Mergers and acquisitions in specialty chemicalsBy our Editorial Team - 20th November 2017
It is a well-recognised mega-trend that modest global growth in the specialty chemicals industry has driven many of the M&As seen in recent years. When organic growth slows, pressure from shareholders drives many companies to adopt a ‘buy and build’ approach to growth.
“Many of our clients have niche positions, so they each have a different set of issues to deal with,” he says. “Of course, a primary concern is always that someone else will replace your niche product, but on the other hand you are likely to represent an ideal ‘buy and bolt-on’ option for another company, and that’s a trend we won’t see going away soon.”
“It’s also a matter of market access,” Mr Dixon explains. “Obviously, buying a company in a different geographic region enables the buyer to extend their reach.”
We asked Mr Dixon whether there is also a trend for companies in China and India to buy into the US and Europe, citing Lianhetech’s recent acquisition of Fine Organics as an example, but according to Mr Dixon “This is the exception rather than the rule, at the moment… there is a lot of interest from companies in China and India looking to acquire sites in the West on an opportunistic basis, but at the moment completed examples are relatively rare.
Looking to the future
In his view the specialty chemical industry is a global marketplace. National events like Brexit are simply more likely to divert supply chains away from the UK if the UK becomes less competitive outside the EU – if anything, a potential driver of more M&A activity.
The greatest challenge to the specialty chemicals industry overall, in Mr Dixon’s view, is the way in which regulations are permeating down to smaller businesses, as everything is being tightened.
“Everyone I speak to is complaining about it,” he says. (We know the feeling!)
With regard to lower-mid market private company M&As, the greatest challenge is ensuring founders – often entrepreneurs in niche markets – realise the true value of their assets.
“One of the things that frustrates me is that many companies are approached by one buyer, and then sell to that buyer without taking a step back to properly prepare and consider the broader market,” he says. “It’s frustrating as an advisor because they are often throwing away value. When I’m preparing a business for sale, I always start with an overall assessment of who all the best buyers might be (in my experience these are often unknown to the seller at the beginning of the process), the strengths and weaknesses of the business both internally and in its market position, what could be improved, and – most crucially – how to position the business to persuade buyers to pay the business’ true current and potential value.”
A lot of smaller specialty companies – those ripe for picking in the M&A market – are often ‘opaque’ from an investment perspective, in that investment-grade information is not readily available about their business, their niche in the broader market, or their future potential. This is one area where private equity investors often seek to turn a profit, he explains. They buy companies that may not be fully understood, they ‘professionalize’ them, present them more clearly, and then those companies will be back on the market in 3 to 5 years’ time with a corresponding uplift in potential sale value.
Mr Dixon’s mission is making sure that companies professionalize themselves – removing their opacity, identifying their potential, and maximizing their value in an M&A situation. “Chemicals is a rapidly growing part of our business as all these factors often apply meaning my team and I can really add value,” he says.
With no end in sight for the trend for M&As satisfying the industry’s requirements for extended service offerings and market access, this looks likely to continue.
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