it is not yet ready to disclose, and it will also be shopping for more acquisitions, Lemma suggests. “We have not yet achieved the critical mass we are looking for.”

Air Liquide, Air Products’ French competitor in industrial gases, also recently made an acquisition in personal care ingredients. In January, it bought Biotech­Marine, a small firm that makes its products from algae.

Through its specialty chemical arm Seppic, Air Liquide has been in the personal care market for 30 years, far longer than Air Products. But BiotechMarine is its entry into nature-derived ingredients, according to Pascal Vinet, vice president of global health care operations for Air Liquide.

Two years ago, Vinet recounts, Seppic decided to concentrate on health-care-focused specialties; it divested other product lines including paint additives. “Once we at Seppic became health care driven, the question became, ‘How do we develop further and quicker?’ ” Vinet asks.

When Vinet and his team came across BiotechMarine, they found a way to take Seppic’s portfolio in a new direction. “Biotech­Marine is small and produces ingredients mainly for cosmetics. The products are natural, being based on algae, which complements our portfolio very well,” Vinet says. “Our customers—including Estée Lauder, L’Oréal, Shiseido—themselves have very demanding customers, so they want high-level products and access to new research and development.”

Besides expanding Air Liquide’s specialties portfolio, the acquisition fits with trends in luxury cosmetics, specifically the move to natural ingredients, Vinet says. And, “being good biologists and chemists over the years at BiotechMarine, they add to what we can do.” In particular, he cites BiotechMarine’s ability to derive high-quality, high-purity cosmetic ingredients from the algae biomass.

Making algae-derived ingredients is second nature to FMC, which has built a whole business around biopolymers for the food and beverage industry. Biopolymers add texture and consistency to products but are otherwise mostly invisible. With the recent acquisition of two natural food coloring firms, however, FMC’s ingredients business will be far more noticeable.

In June 2012, FMC announced that it had bought U.K.-based Phytone and Chile’s South Pole Biogroup as its entry point into a natural-colors market that it estimates will be worth $1 billion by 2015. Most of the firm’s new natural-color raw materials are derived from plants, although red carmine comes from the cochineal insect.

The move into the new market is tied closely to FMC’s Vision 2015 strategy, says Bryan Bast, the company’s business director for natural colors. “It fits very naturally into what we do today: natural products, extraction, and the food and beverage markets,” Bast explains. “Our customers see us as a problem solver. The idea that FMC can extend its capabilities from stabilization to texture to natural colors is exciting to them.”

In choosing acquisition targets, “we were looking for people with strong technology skills to extend across our global operations,” Bast says. “We wanted capable people who had the know-how and tricks to get something to work.”

Both Phytone and South Pole Biogroup provide that expertise, he says, although they happen to be regional firms today. FMC will roll out the natural-colors platform to its formulation research centers around the world and then on to customers. “It is just a matter of how fast we can grow with the market. We definitely think all of our customers should buy just natural colors,” Bast says. “We will help them make that leap to something that is natural, attractive, and appealing to consumers.”

Now that the two companies are firmly inside FMC, the next step is more research, Bast reveals. Natural colors can be unstable and variable in hue from batch to batch. In some cases, they don’t respond well to changes in pH or protein content. “We continue to invest in the product line, and both companies have been doing basic research,” Bast says. “Our guiding principle is to create colors that are easier to use across product ranges.”

When a particular specialty chemical or material starts popping up across multiple sectors, merger activity is sure to follow. Advanced composites, particularly those made with carbon fiber, are now in products as varied as tennis rackets, medical devices, high-end cars, and huge airplanes like Boeing’s new 787.

So it’s no surprise that makers of advanced composites have been targeted for acquisition by chemical firms. Cytec, which already is a major supplier of composites to the military and the airline industry, bought U.K.-based Umeco last year in part to obtain access to industrial and auto­motive markets. And in a smaller deal, specialty polymer maker PolyOne snapped up Glasforms, a maker of glass- and carbon-fiber-reinforced polymers for medical, energy, and construction uses.

Strong demand for composites provides the industry with attractive growth rates, according to consulting firm Lux Research. The largest segments are aerospace and wind power, which Lux expects to expand 13% and 23% per year, respectively, through 2020. The automotive market is quite small for now but is expected to grow 17% per year.

Indeed, in a recent earnings conference call Cytec Chief Executive Officer Shane D. Fleming told analysts he expects Cytec to make a strong showing in wind energy and post double-digit growth in automotive composites. “Despite the economic uncertainty, we continue to see and pursue multiple growth opportunities, including high-end automotive, driven by customer demand in China, the Middle East, and the U.S.,” Fleming said.

So far the automotive market for the pricey composites is on the extremely high end. For example, Umeco has been supplying carbon fiber composites to the motorsport industry, including Formula 1 and Le Mans Series race cars. But according to Laurence Alexander, chemicals analyst for investment firm Jefferies & Co., prices will come down, and the market could expand by a factor of 10.

In fact, shortly after it announced the Umeco acquisition, Cytec said it will partner with Jaguar Land Rover to bring down the cost of composite materials for high-volume vehicle production. The deal “under­scores its commitment to building an automotive composites platform over the balance of the decade,” Alexander wrote in a note to investors.

Chemical firms will invest in growth markets by acquiring technology-driven specialties businesses for the foreseeable future, according to KPMG’s Shannon. “It will continue in this direction and at a faster pace,” he says. “These one-step adjacencies are what everyone is talking about now.”

For a company like BASF that has strong internal R&D capabilities, deciding to buy a company is complicated. “In general we map out mathematically what we need, where the gaps are, and where we need to find the puzzle pieces,” Hanefeld says. “Whenever two groups come together it’s never easy. But the potential upside is that it is either faster or cheaper than it would be to do it in-house, or it will be bigger than we could achieve on our own.”

Lemma of Air Products says small firms with desirable personal care technologies keep popping up, driven by innovation at university research centers and health research hubs. “But it can be risky. We have to put serious selection criteria in place” to avoid mismatches, he says. “We factor in issues like industry trends, which technologies are favored, and how differentiated the products are. We are very selective, which is why we have not been more aggressive.”

To get the right opportunity, chemical firms have to be patient and watchful, Hanefeld says. “As always, when you have 80% of the pieces, getting the last one is hardest because it really has to fit.”