BUSINESS
DOWNTURN DAMPENS BIG MERGERS Chemical firms, FOCUSED ON SURVIVAL, avoided big-ticket acquisitions in 2009
STILL TRUCKING
Chemical firms continue to use mergers and acquisitions to fine-tune their businesses Number of deals 1,000 800
MELODY VOITH, C&EN WASHINGTON
THE ECONOMIC CRISIS significantly
explore new products, get new technology, slowed large deal-making in the chemical access raw materials, and gain know-how.” industry in 2009. Mergers and acquisitions In particular, the larger deals that were (M&A) with price tags that exceeded $1 announced in 2008 set a ripple effect as billion were few; only five such deals were firms sold smaller businesses to make their completed last year, compared with eight acquisitions fit better. Dow moved quickly in 2008 and 11 in the boom year of 2007. to sell Rohm and Haas’s Morton InternaExperts say the overall pace of M&A activtional salt business to Germany’s K+S for ity is picking up in 2010, but they expect big $1.7 billion. In December 2009, a year after deals to remain scarce. Ashland finalized its buyout of Hercules, it The two largest acquisitions finalized in announced that it would sell Hercules Spe2009—Dow Chemical’s purchase of Rohm cialty Resins to a Canadian private equity and Haas for $15.5 billion and BASF’s purfirm for $75 million. chase of Ciba for $5.5 billion—were first In some cases, the economic crisis itself announced in 2008, before the recession is the motivation for divestitures, says J. began to impact industrial firms. William Breen, a managing director at investment bank National Capital. “What we’re BIG DEALS seeing among the comOnly five deals worth more than $1 billion closed in panies we are talking to 2009, compared with eight in 2008 is that they are looking over their portfolio, VALUE MONTH because having been BUYER TARGET ($ BILLIONS) COMPLETED through this recession Dow Chemical Rohm and Haas $15.5 April BASFa Ciba 5.5 June has changed their minds United Arab Emiratesa Nova Chemicals 2.3 July about what’s really a K+S Morton International 1.7 October core business—what is Mitsubishi Rayon Lucite International 1.6 May a real keeper—and what a Deal value includes assumed debt. SOURCES: PricewaterhouseCoopers, C&EN is not,” he says. “When a strategic company Although billion-dollar transactions decides something’s not strategic for their were rare last year, chemical firms continbusiness any more, they want to sell now.” ued to manage their businesses with the At the same time, concerns about overhelp of smaller, bolt-on acquisitions or disupply in a slow market mean that comvestitures. All those little maneuvers added panies in a position to invest will tend to up to 746 deals worth more than $50 milacquire rather than build new capacity, says lion apiece, according to PricewaterhouseBruce Chalmers, advisory director for PwC’s Coopers (PwC), an audit, tax, and advisory chemicals practice. “Once you drop capacity services firm. That’s down only about 17% on the ground, everyone knows about it, and compared with 2008. it impacts price negotiation,” he warns. The Steady deal-making is a familiar theme problem is compounded by the expense of 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
600 400 1999 00 01 02 03 04 05 06 07 08 09 NOTE: Transactions of $50 million or more. SOURCE: PricewaterhouseCoopers
TAPPED
Lack of easy credit hampered large chemical acquisitions in 2009 Total deal value, $ billions 160 120 80 40 0 1999 00 01 02 03 04 05 06 07 08 09 NOTE: Transactions of $50 million or more. SOURCE: PricewaterhouseCoopers
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,
“When a strategic company decides something’s not strategic for their business any more, they want to sell now.”
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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 acquisitiondriven—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 East-
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ern 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. ■
