Pointers to M&A success

15 January 2004 17:55  [Source: ICIS news]

Beware false synergies, ‘multiple multiples’ and the hockey stick graphs that accompany rosy forecasts. And when buying a business, be prepared to be patient and persevere. You need to understand what made the business you acquire and, critically, preserve the success factors.

At least this is what the chemical deals consultants, Lorelli, suggest. They have drawn together some “immutable truths” about chemical sector mergers and acquisitions activity gleaned from industry history and proposed five M&A commandments that are worth bearing in mind as the sector pulls itself out of the worst downturn in two decades.

Despite the naysayers, M&A in chemicals is more often a “win-win” endeavour than a zero sum game.

This is a sector that continues to be forged by acquisitions and divestments. Lorelli makes the critical point that timing can be everything and admits that M&A is a high risk, high reward activity. And while it may be true that some mergers fail, others are successful. Acquisitions do not always have to be costly strategic exercises that companies later regret.

M&A continues to change the face of chemicals. Re-shaping may slow when times are hard but as prospects improve – as they have recently – M&A rises higher up the corporate agenda.

Opportunities in chemicals are many and various so there will always be room for small players to take crumbs from the table of the big suppliers. Likewise, the bigger companies usually will have the capability at least to seize opportunities for further growth. In the midst of this, venture capital funds are taking a much greater interest in industry restructuring. Estimates suggest, for instance, that they might seek to acquire as much as half the Euro10bn ($13bn) of chemicals assets currently up for sale in Europe.

And Lorelli’s five commandments? The consultants’ first: “Thou shall not kill,” relates specifically to the actions of the buyer. It is all too easy to stifle an acquired firm. Avoid doing so by tapping into the good people, Lorelli says. Be humble and learn from previous management. The incentives culture of a company is tampered with at your peril.

Lorelli sensibly says to beware of false synergies. Some are elusive and intangible so it is good not to assume they will be achieved after the deal has been signed. The third commandment warns of ‘multiple multiples. In other words, it urges buyers to compare apples with apples rather than apples with oranges.

Hockey sticks are the bane of many an analyst’s life and should be avoided. So it makes sense to keep asking just how credible is your seller’s rosy forecast? Getting projections wrong at the outset will cause real problems later.

And Lorelli proscribes patience and perseverance. Buyers and sellers will consider many prospective partners but success can come to those who get things right.

Chemicals is a business where the patient usually win. Market conditions change, as do corporate strategies, but a place can be found for good businesses and product lines. There is, of course, no guarantee that the past is any indicator of future performance but it pays at least try to get things right.

By: Nigel Davis
+44 20 8652 3214

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