24 August 2007 07:36 [Source: ICIS news]
By Daniel Ten Kate
“If you buy something, it should be very close to your core business and fit into a strategic business plan to capture synergy,” said Tomas Koch, a principal at consulting firm Mckinsey & Co’s Asian chemical practice, at a petrochemicals seminar.
“If this synergy plan is well constructed, it will likely be successful. But if the acquisition is ego-driven or politically-driven, it’s very likely to be a failure. The capital markets smell that very quickly, and you cannot fool the market.”
The chemical industry has entered a new mergers and acquisitions boom cycle, with the total deal value rising to $47.8bn last year from only $13bn in 2003. Major companies are also cash-rich, meaning more deals are very likely to follow, Koch said.
He added the top five chemical players - SABIC, BASF, Dow, Sasol and DuPont - could easily purchase any other specialty or diversified player. However, prices are more expensive as deal activity has picked up.
“It’s expensive now to do a deal,” he said. “If you buy, be absolutely clear you can extract value.”
The median enterprise value-EBITDA (earnings before interest, tax, depreciation and amortisation) multiple of petrochemical deals has risen to 10.5x in the past few years from 8.1x from 2001-2003, he said, adding that statistics show that share prices are driven more by return on investment than growth.
“If the logic is that you have lots of money and a deal would grow the company, it looks good in the Financial Times,” Koch said. “But you are only in the Financial Times for one day, so you need to be very careful.”
He added that specialty products and derivatives are not necessarily a better investment than commodities over the long term. Over the past 10 years, he said, commodities have been a more attractive investment for shareholders than specialty products.
The chemical industry has performed more or less in line with the total market over the past ten years, he added. Now, Asian petrochemical companies have started to catch up to their
“Chemicals are as good an industry as any other,” he said. “The returns are more to do with the company and each individual. Don’t take operational excellence for granted; there are always ways to save money.”
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