INSIGHT: Companies struggle with M&A in difficult times

02 February 2009 17:24  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--It will be a brave company – or one with considerable foresight – that strikes a major merger or acquisition now.

The credit crunch and the global recession have dealt a body blow to chemicals sector M&A activity.

It is not that there are no deals out there to be done. But the resources to do so are limited, to say the least, and for most players expensive.

Of greater expense is the damage that the wrong deal, done at the wrong time can do to a company.

The market value of sector giant Dow Chemical hangs in the balance as the Dow board decides what it can do next to extricate itself from a massive strategic bind. CEO Andrew Liveris and his board are not in the throes of their toughest period of decision making for nothing.

Dow’s strategy – to shed, or rather, joint venture, upstream assets and then to focus on more market facing business is eminently sensible. But the execution of that strategy has fallen foul of the credit crunch and the sharp downturn in prospects for chemicals.

Liveris has been called many things over the past few weeks as he and the Dow management team have struggled with their potential acquisition of specialities maker Rohm and Haas.

Rohm and Haas’s owners struck an all but watertight deal with Dow in 2008. It has yet either to be finalised or unwind. And it may be months before there is any concrete outcome.

Dow is working to secure another joint venture in basic plastics to compensate for the collapse of its K-Dow deal with Kuwait. The K-Dow/Rohm and Haas saga is proving to be an expensive mess that challenges Liveris, his board and Dow itself.

That is why even talk of strategic deals now is greeted with scepticism.

On the one hand, it makes no sense for a chemical company simply to sit this unprecedented period of uncertainty out. Something has to be done to position the firm for future growth.

But in the short term, at least, it makes no sense to make a mess of two companies, as Liveris has suggested, just to see a deal done.

Consultants Accenture put some of the background to the current state of chemicals sector M&A into perspective in a just-released report.

A common sense approach to a demand downturn would be divestments and targeted acquisitions. But as the consultants say during this industry recession many have abandoned plans for strategically orchestrated growth in geographies and products.

The times add to the complexity of making the right move to expand in order to capture growth.

The strategy has to be right in the first place. But Accenture believes that sovereign wealth funds have a bigger part to play in sector M&A.

More joint ventures, as opposed to outright buy-outs and strategically oriented acquisitions might be expected, it adds.

Sovereign wealth funds offer a deep pool of finance in difficult times.

Dow tapped into the Kuwait Investment Authority sovereign wealth fund to the tune of $1bn (€78m) to help fund its acquisition of Rohm and Haas.

Reports suggest that the Polish government has been courting sovereign wealth funds in the Middle East to take a majority control of fertilizer producer Zaklady Chemiczne Police, Accenture says.

The China Investment Corporation bought a stake in Blackstone last year. And banks such as Citigroup, UBS and Morgan Stanley have sold significant stakes to sovereign wealth funds.

The statistics show that the involvement of sovereign wealth funds has risen.

Private equity was responsible for 27% of $100bn of chemicals M&A transaction value in 2007.

By the end of December 2008 sovereign wealth funds and state-owned enterprises accounted for 19% of the deals done in chemicals.

SABIC's acquisition of GE Plastics is a prime example of a state-controlled enterprise (the Saudi Arabia government owns 70% of the chemicals producer) making a strategic move into a high technology market that is active in developed markets.

SABIC particularly might be expected to take advantage of opportunities to obtain further geographic or technological reach even in the current extremely difficult operating environment.

If Dow is to do a deal in basic plastics, for instance, SABIC is one company many analysts would put in the frame alongside Dow’s Middle East joint venture partners such as Saudi Aramco and Oman Oil.

Dow’s dilemma highlights the difficulties management can have in executing strategy when markets turn against them.

Accenture points to the growing importance of joint ventures in chemicals and of having the right strategy mapped out in the first place.

In the second, that strategy has to be good enough to see the acquired or merged business of to a flying start.

The trouble is, currently, nothing in chemicals is flying. Markets are in the doldrums or simply stuck. The focus of most companies is on preserving cash.

There will come a time, however, when the clever company makes the right, and decisive move. That time is likely to be a while off yet.

The first half of this year will be difficult in chemicals as it will be in so many other sectors of manufacturing. Don’t expect much sector M&A activity, at least of a large scale. On the other hand, don’t be surprised when the next big deal is done.

($1 = €0.78)

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By: Nigel Davis
+44 20 8652 3214

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