CW Financial Outlook & Sustainability Forum: Chemical M&A market robust despite COVID-19
2020-11-20    [Source:Chemical week]

Having face-to-face interaction as part of the M&A process is difficult during the pandemic, which has created a new norm in the M&A world, making due diligence “more critical than ever,” according to Kevin Yttre, president and managing director at Grace Matthews. However, Yttre and Mukta Sharma, managing director/chemical consulting at IHS Markit, said during a discussion on Thursday at CW’s Chemical Industry Financial Outlook and Sustainability Forum and Awards 2020, held in a virtual format, that chemical companies could prefer M&A to investing in new projects in the current environment, owing to the growth slowdown caused by COVID-19.
The chemicals investment climate in the pre-pandemic period was strong, especially in the US, due to availability of feedstock there and in Asia, including China, with consumer demand and the pursuit of self-sufficiency driving investment, Sharma said. Nevertheless, there were “indications of demand and growth easing” in 2019, she said. This resulted in a gradual increase in inventories, which intensified with the fall in demand caused mainly by the response of governments to the threat of COVID-19, especially in the second quarter of 2020, leading to overcapacity and a growth slowdown, Sharma said.

“Finding ways to show growth” is very important for a seller’s mindset in the current M&A climate, according to Yttre. He noted that despite the challenges in the current environment there are many “strategic buyers who are active” and many private equity funds that have raised “a lot of capital and need to put it work.”

There is a “frothy M&A environment” despite challenges and “deceleration of deals” caused by the pandemic, and it is perhaps difficult to believe the "M&A world has been robust even during the pandemic," with Grace Matthews closing 11–12 chemical transactions, Yttre said.

Meanwhile, from a buyer’s point of view, Yttre noted that “sweetheart deals” could be available in some cases during the crisis, but most of the time buyers will still have to pay the market price. The biggest challenge for buyers is to make sure “you get what you pay for,” because in the current environment face-to-face interaction that enables a more accurate assessment of the “intangibles” of a deal is restricted, Yttre said. This is the case for buyers and sellers since “the M&A world is a people business,” he said.

Sharma confirmed that bargains due to COVID-19 are rare and “most buyers are going into conversations which start with a baseline of historical or recent norms and a discussion on the shape of the recovery.” A process that evaluates the health of the sector a company operates in, its consumer base, and its resilience can help mitigate the challenges to due diligence caused by COVID-19, Sharma said.

Using a recent M&A due-diligence process as an example, she noted that the resilience of the company concerned, under the current circumstances, was evaluated through looking into its performance in the second quarter of 2020, the management’s outlook for the full year, and the long-term sustainability and regulatory environment that may affect its business.

Mark Douglas, president and CEO of FMC, in a presentation to the forum about strategic scenario planning, said companies should “set out a vision [and] have belief in that vision despite the fact that you will face inflection points.”

Long-term planning combined with the ability to react are important for the success of the vision, Douglas said. This requires staff that are “agile” and able to adjust and deal with adversities, because reaching a company’s long-term targets also depends on its organizational culture, he said.

This formula helped FMC evolve from a “conglomerate of unrelated chemical businesses” into the “largest pure-play agrochemical, crop protection company” today, with 6.5–7.0% of its sales invested in R&D, and investments in biologicals, precision agriculture, and sustainable application technologies, he said.

Douglas noted that FMC's asset swap with DuPont in 2017 played a fundamental role in the evolution of FMC into a leading ag solutions business. When looking for investment and M&A opportunities, FMC’s approach starts with short-term financial considerations before it surveys the “landscape,” looking for attractive markets to survive and grow in, he said.

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