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Ongoing restructuring in Chemical Industry

On 10 July 2008, The Dow Chemical Company (Dow) announced acquisition of Philadelphia based Rohm and Haas Company for US$18.8bn, representing a premium of 74% on previous days closing price. ^[1]. Berkshire Hathaway Inc will contribute US$3bn as equity investment towards the acquisition. Acquisition of Rohm and Haas, world’s largest producer of acrylic paint ingredients, will add series of specialty chemicals to Dow’s product line reducing the impact making it less dependent on economic cycles. Based on FY 2007 sales, Dow now replaces BASF SE as world’s largest chemical company. The acquisition comes at a time when global M&A activity has come to a halt due to ongoing financial crisis resulting from default of sub prime meltdown in the US market.

The acquisition comes on heel on ongoing restructuring process going on in the global chemical industry with key goals of consolidation and specialization. Major acquisition deals since last one year include acquisition of Pharma business of Akzo Nobel N.V (Netherlands) by Schering-Plough Corporation (USA)^[2], acquisition of Imperial Chemical Industries (UK) Plc by Akzo Nobel N.V, Perstorp Group’s (Sweden) acquisition of isocyanate business of Rhodia S.A (France), Tata Chemicals (India) acquisition of General Chemicals Industrial Products (USA)^[3]. BASF SE (Germany) is in process of divesting its styrenics business by end of FY 2008. Thus it can be inferred that the consolidation has not been restricted to any particular region but it is truly global in nature.

The deals have been done at significant premium to prevalent market price reflecting management’s positive outlook towards industries future growth prospectus. Management of the acquiring companies justify the premium on back of synergies emerging from acquisition, focus on core competencies by disposing unrelated businesses and immunization from economic cycles by addition of specialty chemicals to their product lines. Creation of niches on sale of specialty chemicals will enable companies to pass on rising input costs of raw materials and energy to customers thus helping in maintaining the profitability of the companies.

An ideal case for restructuring of chemical industry would be Akzo Nobel. It sold its Pharma business segments in mid-2007 to focus on its core competencies of coatings and chemicals. Akzo Nobel used the proceeds from the sale to acquire ICI Chemicals. It has further divested non coating business segments of ICI. Thus Akzo Nobel has undergone severe a series of M&A deals to divest unrelated businesses and consolidate its position on its core businesses. In the process company has reduced its exposure to business cycle by increasing the share off specialty chemicals on its entire product portfolio^[4].

The ongoing restructuring has great potential of unlocking the potential value in the chemical industry. Management’s positive outlook towards chemical industry, focus on core competencies, economies of scale and lesser dependence of business cycle will lessen the impact on rising input costs improving profitability of the industry resulting in higher valuation.

References

1. ↑ Dow Acquires Rohm&Haas at 75% premium to market price
2. ↑ Akzo Nobel to sell its Pharma business to Schering-Plough Corporation
3. ↑ Tata Chemicals buys General Chemicals for US$1bn
4. ↑ Akzo Nobel Timeline:Wikipedia