Issue Date: March 8, 2010
Downturn Dampens Big Mergers
The economic crisis significantly slowed large deal-making in the chemical industry in 2009. Mergers and acquisitions (M&A) with price tags that exceeded $1 billion were few; only five such deals were completed last year, compared with eight in 2008 and 11 in the boom year of 2007. Experts say the overall pace of M&A activity is picking up in 2010, but they expect big deals to remain scarce.
The two largest acquisitions finalized in 2009—Dow Chemical’s purchase of Rohm and Haas for $15.5 billion and BASF’s purchase of Ciba for $5.5 billion—were first announced in 2008, before the recession began to impact industrial firms.
Although billion-dollar transactions were rare last year, chemical firms continued to manage their businesses with the help of smaller, bolt-on acquisitions or divestitures. All those little maneuvers added up to 746 deals worth more than $50 million apiece, according to PricewaterhouseCoopers (PwC), an audit, tax, and advisory services firm. That’s down only about 17% compared with 2008.
Steady deal-making is a familiar theme in the chemical industry regardless of the economic climate, says Saverio Fato, global chemicals leader at PwC. “If you look over time, the majority of deals done in this industry are small and midsized. It’s a tool in their tool kit, and it’s constantly used to increase capacity and market share, and to explore new products, get new technology, access raw materials, and gain know-how.”
In particular, the larger deals that were announced in 2008 set a ripple effect as firms sold smaller businesses to make their acquisitions fit better. Dow moved quickly to sell Rohm and Haas’s Morton International salt business to Germany’s K+S for $1.7 billion. In December 2009, a year after Ashland finalized its buyout of Hercules, it announced that it would sell Hercules Specialty Resins to a Canadian private equity firm for $75 million.
In some cases, the economic crisis itself is the motivation for divestitures, says J. William Breen, a managing director at investment bank National Capital. “What we’re seeing among the companies we are talking to is that they are looking over their portfolio, because having been through this recession has changed their minds about what’s really a core business—what is a real keeper—and what is not,” he says. “When a strategic company decides something’s not strategic for their business any more, they want to sell now.”
At the same time, concerns about oversupply in a slow market mean that companies in a position to invest will tend to acquire rather than build new capacity, says Bruce Chalmers, advisory director for PwC’s chemicals practice. “Once you drop capacity on the ground, everyone knows about it, and it impacts price negotiation,” he warns. The problem is compounded by the expense of having to shut down plants when demand is low. “If you want to keep growing, acquisition makes sense,” Chalmers says.
Although the recession caused only a small dip in the number of deals made in 2009, it did take a big bite out of the total amount of money spent, which was down to less than $30 billion compared with nearly $64 billion in 2008.
One reason for the drop was the lack of large acquisitions. Fato points out that even firms with strong balance sheets temporarily lost their taste for big investments. The recession took attention away from growth strategies. Instead, “the focus was on cash flow, the strength of the balance sheet, and access to capital markets,” he says.
Fato says executives had to emphasize cash, because overall liquidity became an important metric watched by Wall Street. The important success factor became survivability rather than growth or stock performance.
Falling stock prices also held down the valuations of companies put up for sale, and the credit crunch meant that fewer potential buyers could gather the funds needed to purchase them. The lack of credit particularly impacted the ability of private equity firms to buy chemical companies, even when prices were attractive. According to PwC, only 14% of total deal activity in 2009 was by private equity investors. The high-water mark for private equity participation was in 2006, when private investors were responsible for 25% of deals.
Many of the deals announced in 2009 stretched across borders—particularly to developing economies that were not hit as hard by the recession. These cross-border deals have been increasingly common, as companies in the U.S. and Europe work to gain access to markets in China and Brazil. A new trend, however, is cash flowing the other way. Successful firms in developing markets are looking to grow through acquisition. “We’ll see more and more activity from emerging countries in the bidding process. They have the desire and financial wherewithal to do it,” PwC’s Chalmers says.
Emerging countries, especially in Asia and the Middle East, will be in the lead as M&A activity returns, says KPMG International, an audit, tax, and advisory services company. In a report on chemical M&A, the company writes that in China, “the government’s stimulus and its determination to make the country self-sufficient in chemicals bode well for the industry’s future.” The growth of chemical firms in China, the report adds, “is likely to be acquisition-driven—especially given the current low valuations of potential targets.” KPMG adds that firms in the Middle East are eager to use acquisitions to transform themselves into major global petrochemical players.
Meanwhile, Breen says his company is already seeing more business come in that will soon translate into a bump in actual deals. “We’re busy now, and we’ll see that a lot of deals will close in 2010, initiated by both strategic buyers and sellers and private equity investors. Still, it will be a better time to buy than to sell,” he says, because paying a premium over the share price will still be a bargain given most target firms’ annual earnings. Depressed stock prices may be partly to blame for hostile takeover attempts such as Air Products’ $7 billion bid for Airgas, he suggests.
KPMG projects that large-scale acquisitions by U.S. and European companies will continue to be rare over the next 18–24 months. But the expansion of Middle Eastern chemicals capacity will drive Western firms away from basic chemicals into downstream, specialty businesses. And in Asia, PwC forecasts that acquisitions will gain momentum as companies aim to strengthen their access to global markets. “Where you have wealth that has grown outside the U.S., assets in the Western world become attractive,” Chalmers says.
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