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The chemistry of outbound M&A
By Kirk McIntosh |
September 14, 2012, Friday
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Print Edition
Print Edition
THE chemicals market in China has enjoyed prodigious growth over the past two decades.
China is now the world's largest chemicals producer in a number of sub-sectors such as agro-chemicals and photovoltaic materials, and it is expected to be the world's largest market for chemicals by 2020.
This growth has been driven domestically by the underlying vitality of the Chinese economy and by the cost advantage of Chinese production. Penetration of overseas markets has also been achieved in products where cost advantage is a critical factor in purchasing decisions. However, double-digit increases in labor costs in China are altering this model, resulting in changes in market dynamics.
Chemical producers in China, faced by rising labor costs and lacking the energy cost advantages of the Middle East or North America, are actively seeking to move up the value chain to maintain and extend their market position.
Rather than selling on price, the chemicals industry in China in the future will seek to gain competitive advantage by leading technology and customer-tailored solutions. Particular focus will be given to markets benefiting from either long-term macro trends - such as agriculture, new energy and water - or from the continuing migration of global focus to China and Asia, such as the auto and textile sectors.
Immediate access
Whilst technology can be developed domestically, such development involves significant lead times. By contrast, mergers and acquisitions offer the opportunity to gain more immediate access to international leading technology. Such technology can take the form of new and innovative products and materials sold on the basis of performance rather than cost, or of leading production technology which improves efficiency and product quality. In either case, cost ceases to be the key to competitive advantage.
A clear demonstration of the importance of technology and innovative products can be seen in ChemChina's 2011 acquisitions of Elkem and Machteshim. Both were multi-billion dollar transactions that provided a market leading position in agro-chemicals and advanced technology in silicon materials for photovoltaic cells respectively. The transactions also clearly expanded ChemChina's global footprint with respect to both market access and operations.
The second area of focus, the move towards customer value-added solutions, is in many ways more challenging.
This involves a deep understanding and appreciation of a customer's needs and the design of products to meet the requirements of global and regional markets. The skill set, knowledge base and cultural understanding to achieve this are very challenging to develop. However, the advantages to chemicals producers are considerable.
The more tailored and value-added the product, the less cost will play in the customers' purchasing decisions.
Chemicals producers, principally in Western economies, have spent many years reconfiguring their businesses to move up the value chain and to focus sales organizations on the benefit delivered to the customer rather than cost-based sales.
Mergers and acquisitions offer the Chinese manufacturer the opportunity to take advantage of this expertise and related culture and to establish similar relationships with international customers in China, particularly in end markets where China has established, or is seeking to establish global leadership positions.
Important criteria
Therefore, it follows that an important criteria in the decision making process undertaken by Chinese companies will be an assessment of the growth prospects of the business in China and whether it is possible to replicate the production capability and added value in China to serve the domestic market.
The most obvious challenge faced by outbound Chinese acquirers is in assessing a target's long-term growth prospects and valuation.
The current world macro-economic environment provides a highly advantageous backdrop for Chinese acquirers. A low-growth environment in the West is a significant impediment to Western-focused businesses and is therefore a material drag on valuations. The Chinese buyer, on the other hand, has the potential to take the technology and the value-added of the Western target and deploy it in its home market, creating value well in excess of that easily available to the target Western company.
The most serious challenge to outbound mergers and acquisitions is not, therefore, valuation but rather the confidence and ability of Chinese companies to manage complex international businesses operating in multiple jurisdictions with large multinational workforces.
To date within the chemicals sector, only major state-owned enterprises such as ChemChina and Sinochem have felt able to take on these challenges. However, increasing numbers of Chinese companies are gaining greater exposure to international operations. This is increasing the confidence level and will result in a wider pool of potential outbound acquirers.
A multi-national management team is crucial. Successful deals will see Chinese companies acquire and then leave in place talented international management teams. The synergy from successful integration of international management expertise and existing Chinese wisdom will become one of the most important drivers for Chinese outbound acquisitions.
The Valence Group is a specialist investment bank offering M&A advisory services to companies and investors in the chemicals, materials and related sectors.
China is now the world's largest chemicals producer in a number of sub-sectors such as agro-chemicals and photovoltaic materials, and it is expected to be the world's largest market for chemicals by 2020.
This growth has been driven domestically by the underlying vitality of the Chinese economy and by the cost advantage of Chinese production. Penetration of overseas markets has also been achieved in products where cost advantage is a critical factor in purchasing decisions. However, double-digit increases in labor costs in China are altering this model, resulting in changes in market dynamics.
Chemical producers in China, faced by rising labor costs and lacking the energy cost advantages of the Middle East or North America, are actively seeking to move up the value chain to maintain and extend their market position.
Rather than selling on price, the chemicals industry in China in the future will seek to gain competitive advantage by leading technology and customer-tailored solutions. Particular focus will be given to markets benefiting from either long-term macro trends - such as agriculture, new energy and water - or from the continuing migration of global focus to China and Asia, such as the auto and textile sectors.
Immediate access
Whilst technology can be developed domestically, such development involves significant lead times. By contrast, mergers and acquisitions offer the opportunity to gain more immediate access to international leading technology. Such technology can take the form of new and innovative products and materials sold on the basis of performance rather than cost, or of leading production technology which improves efficiency and product quality. In either case, cost ceases to be the key to competitive advantage.
A clear demonstration of the importance of technology and innovative products can be seen in ChemChina's 2011 acquisitions of Elkem and Machteshim. Both were multi-billion dollar transactions that provided a market leading position in agro-chemicals and advanced technology in silicon materials for photovoltaic cells respectively. The transactions also clearly expanded ChemChina's global footprint with respect to both market access and operations.
The second area of focus, the move towards customer value-added solutions, is in many ways more challenging.
This involves a deep understanding and appreciation of a customer's needs and the design of products to meet the requirements of global and regional markets. The skill set, knowledge base and cultural understanding to achieve this are very challenging to develop. However, the advantages to chemicals producers are considerable.
The more tailored and value-added the product, the less cost will play in the customers' purchasing decisions.
Chemicals producers, principally in Western economies, have spent many years reconfiguring their businesses to move up the value chain and to focus sales organizations on the benefit delivered to the customer rather than cost-based sales.
Mergers and acquisitions offer the Chinese manufacturer the opportunity to take advantage of this expertise and related culture and to establish similar relationships with international customers in China, particularly in end markets where China has established, or is seeking to establish global leadership positions.
Important criteria
Therefore, it follows that an important criteria in the decision making process undertaken by Chinese companies will be an assessment of the growth prospects of the business in China and whether it is possible to replicate the production capability and added value in China to serve the domestic market.
The most obvious challenge faced by outbound Chinese acquirers is in assessing a target's long-term growth prospects and valuation.
The current world macro-economic environment provides a highly advantageous backdrop for Chinese acquirers. A low-growth environment in the West is a significant impediment to Western-focused businesses and is therefore a material drag on valuations. The Chinese buyer, on the other hand, has the potential to take the technology and the value-added of the Western target and deploy it in its home market, creating value well in excess of that easily available to the target Western company.
The most serious challenge to outbound mergers and acquisitions is not, therefore, valuation but rather the confidence and ability of Chinese companies to manage complex international businesses operating in multiple jurisdictions with large multinational workforces.
To date within the chemicals sector, only major state-owned enterprises such as ChemChina and Sinochem have felt able to take on these challenges. However, increasing numbers of Chinese companies are gaining greater exposure to international operations. This is increasing the confidence level and will result in a wider pool of potential outbound acquirers.
A multi-national management team is crucial. Successful deals will see Chinese companies acquire and then leave in place talented international management teams. The synergy from successful integration of international management expertise and existing Chinese wisdom will become one of the most important drivers for Chinese outbound acquisitions.
The Valence Group is a specialist investment bank offering M&A advisory services to companies and investors in the chemicals, materials and related sectors.
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