$25bn M&A surge suggests market top is close

M&A.pngFinancial markets are different from other markets. And the way we relate to them is different too.

Shops, for example, would never seek to win new customers by advertising ‘Prices increased 10% last week’. Instead, they splash red signs across their windows featuring their ‘new, lower prices’.

But sellers of financial products do the exact opposite. Their advertising focuses on funds that have recently moved up in price. Neither they, nor share tipsters, spend much time on companies whose price has recently fallen.

CEO’s are just the same as the rest of us. None got out their cheque book to make an acquisition 2 years ago, when most shares were dirt cheap during the height of the Crisis. But now prices have doubled, or more, they are lining up to buy.

As Bloomberg note:

• Specialty chemicals have seen deals worth $25bn so far this year
• This is the highest M&A (Mergers & Acquisition) level for a decade
• In 2010, just $3bn of deals were done in the whole of H1

Are specialty chemical prospects suddenly that much better than a year ago, or 2 years ago, when expectations and prices were very much lower? The blog, being a good contrarian, rather thinks not.

Lubrizol, Danisco, Rhodia and the other recent acquisition targets are all good businesses. But the current frenzy of deal-making is perhaps yet another warning sign that the top of the market is not far away.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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2 Responses to $25bn M&A surge suggests market top is close

  1. Bart Moodie 9 April, 2011 at 10:01 pm #

    Dear Paul
    My fellow workers are wondering what will happen now that Solvay will be acquiring our firm. the business areas are different and we are stronger in different countries. In your experience, how does an acquisition such as Solvay taking Rhodia change the new, combined firm? What would normally be considered the “good” changes?
    Thanks again for your insight!

  2. Paul Hodges 11 April, 2011 at 5:17 pm #

    You’ve asked me to focus on the potential ‘good’ changes that might develop from the acquisition.

    My ‘top of the head’ list of these would include:

    • Both companies have tended to focus on the longer-term, rather than simply doing things to boost earnings in the short-term. So I imagine the implementation plan will have a similar long-term focus, and be mainly concerned with growing the business, rather than just slashing costs.
    • A good friend of mine, and a former Rhodia ‘insider’, tells me that he thinks this acquisition is more likely to be positive for employees and shareholders, than most. Solvay brings cash, from its pharmaceuticals’ sale, which Rhodia has lacked since its period of mismanagement in its early days.
    • He also feels that J-P Clamadieu has made an excellent job of restructuring Rhodia’s business, and has been particularly successful in pushing the Group’s emphasis towards developing markets.
    • Equally, my experience of Solvay over many years is that although its businesses are less ‘exciting’, it is very well managed and cash generative.

    It therefore seems very possible that the combined group will now be able to move forward on worthwhile projects which were not affordable for Rhodia in the past. Or as the French would say, “le nouveau groupe devrait avoir les moyens de ses ambitions”.

    I hope these thoughts help, and that the acquisition goes well for you and all the employees of the new combined company.


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