Analyzing the data of the past 15 years may be the key factor to find the next wave of M & A integration in the chemical industry.
There are more and more M & A activities in chemical companies. Many people in the chemical industry are trying to predict where this increasing M & A activity will take place and how it will continue in the future.
At Ernst & young, we reviewed the strategic principles behind the large-scale chemical transactions that have taken place in the past 15 years to predict the trends that will drive these transactions.
In our report, “where are we going to see the next wave of consolidation in the chemical industry?” (PDF), three points become clear:
Companies with lagged financial performance are more likely to engage in M & A activities than those with strong growth and profitability.
Companies with lower than average financial performance are more likely to carry out transformation transactions.
Enterprises with revenue growth and profit potential are facing increasing strategic pressure, requiring them to carry out large-scale transformation transactions.
Jens Christian Fritz, chief financial officer of ey, head of strategy and trading, founding business in Germany, Switzerland and Austria, said: “growth and profitability are the reasons why mergers and acquisitions are on the executive agenda, especially in companies with more than average financial difficulties.”
Chemical trade
In the past 15 years, M & A activities in the global chemical industry have increased significantly. The number of transactions worth more than 3 billion euros is about three times that of the previous 15 years (1988-2002).
The direct result of these transactions is:
Expand products to segments with higher profit margins. The geographical focus of these transactions is driven by their respective end market profiles (e.g. e-chemicals in Southeast Asia).
Geographical expansion. Targeted geographic expansion usually occurs in growth regions such as Asia Pacific and Eastern Europe.
Market share. These developments usually occur in more mature regions, including Western Europe and North America.
There is also a regional impact in trading. Most of the big deals are in mature regions such as the US, Western Europe and Japan. Such transactions have also occurred in growth regions such as China, India, Thailand, Indonesia, South Africa and Eastern Europe.
In addition, the number of transactions increased in selected chemical segments, including adhesives, petrochemicals, paints and coatings. The most recent deals have focused on the agricultural and industrial gas subsectors from 2016 to 2018.
Expected decline in chemical trade
Despite the increase in the number of deals, most of the recently acquired entities underperformed in the S & P 500 chemicals index in the first year after the deal was announced. In addition, macroeconomic slowdown and geopolitical reasons are expected to temporarily slow M & A activity in the industry.
However, the frequency of these activities is expected to return to the right track in the long term, given that chemical companies are continuing to look for high growth and high profit segments. In the past, companies with low growth and low profits may lag behind competitors in finding more deals.
These companies need to develop strategies to improve growth and profitability. For the same reason, we also expect them to play an important role in the next wave of consolidation in some chemical industry segments.
Trading attraction of chemical industry
Companies that need large-scale conversion transactions can be identified through more detailed analysis. At the same time, it is important to identify the chemical sub industries that may have more M & A activities.
Three key indicators help to drive the attractiveness of sub sectors:
Growth prospects of various industries
EBITDA margin level
Asset strength by Sector
Taking these indicators into account, we expect sub sectors such as food ingredients chemicals, personal care chemicals, construction chemicals, paints and coatings to lag behind the broader sectors. Therefore, these sub sectors are likely to increase M & A activities in the near future.
However, before starting this road, chemical companies need to equip themselves with advanced technology and innovation, which can extend the life cycle of professional products.
