Economy may be poised for strength, less need for chems M&A – lawyer

BARCELONA (ICIS)–The global economy could be at a tipping point where stronger growth returns, creating better conditions for investment and lessening the need to use mergers and acquisitions (M&A) to chase growth, according to a chemicals sector lawyer.

After years of very low growth, there are early signs of improvements in manufacturing in different regions and a stock market rally which can’t readily be dismissed as a ‘Trump Bump’, says US-based Carolyn Buller, global chemicals lead for law firm Squire Patton Boggs.  

She speculates that, following a prolonged period of tepid performance since the recession of 2008/9, the global economy could now be poised to enter a period of higher activity driven by fuller employment and increasing investment.

“If you look at manufacturing data over the last three-to-six months it has improved globally. This has been consistent for the last six months and that is inconsistent with the ‘slow growth forever’ view,” said Buller.

“Markets tend to predict events by six months so we could be at the end of this period and be ready to go beyond 1-2% [GDP growth],” she added.

She points out that global economy has been growing slowly since 2008/9 so it is possible that it is now bumping up against full employment and capacity. If that is the case then there could be a multiplier effect where people start spending money and investment increases.

Supporting this theory, she highlights the fact that interest rates are expected to rise and this is consistent with full employment and capacity. Bond markets are pricing in increases and US treasuries have been rising.   

If a strong economy is returning then the need for chemical companies to rely on M&A to drive margins and growth will lessen. There could be a refocus on organic investment, says Buller, whose practice specialises in M&A transactions as well as environmental law and advocacy.

“M&A multiples have been very high with 15x to 20x [times earnings before interest, tax, depreciation and amortisation – EBITDA] no longer unusual. What happens when organic growth becomes more of a possibility through investment as demand increases?” she said.

“Perhaps M&A will become less compelling because now it is possible to grow in multiple ways. There could be less pressure on M&A,” she added.

Many companies have used M&A to chase margins by, for example, moving downstream into life sciences and healthcare. This may no longer be necessary if economic growth is returning: “If manufacturing is coming back it could be time to go for 3-4% growth by investing in new technologies, ideas and ways of making money.”

Buller points out that when Trump was elected the “smart money” went into cash as investors were expecting stock markets to plunge. However, since his appointment markets have risen strongly in the US whilst in Europe the FTSE index has been hitting all-time highs.

“Is this a Trump Bump? He has promised less regulation and if his infrastructure programme happens that will benefit manufacturing tremendously. On the other hand is protectionist and as the chemicals industry is so global any trade barriers will not help in the least,” Buller said.

Buller says that, for her company’s advocacy on behalf of chemical company clients, the overwhelming issues in the US are trade and tax.

“If a border tax is raised then everyone retaliates. Trump has made promises to protect US jobs but I think a border tax will hurt US jobs because of the retaliation,” she said.

She believes any economic resurgence could happen despite or without Trump’s influence.

Another major issue for US chemical clients is tax reform: “The US tax code is broken – it has not changed since the 1980’s so US companies go overseas because of our unfavourable taxes. Everyone hopes we do get tax reform to put us on a par with other countries,” she added.