In today’s market, chemical companies need to start to regard M & A as a strategic tool to make themselves more advantageous than their peers. Successful M & A usually helps to seize growth opportunities, improve capabilities, diversify service / product portfolio, change leaders and / or strengthen their position in the market, reduce costs in the value chain and, most importantly, help to maintain a dynamic environment.
The integration of any industry is an inevitable phenomenon beyond a certain point in the business cycle. When enterprises find it difficult to achieve organic growth, they will consider mergers and acquisitions, joint ventures and cooperation. About 57% of the global chemical companies are facing challenges in terms of organic growth, and they are turning to profitable partnerships to survive in this volatile industry. As a result, the company constantly monitors the financial performance of markets, products and other companies and focuses on acquiring them. Recent acquisitions include Dow / DuPont (US $140 billion), Bayer / Monsanto (US $66 billion), Air Liquide / Airgas (US $13 billion), Praxair / Linde (US $43 billion) and CHEMCHINA / Syngenta (US $44 billion).
From the perspective of market segmentation, industrial gas seems to be the most integrated sub market, with the top five companies controlling 86% of the market share. Similar trends have been seen in other industries, such as agrochemicals, paints, coatings and fertilizers, where top companies control an average of 60% of the global market. Specialty chemicals is another area with strong growth momentum, accounting for about 50% of all M & A transactions in the fourth quarter of 2016.
In today’s dynamic environment, a notable trend is that the value / transaction increases year by year, while the total number of transactions decreases year by year. Compared with the first quarter of 2016, the number of transactions completed in the first quarter of 2017 decreased by about 20%. Another new trend is that companies are considering divesting unprofitable business units. A typical example is DuPont’s divestiture of its high performance chemicals business, chemours, while Akzo Nobel is exploring divestiture of its specialty chemicals business to resist PPG’s acquisition. In the short term, these practices will continue to dominate the market and strategically adjust the existing portfolio in a profitable way.
There are many reasons for the merger of chemical industry. The main problems include the global economic downturn, the oil market downturn, the uncertainty brought by brexit, the commercialization of chemicals and the current challenging business environment. In order to seek growth and value, the company will focus on Strategic M & A, and continue its growth story by adding new products to its product portfolio, promoting the synergy of existing products and expanding the region.
However, integration alone will not promote the survival of the chemical market. Despite the intense M & A activity, the growth rate of the industry was only about 2% in 2016. Overvalued transactions have yet to yield higher returns. The new environment creates a situation in which threats and opportunities coexist for all participants in the value chain. If enterprises want to succeed in this field, they must be more focused and innovative to create value for customers. Looking ahead, a strong differentiation factor will distinguish the best from the others. Even companies that choose to stick to their current value proposition need to build new capabilities to succeed in a changing environment. For example, capabilities in digital space, analysis and sustainable development will play a big role in their growth stories. Enterprises need to realize that the future of the chemical industry will be completely different from today’s scene. So, how should chemical companies position themselves in the changing environment?
Successful companies need to make conscious decisions about their identity and action plans in the market. In order to support this decision, companies need to look at and understand from within which unique capabilities can make a difference, so that they can better realize their value proposition than their competitors. Then they need to focus all their energy on building these capabilities and turning them into a powerful growth engine to drive them in the future. This new way of thinking and resource allocation requires cross functional collaboration. Companies with this vision will have the upper hand among others.