Chemical M&A Soars

Global chemicals M&A deal values rose 30% last year to $110 billion, a fourth straight annual increase, laying the ground for an all-time record spike in 2016, according to the fifth edition of AT Kearney's Chemicals Executive M&A Report. With two mega-deals already announced—Dow Chemical and DuPont's $130 million merger and ChemChina's $43 billion bid for Syngenta—and potential large new transactions generated by emerging-market players, total chemicals M&A values for 2016 could double last year's level.


The M&A wave comes as chemicals conglomerates and their investors question the value of the traditional diversification model and look for stronger coherence in their portfolios.


“Chemicals companies are taking a fresh look at their portfolios, divesting assets that do not fit with a clear portfolio logic. At the same time, they are looking for increased scale in their remaining businesses, driving increased M&A,” said Andy Walberer, AT Kearney partner and leader of the firm's Americas chemicals practice.


Nowhere is the trend of increased focus and scale playing out more clearly than in the agricultural chemicals and seeds market, where multiple players are competing for one of the few “endgame” positions.


“Dow and DuPont's planned merger and subsequent split into three focused companies will create a dominant leader in the agriculture industry and starts to shut the door on future M&A activity by competitors. ChemChina's bid for Syngenta is clearly a move to lock up one of the few remaining positions in the agricultural sector,” said Guttorm Aase, AT Kearney principal and co-author of the report.


Based on AT Kearney's research, chemicals executives see five core drivers of the surge in M&A deals: limited organic growth options; favorable feedstock prices, especially in the US; lower oil prices; portfolio optimization; and pressure from activist investors.


Executives see the lack of organic investment options as the No. 1 factor driving M&A. Chemicals executives noted that valuations for publicly traded companies were high in 2015 compared to historical averages. To sustain the valuations, chemicals companies must demonstrate an ability to grow earnings. In this environment, growth is hard to achieve organically, leading many companies to seek M&A deals.


The report shows that while North America is the largest market for chemicals M&A activity, China is a close second and is rapidly growing as a source of M&A. Emerging-market investors, especially Chinese investors, are making aggressive plays for capabilities and IP by acquiring mature market players with low valuations.


“China's influence on the global M&A market is likely to increase in 2016 as more companies look to acquire world-class know-how and growth opportunities outside their slowing home markets. Undervalued targets in mature markets, such as Europe, are likely to be attractive targets for these acquirers,” said Linus Hildebrandt, AT Kearney principal, Asia Pacific.