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.

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.