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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