The economic downturn has adversely affected almost every industry and the shrinking demand for acquisitions depressed valuations for selling companies to their lowest levels in recent history that drove M&A activities to crawl. While no one can be certain what the immediate or long-term future holds for M&A activity, we are beginning to see empirical and anecdotal evidence that 2010 might get better for chemical and related industry deals. Until the general economic climate improves, or at least stabilizes, there is little reason to believe that financial and strategic buyers will jump back into acquisition mode. Here are some perspectives to consider:
Both the volume and value of deals within the chemical industry has increased markedly from the fourth quarter of 2009 to the first quarter of 2010. As measured by value, deal activity during the first quarter of 2010 increased by $15 billion, from $7 billion to $22 billion. While this increase was fueled mainly by five large deals, which accounted for 80% of the total activity, deal-making across the value spectrum is expected to increase throughout 2010. Cross-border deals are also expected to increase from 2009 to 2010, as the global economy continues to recover.
Two hundred sixty deals were announced during the first quarter of 2010, representing a 33% increase from the same quarter of 2009. While the number of deals announced dropped from 292 in the fourth quarter of 2009, the 262 figure does not accurately reflect the true deal volume during the first quarter, as it has been taking longer for interested parties to reach the announcement phase of deal negotiations.
During the first quarter of 2010, the proportion of deals by value involving financial investors continued to drop– 11% compared to a peak of 20% in 2007. By actual deal size, finical investors were only involved in $2.6 billion worth of transactions, as compared to $26.1 billion in 2007.
As access to credit continues to improve, private equity buyers are expected to reverse this trend. In fact, one of the largest deals of the first quarter, valued at $1.63 billion, was the acquisition of Styron Corp by Bain Capital, announced in March. However, for the moment, strategic buyers still retain a competitive edge over purely financial buyers.
Consolidation and increased competition within the industries are expected to be the key drivers behind strategic deals, with a focus by acquirers of achieving cost and operational synergies in their core businesses. Additionally, the opportunity to acquire companies that remain financially distressed is still present.
As a result of the focus on strategic deals, many sales have either resulted from direct discussions between the two participants or have been conducted as auctions in which the number of bidders has been intentionally restricted. Due to the effects of the recession on reported earnings over the past few years, the complexity of conducting an accurate analysis of potential targets has increased significantly. Combined with the private nature of most recent deals, it is of the utmost importance that prospective acquirers conduct thorough up-front research and have the experience to fully understand the industry, so that they are ready to act when deal opportunities present themselves.
Looking forward, the need for a complete understanding of target companies’ operations will be amplified by increasing uncertainty in the chemical industry. This uncertainty will be driven by commodity price volatility, as well as government actions concerning health-care and climate change.
We may agree after this latest downturn, private equity firms and traditional strategic/companies should be keen to understand the target’s business fundamentals, it’s relevant market/customer to avoid next disasters. Operational intelligence, domain expertise and alignment of interests would be the critical “must have catalyst” for sustained success. The question to ask, if a generalist PE firm have the necessary skills to produce higher IRR that LP/investors are demanding?
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