The Sleeping Merger Giant Awakens

The pace of deal-making began slowly in 2013. According to the consulting group PricewaterhouseCoopers, chemical brass shook hands during the first half of the year on 38 deals, each valued at more than $50 million. This is a sharp decline from the 62 mergers unveiled during the same period the year before.

But the statistics might belie a coming boom. A number of chemical firms aim to get rid of businesses that no longer align with strategic aims. It’s a trend that gained steam in 2013 and has already led to multiple transactions.

The bellwether for this movement was DuPont. After selling its automotive coatings unit to the private equity firm Carlyle Group in February for $4.9 billion, the company announced in July that it might divest its performance chemicals business. That unit, which includes most of DuPont’s traditional chemical operations, generated $7.2 billion in sales in 2012.

The business is profitable, delivering $1.8 billion in operating income in 2012, but its performance has been sporadic. In late October, DuPont decided against selling the unit outright, instead announcing that it will spin the unit off as a separate company by April 2015.

Dow Chemical wouldn’t be outdone. Earlier this month, the company said it will divest businesses in chlorine, epoxy resins, and chlorinated organics that generate about $5 billion in annual sales. The company has been making chlorine for more than 100 years. But like DuPont’s performance chemicals segment, the three businesses are mature and cyclical. Dow would rather focus on high-growth, high-margin specialty chemicals.

Chemical companies, even some of the biggest ones, became the targets of activist investors in 2013. Trian Fund Management, an investment firm run by Nelson Peltz, acquired a large stake in DuPont before the company announced it was considering unloading the performance chemicals unit.

Pershing Square Capital Management, headed by William A. Ackman, bought a 9.8% stake in Air Products & Chemicals. Pershing Square remarked that the industrial gas firm is “undervalued.” Air Products management seemed to get the hint. In September, CEO John E. McGlade announced he will retire in 2014, and the firm appointed three directors recommended by Pershing Square.