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Video: Will M&A activity accelerate as an alternative to building new chemical assets?

Interview Transcript

How will M & A activity accelerate in 2014?

In 2014 I think M & A activity might really surprise us, and we might see a major uptick in the number of deals coming forward. I think that's for a number of reasons, but probably one of the main ones is that most of the major uncertainties that we see in the economy, major risks, have really now faded somewhat. There's a lot more confidence when we're talking to all of our clients about their future plans.

I think a lot of the companies are now looking strategically at their portfolios to really challenge themselves as to how they grow in the future to add value to their businesses. Clearly, you've got a couple of routes to grow. You can grow organically, but also you can grow through M & A. But equally, you need to really focus on certain parts of your business strategically, because you can't do everything. If you focus on everything then essentially you're not focusing on anything.

I think mergers and acquisitions will be an attractive proposition for a number of companies to grow strategically. Most of the major risks are now out of the way.

In terms of growing organically, companies now are finding that the capital costs of building, particularly certain markets such as the US where we've got such strong activity with all the shale gas, lower feed stock costs, the capital costs now are accelerating. That means that a lot of companies are perhaps pulling back from growing organically. M & A activity would be an alternative for them to grow their businesses.

Equally, companies looking to expand globally, companies that have generated a lot of cash from having low cost feed stocks. One of the ways they can do that, again, is through mergers and acquisitions potentially to buy into an end use market which they're not in already as a wet market entry mechanism, but maybe also to get their hands on a particular technology or supply chain advantage.

Those are really the main reasons I think we could really see a big surprise in the level of M & A activity in 2014.

Going forward, will buyers be private equity or strategic plays?

The types of buyers that we're going to see are perhaps going to be much more strategic than private equity. There are really a couple of reasons for this. In terms of private equity, private equity companies are really trying to buy assets at the bottom of the cycle. If you look at all of our forecasts and expectations for 2014, 15, and 16, we are forecasting an uptick in margins around the world as growth comes back into economies and demand increases.

There has been a pause in people building assets during the recent down time. I think for private equity that cycle timing is not right for major plays. I think private equity might buy smaller companies which fit with other assets that they already own if they do deals. We've seen some of those in 2013.

The strategic buyers, I think, will really come into the market because some of them have got a lot of cash from having big producing from low cost feed stocks, but also they will want to gain access to technology and also into markets that are already producing it. I think that in 2014 and 15, we will probably see a shift in the balance to much more strategic buyers rather than the private equity.

Geographically, where will we see deals?

Geographically, I think we're going to see quite a difference, potentially. If you look in North America, clearly a lot of producers now have got a significant cost advantage in that market. People coming into North America will try and get some of that action, if you like.

In Europe, we’ve still got a market that is really struggling. Costs are significantly higher. I think we'll see some companies trying to get out of certain market segments. Those products that they're selling, or businesses they're selling, could actually be very useful to companies that are in the Middle East or in Asia in terms of those buyers getting access to technology, or to market knowledge, or good products to expand their businesses in other regions.

In Asia, I think everybody's looking at Asia in terms of the huge increase in end use demand for products. Producers who are sitting with assets just in North America or the Middle East will want to get into the much faster growing Asian market, so will be looking to buy assets in Asia.

John Page VP Global Chemical Consulting, IHS Chemical