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M&A in a low growth climate: Getting deals right

19 October 2016 Mukta Sharma

Despite more than half a decade of improving economics, the chemical industry is in the midst of a low-growth environment. Between 2010 and 2015, overall global petrochemical capacity grew at an average of just 3.9% per year, according to IHS estimates. That's down from the previous five-year average of 5.9%. From now until 2020, IHS forecasts average annual growth at 3.5%, a rate that is about par with global GDP.

This lackluster economic environment is driving shareholders to seek alternative sources of growth and value. Through the early 2000s, chemical companies relied on merger and acquisition (M&A) activity to build scale and market share. Big M&A deals were designed to expand and diversify portfolios and increase geographical presence.

Not all deals succeeded as intended. By the late 2000s, a number of industry players were left with the fallout from deals that failed to deliver and a few high profile names disappeared as a result (e.g., ICI and Hercules).

The motivation for M&A has evolved. Today we're seeing companies look again to M&A as an important strategic lever, one designed to boost returns and enhance growth while supporting tactical and strategic portfolio management.

Another change in the M&A atmosphere is the heightened pressure exerted by activist shareholders, who are demanding actions that improve returns. DuPont, which was pressed by activist hedge fund Trian Partners to break up the company, plans to merge with Dow in a $130-billion mega-deal. Air Products has spun off its Versum Materials division and sold another division, citing shareholder value as a catalyst.

Executives are only too aware that a deliberate, targeted approach to M&A activity is essential to success, particularly in managing risk and exposure. To satisfy investor demand for higher returns in a low-growth economic environment, companies must align around coherent, structured investment portfolios. With this in mind, deals are being shaped not simply as buy/sell transactions but also with consideration for spin-off and carve-out potential.

The pace of M&A activity has picked up dramatically, encouraged by shareholder scrutiny and supported by cheap debt and readily available cash. Air Liquide's acquisition of Airgas and the merger between Sherwin-Williams and Valspar are two examples. ChemChina's buying spree has been remarkable to say the least, with its purchase of Syngenta being its largest, most recent overseas deal.

By successfully executing M&A deals, companies can create appreciable financial advantage and elevate their industry position. The challenge for chemical firms is to identify and realistically assess the value of potential deals. IHS Chemical frequently helps companies screen and evaluate acquisition targets, using proven methodologies and client-specific criteria to assess their qualifications and value.

The stakes are high. Do you have the expertise to develop a sophisticated, disciplined investment approach that ensures M&A deals create long-term value?

For more information on how M&A activity can help chemical companies achieve strategic growth, read this article in the latest edition of IHS Chemical Bulletin.


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