Growth and profitability are what’s putting M&A on the C-suite agenda, particularly at companies that are struggling more than average in financial performance.
The expected slump in chemical transactions
While the number of deals have increased, most recently-acquired entities have underperformed on the S&P 500 Chemicals Index within the first year after announcing the transaction. Also, slowdown macroeconomic and geopolitical reasons are expected to briefly slowdown M&A activities in the sector.
However, considering that companies are continuing to seek out high-growth and high-margin segments, the frequency of these activities is expected to be back on track in the long term. Companies that have registered low growth and low profits in the past could risk falling behind the competition in finding more deals.
These companies need to develop strategies that could improve their growth and profitability. For the same reason, we also expect them to play a major role in the next wave of consolidation in certain chemical subsectors.
Transaction attractiveness of chemical subsectors
Companies that require large, transformational transactions can be identified on closer analysis. At the same time, it is important to identify the chemical subsectors where increased M&A activity may take place.
Three important metrics help drive the attractiveness of subsectors:
- Growth prospects of each subsector
- EBITDA margin levels
- Asset intensity of each subsector
Considering these metrics, we expect that subsectors such as food ingredient chemicals, personal care chemicals, construction chemicals, and paints and coatings to fall behind the broader sector. Therefore, these subsectors have potential for increased M&A activity in the near future.
However, before starting on this path, companies need to equip themselves with advanced technologies and innovations, which could extend the specialty product life cycle.
Summary
Companies expecting to predict the next wave of consolidation in chemicals need to begin exploring new locations, markets and product categories to achieve both growth and profitability. They should also be focusing on improving their business offerings with the help of strategic transactions. (Download the PDF.)