Why is the chemical industry a hotbed for M&A deals?

Why is the chemical industry a hotbed for M&A deals?
In the light of declining crude prices and a more competitive market, the chemical industry is relying on mergers and acquisition activities (M&A) for their growth and earning profits. Due to the opportunities for growth being insufficient in taking a completely organic route and having to go through various environmental checks and approvals, M&A is a better alternative as a growth avenue for the chemical industry. For smaller organizations, it’s a way through which they can either scale up through forming partnerships or get potential ways to exit through selling off. World-over, the chemical organizations scout for companies that can gauge the economic condition well enough to determine an increase in demand.

Chemical industry is one of the most essential industries in India. India is the third largest producer of chemicals in Asia and the eighth largest in the world, thus reiterating its importance in the Indian economy. The industry is linked to the most important sector in India’s economy which is the agriculture society along with agro-commodities, services and manufacturing. With diverse bases for manufacturing, the Indian chemicals industry produces high-class products.

Since the Indian chemical industry’s market is dominated by family run small or medium size firms, M&A deals are a hotbed for such companies who have financial , technological and managerial limitations. These smaller firms have an established presence in their localities and have a vast sense of knowledge about customer requirements. But due to their limitations, they are unable to compete with their competitors globally. However, through M&A, global companies approach these smaller firms to get an entry into the Indian market and in turn provide these firms with appropriate partnerships and their consolidation seeks to help both the parties involved. They also act as exit routes for those small firms that are barely managing to survive or blessing in disguise when they have hit a runway in their businesses.

M&A has converted the industry into a seller’s market, especially for smaller firms wherein the prices have increased substantially. Moreover, the sheer increase in the merger-of-equal deals both in quantity and size shows that the industry is moving towards an era of full-scale consolidation. Since 2010, activists’ led campaigns and their investors have become imperative in the chemical industry.

In the global market, M&A deals are the means by which the chemical industry aspires to stay relevant and in competition. These deals are used as a method to achieve growth targets and facilitate innovation. M&A is also a way by which the industry tends to change its strategies, thus making it a hotbed for such deals.

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Chemical industry- growth plan during M&A

Chemical industry- growth plan during M&A

Due to the chemical industry experiencing a slowdown due to the decline of organic sales, many firms turned to M&A in order to achieve growth. A dearth in new opportunities coupled with a lack of new innovation or technology, M&A has been a medium through which growth can be achieved.

Deloitte predicted that in 2019 “M&A activity will pursue smaller, more focused portfolio rebalancing and that activity in this year will focus primarily on fertilizers rather than agricultural chemicals.” Despite the challenges facing the chemical industry leading to a push back in M&A deals due to high interest rates, growing trade tensions and decelerating economic growth- Deloitte still predicted a robust market for M&A in the industry. This has been linked to the increasing availability of cash on-hand for buyers, cheaper credit and the will to increase return of interest for investors.

For the chemical industry to thrive, the first step to be taken is a complete understanding of the actual potential of how M&A deals can be a catalyst for growth in the industry. In order to ensure that these M&A deals work towards the ultimate goal of achieving growth, three factors will play an important role:

  • First of all, it’s important to analyze and identify the consequences of combining the two businesses. These would include- how much each partner would save, similarities or overlaps in the products that they offer, the consumer market being served and the true potential of technology and research and development projects.
  • It’s imperative to make sure that the companies being merged are being served by the best managing strategies and team. To ensure this, integration programs serve as a means through which a holistic review can be done of both the merging parties.
  • One of the most essential steps is to make sure that the opportunities that arise as a result of the transition are addressed. This would include broadening of the geographical reach of the product, coming up with new product ideas and a proper analysis of how the merger can utilize the best potential from sides.

To ensure that the M&A deals lead to adequate growth- it’s important to establish the required leadership in place and also determining a comprehensive roadmap. Furthermore, a very key aspect to be recognized and acted upon would be to address the cultural differences of the two merging entities in order to ensure a long and successful partnership. Seeing South East Asian countries as a cultural fit and with countries in the region becoming a hotbed for M&A deals, the Indian chemical industry is increasingly looking to merge with companies of this region. With an increase in global demand, the industry has witnessed substantial growth and will continue to grow if the above mentioned points are followed.

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Adding Value to Acquisition Process: A Guide For Chemical M&A Advisors

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Mergers and Acquisitions (M&A) are the hottest trend in the chemical industry market, and for good reason. They help consolidation and in eliminating non-core elements in a way that can boost a company’s product and client pool, while also leveling the playing field. A combination of a great legal team, business strategy, and confluence of work philosophy are what help create the perfect merger. Here’s how to make sure you get the right deal, instead of being stuck with a deal that runs major losses.

The Due Diligence

This is your legal team’s main domain and where their strengths are to be fully utilized. While lawyers may not have the expertise on market strategy, they are the main players in negotiating the M&A process. The right contract can create life-or-death situation for your business, so ensuring the due diligence is done correctly by expert lawyers is key. Make sure you find a legal team that understands the business, the specifics of the escrow, and advises the company on the right insurance plan in case of failures.

Private Equity and Activist Investors

Given how competitive the business market is, it’s important to take into account the role PE and Activists play in the M&A process. Although they pose a threat to strategics, they are also a major source of funding that cannot be completely out-ruled. The correct M&A adviser will consider the pros and cons of a particular sponsorship deal before immediately saying no to an investor. While they are a competition, they are also a good exit strategy to liquidate assets and offload part of the business that are difficult to shed.

Chemical M&A Carve-Outs

Carving out assets and portfolio management is a huge part of M&A. Understanding the right carve-out strategy is crucial to a chemical M&A. It is important to understand that carve-outs are no longer just limited to offloading non-core businesses. A good M&A advisor will understand their importance in creating shareholder value, as long as the correct preparation is done when framing the sale plan.

Ultimately, the M&A game is one that will be played for a long time coming in the chemicals industry. Ensuring that you don’t lose it is all about finding the right team to help you – and the right advisory board can take all these factors into account to score you the deal your business deserves.

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Common mistakes companies make during an M&A

Common mistakes companies make during an M&A

Mergers and Acquisitions (M&As) are possibly one of the most common form of consolidating segments, and adding new products, in the chemical industry. Like any legal proceeding, they come with massive risks and opportunities alike. In a worst case scenario, one faces not only a loss of time and effort, but also monetary losses that can run up into multiple zero figures. In an excellent scenario, you have got yourself a deal that can bring in a lot of money, market opportunities, and even a lead over competitors.

Here are the mistakes to avoid so that you can reduce your risk of the first case situation:

Licenses and Patents

Don’t forget the difference between a brand and a technology. While a brand may be the biggest face of a particular product, there’s a good chance that it has bought the patent rights to a technology – or is paying a royalty to the patent holder. There is very little ROI in buying a company for its technology without acquiring the patent to the technology you’re after – so ensure that when you’re drafting a chemical M&A contract, it also accounts for full rights and access to the technology you wish to acquire.

Avoiding M&A Culture Clash

Culture clash in M&As can cover a range of differences – from simple product and marketing differences, to differences in philosophy and ethics. Or, on an even larger scale, literal culture clash with international M&As. It’s not just about due diligence – it’s about speaking with customers, taking full note of company stock, and relaying philosophy to clients. It’s also about recognizing the difference between a good deal and a deal for the sake of a deal.

Make Realistic Expectations, Not Estimated Assumptions

It is simply not enough to rely on projected synergies and estimated valuations. More often than not, these numbers are disfigured during execution of an M&A, which creates what is commonly called the winner’s curse. Avoid underestimating customer losses (McKinsey 2002), and increase the estimates of one-time costs. And, most importantly, compare projections to realities.

 

These facts might seem incredibly obvious, but often get lost in the fine print of a chemical M&A. With the right legal time to cover all your loopholes, and a strategy and finance team to accurately manage your projected accounts and profits, you can greatly reduce the risks of a bad M&A deal.

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The Challenges of M&A and the Chemical Industry

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In an economy that is negatively fluctuating on a daily basis, Mergers and Acquisitions (M&A) are becoming a difficult business for most industries. And the chemical industry is one that has always partaken in M&As in order to expand their businesses and market, change their strategies, and to bring together all the segments they work within. So what news does it bear for chemical industries, when there is a crashing economy that refuses to hand-hold them through the process?

What Do the Chemical M&A Numbers Show?

Deloitte Globals’ 2019 chemical industry mergers and acquisitions outlooks had conflicting things to say, especially concerning the chemical industry in India. Although 2018 saw a 5% decline in the number of deals, the numbers are still significantly higher compared to early 2010s. Moreover, the Indian market is expected to witness chemical M&A growth led by chemicals, agro-chemicals, and construction chemicals sectors. It is the sixth largest chemical supplier in the world, and contributes to 2.1% of the GDP.

These numbers are expected to pull back further in 2019 and 2020, given the rising interest rates and slowing economic growth. But this pull back is not going to be a massive one, given that the underlying factors for chemical industry M&As continue to remain the same – specifically, “ample cash on-hand for buyers, the availability of relatively cheap credit, and the desire to increase ROI for investors,” as Dan Schweller, Deloitte Global M&A leader for the Chemicals and Specialty Materials Sectors, says.

The Currency Challenge and Market Competition

The profit margins of Indian companies are shrinking currently under a highly competitive global market, which is leading to a drop in operational capacities. The incredibly strong US dollar is exerting a downward pressure on demand for chemicals, explains Mahesh Singhi.

Another challenge has been the consolidation of the industry. For instance, the industrial gas segment remains the most segmented, with more than 85% of the market sitting with five companies. Therefore, any new entry into the market is creating massive competition – which is not necessarily a bad thing, since it also fuels a higher demand, particularly for targeted products.

The Future of Chemical Industries

Steven Jenkins, vice president and consulting at Wood Mackenzie Chemicals has a positive view of the future. “Two major trends may begin to impact industry portfolio restructuring. The first is slowing growth in transportation fuel demand. The second is an increasing focus on the circular economy, whether through recycling, regulation or substitution,” he explains. “Refiners now recognise that by 2030, up to 50 percent of growth in oil consumption will come from chemicals, and they are looking at crude-to-chemicals integration to secure future growth. This may lead to larger refiners actively seeking to grow their chemicals businesses without adding additional supply via capital investment in new plants, which means M&A becomes a preferred option to realign businesses for the future.”

Sustainability, technology, and large-scale consolidation are all becoming key to deciding how acquisitions take place. Trade rules, shifting political climates, as well as regulatory guidelines will become a major factor in deciding the direction in which chemical M&A proceeds.

A New Approach to Chemical M&A

There needs to be a flexibility in M&A structures, and how merger deals are approached. Although regulatory requirements are becoming stricter and causing a slowdown in the processing of M&As, they are also creating opportunities for companies to take an unconventional path – mainly through, carve-outs, asset sharing, asset swapping, and joint-ventures.

Flexibility is also required in order to combat the current global trade market, which is constantly in flux due to political and social situations. A more flexible supply chain, consolidating overlapping sectors, and dropping production lines that no longer fit the future strategy are all part of this.

As is opening up the doors for private-equity funds. While this definitely creates more competition, the approach to chemical M&A needs to become more aggressive in order to sustain itself. Although there is a massive shift in the M&A process for the chemical sector, the future still remains extremely bright. It is simply evolving, and the chemical industry needs to evolve with it.

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