By: Amit Gandhi and Amita Parekh
Last updated : March 17, 2023 5:44 pm
However, 2021 was a special year as around 42% of deals, by value, were Chemicals Merger & Acquisition (M&A) has rebounded significantly in 2021 – a total of around US $134 billion of deals, up from the lull of US $54 billion in 2020. However, the overall numbers hide more than they reveal. Disaggregating these deals by size, and overlaying larger global strategic trends, showcases instructive patterns for Indian ChemCos as we build the industry. The article discusses three specific questions: What patterns are discernible in global chemicals M&A? What does this mean for Indian ChemCos? And, finally, what is the “call to action”? Disaggregating global M&A trend for patterns M&A in the global chemicals industry has had a strong run since 2014 – consistently clocking US $100 billion plus worth of deals (except 2020), including a few mega deals (Bayer/Monsanto, DuPont/Dow, to name a few). However, 2021 was a special year as around 42% of deals, by value, were <US $1 billion The centre of gravity of the industry is fundamentally shifting toward Asia – in 2010, Asia accounted for around 43% of global chemicals revenue. By 2020, it had risen to 60% - an increase of over 1 trillion euros. This has created strong local champions in these countries, who have war chests and are looking toward US/Europe/Japan for technology and market access (or to partner with global ChemCos on greenfield projects). This is particularly visible in the strong performance across Indian ChemCos since 2020. To compete, chemical conglomerates are shedding weight and streamlining portfolios to create narrower, more focused plays. The market share of the top 20 global chemical companies has reduced from 19% in 2006 to 14% in 2020. This refocusing has opened up opportunity for M&A – e.g. the creation of Dow, DuPont, and Corteva from the merger has resulted in further specialization through acquisitions (e.g. Rogers and Laird acquisitions by DuPont); as well as divestments (e.g. N&B sold to IFF). In addition, the trend toward regionalization of supply chains should result in further cross-border M&A and this is particularly important for Indian ChemCos looking to get embedded in global supply chains. Imperatives for Indian ChemCos Indian multiples are at elevated levels – and capital is accessible. There is a strong expectation of growth, riding the current wave of supply chain realignment. The time is now to act – and many Indian promoters and senior professionals have recognized this. In our discussions across the industry, there is a focus on accelerating outbound M&A. However, the specific strategic needs are varied based on the starting position of the company. We see four archetypes of outbound M&A efforts: 1. Technology and new chemistry platform acquisitions in Europe/US/Japan – primarily by specialty chemical companies looking to grow. This could be as varied as a fundamentally new future-looking business line (e.g. battery chemicals, and food ingredients) or contract manufacturers (pharma and agchem primarily) looking at acquiring a network of scientists and R&D professionals embedded in the geographies of interest 2. Base chemical companies accelerate entry into specialties by acquiring technology, equipment and business books, with the target being small to mid-sized firms in Europe/US/Japan. This could be either downstream from bulk (e.g. the halide value chain) or a new value chain. 3. Geography expansion for specific segments with large entry barriers – eg. AgChem companies looking to enter newer geographies through acquisition of potential players with registrations & customer capabilities. 4. Contract manufacturing companies looking at acquisition of manufacturing facilities with business books, and creating a beachfront closer to customers The typical challenge is valuation multiples, and the “right deal”. However, the arbitrage of Indian multiples provides some room to mitigate the challenge – and future-looking management teams would be well served to ask the larger question: how do we create 5-10x value from the asset, even at higher valuations? Can access to the Indian market change the economics? Will a changed cost structure fundamentally accelerate the asset? In our experience, asking sector-specific questions on the deal can increase the attractiveness. The call to action – “always-on M&A” The M&A process has significant volatility inbuilt – timelines, targets, outcomes, geopolitics, interest rates, and capital. Thus, a “one-shot” M&A search, which would have worked well in the early 2000s, is bound to be sub-optimal in the current environment. The need of the hour is an “always-on M&A” approach. This approach has three ingredients: • Clarity on the ideal target list, and boundary conditions: A one-time effort is required to build a smartly filtered, named list of ideal companies to acquire. This needs to be prioritized and aligned with the strategy of the company. The current availability of the asset, while important, is not an overriding factor – some of the most successful M&A have concluded 2-3 years after first approaching an attractive target. • Proactive outreach with a dedicated M&A team: The approach needs to be proactive outreach to the named company list and engaging in discussions to create M&A opportunities; not just wait for inbound options. This is critical, considering the increased M&A activity in the market, as well as the scope and scale of acquisitions. • Getting the first (few) PMI right: Potential candidates will look at the track record of the company on post-merger integration, and thus, it is imperative to really close the M&A cycle effectively through a specified “integration playbook”. The next three years will shape the rest of the decade, and we believe a focused M&A approach will go a long way in building a strong foundation for the Indian chemicals industry. (Author: Amita Parekh, Managing Director and Partner, BCG India and Amit Gandhi, Managing Director and Partner, Lead for chemicals and agribusiness practice for India, BCG India)