Small-deal activity continues to drive healthy deal volume in the global chemicals industry with 374 announced deals in the first half of 2008, according to the PricewaterhouseCoopers’ LLP report, Chemical Compounds: Global Chemicals Mergers & Acquisitions Analysis – Second Quarter 2008. Deal value continues to be impacted by economic volatility, with large deals continuing to lag behind the prior year. While growth in deal volume almost doubled since the first quarter, average deal value declined to $340 million compared with approximately $545 million in Q1. There were no large deals (worth more than $1 billion) announced this quarter, indicating that the industry is delaying large investments and focusing on smaller transactions. However, this is predicted to be a short-term trend as several deal announcements made less than two weeks into the third quarter will likely impact 2008 year-end levels.
“Deal activity in the first half of 2008 was similar to what we have seen during periods of economic uncertainty with a relatively large number of conservative deals driven by companies taking incremental steps to shift their position in the industry through acquisitions,” said Saverio Fato, global chemicals leader of PricewaterhouseCoopers. “Because the chemicals industry has been hit hard by volatile raw material costs, many companies are unable to make major movements that would drive significant business changes in terms of M&A.”
Economic uncertainty has caused industry players to forgo larger transactions and pursue smaller opportunities to change their market position. Forty-four middle-market deals (with reported value of at least $50 million), compared with 374 small deals (valued at less than $50 million), in the second quarter indicate that the chemical industry is taking incremental steps to diversify product and service offerings and counteract high raw material costs without pursuing large transactions.
At an annualized rate, deal value and volume in the first half of 2008 are not on track to meet 2007 levels. However, if several large deals speculated to close in the third quarter are finalized, deal value could meet or exceed the 2006 level of $55 billion.
The lack of large deal transactions reveals underlying global economic trends. As predicted in previous reports, the regional distribution of deals continues to be dominated by both Asia-Pacific and Middle Eastern players, while activity in North America and Western Europe declined.
Credit market woes have altered the amount of financial investor activity in the chemicals industry. While these bidders accounted for 20% of the activity in the second quarter of 2008 (an increase of 10% since the first quarter), their involvement is behind 2006 levels, when financial investors were responsible for 26% of deals and on par with 2007 levels, when they held 21% of all activity.
“As companies remain under significant pressure from rising raw material costs, we expect to see additional backward integration acquisitions,” Fato added. “Given the amount of cash that appears available to fund major acquisitions, we believe that private equity will become active again in the bidding process for chemical companies. The current environment, however, continues to be favorable for corporate acquirers that are financially sound and willing to proactively pursue opportunities.”
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