Grace Matthews advises companies, entrepreneurs, and private equity groups on business sales, acquisitions, recapitalizations, and management buyouts.

Smaller Transactions to Drive M&A

By Nancy Seewald
From Chemical Week
January 12, 2009

M&A volume will be slow through at least the first half of the year as companies assess the extent of the economic downturn and get a better idea of industry demand and asset valuations, bankers say. "There is a lot of uncertainty about what is going to happen in the economy, and (chemical makers) are focusing on their own operations," says Peter Young, President of investment bank Young & Partners (New York).


Many major players including Dow Chemical, DuPont, and Eastman Chemical recently announced restructuring plans that focus on cash preservation and lower spending. Still, some bolt-on or targeted acquisitions are planned. RPM's earnings have slid on the deterioration of the economy, but the company says its financials are solid and that it plans growth initiatives, including acquisitions.


M&A will begin to pick up in the second half, although companies will take a "conservative approach" to acquisitions, says Christopher Cerimele, Managing Director and global co-head/chemicals at Lincoln International (Chicago). "Fewer companies will make large, transformational acquisitions," such as the recent merger of Ashland and Hercules, or Dow Chemical's planned takeover of Rohm and Haas, Cerimele says. Companies will seek smaller acquisitions that are a better fit with their existing operations, he says.


"It will be a good time for large chemical companies committed to their base businesses to do small- and mid-size accretive deals," says John Beagle, Managing Director at Grace Matthews (Milwaukee). "Corporate focus on cash flow and liquidity will temper interest in larger, riskier transactions." Beagle says. Large deals, those above $1 billion, "will be rare, unless driven out of necessity," he says. However, these deals will also be difficult to secure financing for, and sellers "will be reluctant to agree to any deal without firm financing in place," he adds. Transactions under $100 million will be easier to finance through traditional bank loans, Beagle says.


Some companies will need to make divestitures, either for antitrust reasons or because they are too highly leveraged, Young says. Some chemical firms will use divestitures to bolster their balance sheets or generate cash for growth, Beagle says.


Buyers and sellers may not be able to agree on price, however, Young says. "Sellers (may) still think yesterday's price is reasonable." he says. Valuations will be based on balance sheets rather than earnings, Beagle says.


Specialty chemical assets will be in higher demand than commodities, because specialty chemical companies "tend to be valued higher" and are less prone to cyclical downturns, Cerimele says. The recent fluctuations in commodity chemical prices makes commodities a less attractive asset in an economic downturn, he says. Players in certain industries, including adhesives, coatings, and soaps and detergents, have "very strong balance sheets," despite the economic downturn. These firms have the ability to complete small- and mid-size acquisitions without assuming new debt, Beagle says.


Meanwhile, private equity firms, which were major players in chemical industry M&A during the past few year, will become far less active. "The lack of liquidity in credit markets has effectively removed private equity as a driver of M&A activity in chemicals," Beagle says. Strategic buyers will have the best window of opportunity to make acquisitions since 2003, due to the absence of private equity firms, he adds.


"Private equity deals are not dead," however, Young says. The role of private equity firms in industry will be modest, but they will still play a part in chemical industry M&A, he says.