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STRUNG TOGETHER Koch Industries expanded its fiber operations—a European plant is shown—with the purchase last year of Dupont's Invista unit.
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LETS MAKE A DEAL Corporate buyers staged a comeback in 2 0 0 4 as they pursued strategic assets in search of growth MARC S. REISCH, C&EN NORTHEAST NEWS BUREAU
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T IS COMMONLY HELD THAT FINANCIAL
buyers—banks and investment funds with mosdy short-term gains in mind— have become an all-powerful force in the competition to buy and sell businesses. True, they are a factor, but in the chemical industry the scales are tipping in favor of strategic corporate buyers. "People make a lot of noise about the importance of financial buyers in the market. They get a disproportionate share of attention," says Peter Ifoung, president of Ifoung & Partners—an investment banking firm that provides merger, acquisition, divestiture, and other services to chemical and life sciences firms. According to Young, who recently shared his just-completed study on chemical industry financial trends with C&EN,
financial buyers made five of the 10 largest chemical acquisitions in 2004. Strategic corporate buyers accounted for the balance. Overall, however, financial buyers were responsible for only a quarter of the 85 deals completed in 2004, down from 28% of 68 deals in 2003. Based on value, financial buyers of chemical assets spent slightly more in 2004 than in the year earlier: $ 10.9 billion compared with $10.3 billion in 2003. But in the more dynamic market of 2004, financial buyers accounted for only 35% of the $31 billion in chemical merger and acquisition activity, versus 4 9 % of the $21 billion in activity in 2003. According to bung's statistics, Kohlberg Kravis Roberts (KKR), the majority shareholder in Rockwood Specialties, was be-
BIG DEALS Each of the top 10 deals in 2004 was worth more than $1 billion ACQUIRER
TARGET
Koch Industries Cargill Crop Nutrition Air Liquide Rockwood Specialties-KKR Lyondell Chemical Blackstone Group Lubrizol Bain Capital Clayton, Dubilier & Rice Apollo Management
DuPont Invista IMC Global Messer Griesheim Dynamit Nobel Chemicals Millennium Chemicals Celanese AG Noveon Brenntag Merck KGaA-VWR Borden Chemical
VALUE ($ BILLIONS)
$4.20 3.73 3.24 2.70 2.63 2.11 1.84 1.70 1.68 1.20
KKR = Kohlberg Kravis Roberts. SOURCES: Young & Partners, C&EN estimates
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April October May July November April June February April August
hind the largest financially motivated chemical acquisition in 2004. Rockwood itself was created in 2000 when KKR bought several chemical operations from Laporte, prior to that company's acquisition by Degussa. Then last year KKRpaid $2.7 billion to buy four Dynamit Nobel businesses and merge them with Rockwood. Another financial buyer, Blackstone Group, led the charge to take the German firm Celanese private last April for $2.1 billion. Blackstone turned around and sold shares to the public in a new U.S.-based Celanese in February of this year. Bain Capital engineered the $ 1.7 billion purchase of chemical distributor Brenntag. Clayton, Dubilier & Rice bought Merck KGaAsVWR laboratory supplies business for $1.7 billion, and Apollo Management bought Borden Chemical from KKR for $1.2 billion. But while a financial buyer, Blackstone, engineered the largest acquisition in 2003—the $4.35 billion purchase of water services firm Ondeo Nalco—a corporate strategic buyer pulled off the biggest deal in 2004. In April, Koch Industries bought the Invista fibers business from DuPont for $4.2 billion. Cargill and Air Liquide arranged the second and third largest combinations last year. Cargill Crop Nutrition got hitched with IMC Global to form the new fertilizer entity Mosaic in a $3.7 billion deal that closed in October. And Air Liquide purchased most of the industrial gases assets of Messer Griesheim for $3.2 billion in May Two other significant strategic acquisitions took place last year as well. In November, Lyondell Chemical completed the $2.6 billion purchase of Millennium Chemicals. In June, Lubrizol spent nearly $ 1.9 billion to buy specialty chemicals and materials maker Noveon from a group of financial investors that included AEA Investors, Credit Suisse First Boston, and MidOcean Capital Investors. FINANCIAL BUYERS have been especial ly active since 2 0 0 0 when they were involved in 16 chemical deals, up from six in 1999. Overnight, it seems, they went from participating in fewer than 10% of all chemical acquisitions to 20% or more of all such deals from 2 0 0 0 to 2004. At a New Ifork City meeting in December of the American Section of the Société C&EN
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BUSINESS de Chemie Industrielle, "ïbung said, "The challenge forfinancialbuyers is getting their money out of the deal." Over the past five years, only a few have successfully sold out and made a profit, such as AEA's group, which sold Noveon; Ripplewood, which sold Kraton Polymers to another group of investors; and Apollo, which completed a public offering of Compass Minerals. Some financial deals have ended in failure, % u n g said. Financial buyers owned Perm Specialties and Geo Specialty Chemicals when they declared bankruptcy in recent years. A financial buyer owned Vantico when it got into financial difficulties, was bought by MatlinPatterson Global Opportunities, and merged into Huntsman. Financial buyers typically look for away V E N T U R E
CAPITAL
The Next Big Thing
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stablished businesses attract investment bankers, private equity funds, and strategic corporate buyers. Start-up businesses attract many of the same suitors. With small start-up companies, however, the risks of investing and losing it all are greater. But then, the potential rewards are greater, too. And there is a lot of money chasing the next big thing. According to the National Venture Capital Association (NVCA), 170 venture-capital funds raised $17.6 billion in 2004, $7 billion more than in 2003. NVCA predicts that venture capitalists will continue to look for investments in new technology in 2005. And just as in the recent past, much of the money raised will go to start-up software and life sciences businesses. Among the most promising areas for investment, the group says, will be energy, clean technology, and financial services. Investors will closely watch emerging areas such as stem cell research and nanotechnology but aren't ready to put much money into them. The life sciences sector, including biotechnology, is the largest single investment sector and accounted for 27% of all venture investments in 2004, NVCA says, with $5.6 billion placed in 568 companies. "Even with scientific advances of recent years, we are an aging population suffering from dozens of underserved diseases," says Jim Healy of Sofinnova Ventures. "Biotech is here to stay."
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out and a profit within five to seven years of initial purchase, Ifoung said. By that measure, of the 89 financial deals completed since 2000, a good many are approaching their ideal exit dates. "Financial buyers are generally unhappy ifthey haven't sold a business within five years of purchase." Private equity investor interest in the chemical industry is a relatively recent phenomenon. "Twentyyears ago, business auctions were rare and private equity wasn't available," says Kumar Shah, who was senior vice president of corporate business development at Noveon until it was sold to Lubrizol. He is now a senior adviser for chemicals with Bear Stearns Merchant Banking. Today, about two-thirds of businesses put on the market are auctioned to the highest bidder. And private equity money is available because "financing is cheap," says Shah. According to market research firm Dealogic, private equityfirmsaccounted for just 9% ofglobal merger and acquisition activity last year in all industries, based on the number of completed deals. Such firms accounted for about 14% of activity based on dollar volume. Comparing these figures to Ifoung's data shows that financial buyers have an inordinate interest in chemical operations. Shah, who also worked to buy and sell businesses at Cytec Industries and American Cyanamid, explains why Private equity funds are particularly interested in chemical businesses that are "stable, mature, and durable." They are attracted to specialty chemical firms because such businesses "tend to be less cyclical, and the customer base won't change overnight." Once they own a business, private equity buyers will look to reducefixedcosts and improve profitability before they sell to another buyer or offer shares to the public, Shah notes.
confident about their business, and they are willing to venture out into the market." That doesn't mean financial buyers are going to go away, %ung adds. Right now, private equity firms have "easy access to bank debt, the high-yield market is strong, and interest rates are low" libung expects the number of acquisitions to continue at a high level for at least another year. Major drivers, he says, will be ongoing industrial restructuring, business portfolio rearrangements, consolidation activity and active financial buyers. Several chemical transactions that have already closed this year, or that have been announced and will close soon, should drive the value of deals in 2005 beyond the $31 billion total in 2004. They include Cargill's purchase of Dow Chemical's half interest in apolylactic acid joint venture, Cytec Industries' $1.8 bil-
Financial buyers are generally unhappy if they haven't sold a business within five years of purchase."
BETWEEN 2000 and 2003, financial buyers did relatively well because corporate earnings were poor. Chemical companies were particularly cash-strapped as they dealt with overcapacity, weak demand, and raw material cost pressures. As the economy picked up in 2004—and along with it chemical industry profits—"industrial buyers have become more assertive," %ung says. "Industrial buyers have done a lot of cleanup," he says. "They are in better shape now than they were a year ago. They've put out most of the local fires and feel more
POWER OF THE PURSE Financial buyers account for one-fifth of deals since 2000 Number of deals 1001
I
1996 97 98 99 00 01 02 03 04 SI Total chemical deals worldwide • Financial buyer transactions NOTE: Completed deals worldwide greater than $25 million. SOURCE: Young & Partners
lion purchase of UCB's surface specialties business, and Henkel's $575 million purchase of Sovereign Specialty Chemicals. They also include Danisco's $419 million purchase of Eastman Chemical's stake in Genencor and Borden Chemical's purchase of Bakélite. In addition, PQ Corp. has put itself up for sale, and Akzo Nobel plans to sell six chemical businesses with annual sales of nearly $1 billion. According to ^bung, "The increased aggressiveness of industrial buyers has lowered and will continue to lower the relative market clout of financial buyers." But those financial buyers, he asserts, will help keep the numbers up by "absorbing deals that would otherwise fail." • HTTP://WWW.CEN-ONLINE.ORG
