Chemical Industry Merger and Acquisition (M&A) Activity Gaining Momentum

In the first half of 2010, there has been a noticeable pickup in the level of M&A activity in the core chemicals industry. In fact, in the first half of 2010, there were more deals than there were in all of 2009; to date, there have been 23 closed deals in 2010 whereas 2009 saw only 20 deals for the whole year (and only 7 for the first half). In terms of actual value, the 23 deals in 2010 represent $29 billion whereas 2009 saw $25 billion in deals for the whole year. Median valuations multiples (i.e. EV/EBITDA multiple) are on the rise for deals within the industry this year, that is significantly higher than the 2009, 2008; however, actual transaction value remains lower than 2007. It seems that sellers are more focused in achieving their strategic objectives and buyer are more focused on the value (instead of multiples or price)....Everyone wins!!

Semiconductor industry (early in the supply chain) seems to experience a further gain along with the global manufacturing and chemical sectors’ continued advancement (at a slower pace). Housing and job growth was disappointing and employment recovery may take a very long time. On the other hand, inventory rebuilding of manufactured product is moving into a moderate growth phase. All of these data coincide with the major upswing in reported second quarter revenues and profits across the industry.

Not only has there been an increase in the number of deals, but they have been more focused towards smaller-scale transactions as opposed to large, transformative deals. This can be attributed to several factors, among which include the European Union’s Reach legislation, an expected increase in the US capital gains tax, as well as banks’ predilection to favor smaller deals that focus on add-on acquisitions as opposed to massive transformations. Furthermore, a good deal of M&A activity has been conducted by financial buyers as opposed to major industry players; in the first quarter of 2010, financial buyers accounted for only 6% of the M&A dollar value, which has since risen to 48% in the second quarter.

So, what does all this information mean for the industry as a whole and how can investors capitalize on these conditions? In terms of the chemicals industry, these figures convey a strong underlying value and demonstrate the beginnings of a vibrant recovery for the industry. Furthermore, in terms of capitalizing on investments, the data indicates that the market is leaning towards smaller, operational value-adding deals for numerous reasons, and it is an ideal time for investors to take advantage of this new, and probably lasting, development in a recovering market.

1H-2010 M&A Update Slide Link: http://www.slideshare.net/ennovance

Quick perspectives on chemical related M&A deals: uptick in Q1-2010

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?