Most chemical industry executives believe global chemicals merger and acquisition (M&A) activity will continue to increase or stay at high levels, as a global trend of coping with challenging economic conditions.
Management consultancy AT Kearney in its latest ‘Chemicals Executive M&A’ report finds that 39% of chemicals executives expect deal activity to increase, while 41% anticipate a stabilisation at high level.
Since the close of last year’s megadeals, the pipeline had dried up significantly. AT Kearney says the value of pending deals plummeted by 67%, driven mainly by the completion of megadeals, such as Bayer’s acquisition of Monsanto and the Linde–Praxair merger.
The value of announced deals recovered by a moderate 12% in 2018, while the number of announced deals dropped by 11% simultaneously – dipping more than 10% below the ten-year average.
Compared with last year’s survey, skepticism regarding gross domestic product (GDP) growth has grown, as evidenced by almost 50% of executives citing that global GDP growth is becoming an impediment to M&A activity.
AT Kearney global chemicals practice lead partner Thomas Rings says there is a great deal of uncertainty about the slowing economy and a dampening effect on the appetite for M&A deals amid China’s slow economic growth, the escalating risk of trade wars and the unresolved Brexit.
“In this environment, executives view the lack of global GDP growth as a major impediment to M&A activity,” he adds.
Geographically, M&A activity is expected to keep shifting toward emerging markets such as China and the Middle East. After the recent consolidation from megadeals, largely driven by the US and Europe, M&A activity will likely decline in mature markets.
“The appetite for local consolidation, as well as downstream development in China and the Middle East, are spurring M&A activity in emerging markets,” Rings explains.
AT Kearney Johannesburg partner François Santos notes that the Middle East and Africa regions are the only ones presenting growth opportunities this year, driven mainly by Saudi Arabian deals.
“We do not foresee large deals in South Africa in 2020, except for discrete asset disposals. On the other hand, South Africa participated indirectly in megadeals in 2019 as one of the regions being internally consolidated and we expect this trend to continue in 2020,” Santos points out.
The M&A landscape is not only experiencing structural shifts regarding geographies, but also investor types. Santos explains that over the past several years, strategic buyers have not left much room for private equity in the chemicals industry.
“With a financial investor deal share of almost 30% in 2018, compared with 7% in 2016, this trend is changing. Private equity investors gained a significant share in 2018. The share of financial investors finally returned to pre-megamerger levels, which is a trend that is expected to continue,” says AT Kearney principal Evelyn Hartinger.
Further, the consultancy states that many indicators show that the simple consolidation game in chemicals M&A is over.
Consolidation and scale have been the dominant and most cited rationale for the latest wave of megadeals.
In 2019, it is expected to lose ground and only rank third among the deal types with the strongest expected growth. Regional expansion is now the strongest growing deal rationale closely followed by product extension.
“With the new dominating deal types and an overall higher need for synergies, companies will need to aggressively leverage the full set of value-creation levers, covering both top and bottom-line,” Rings concludes.