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March 4, 2002
Volume 80, Number 9
CENEAR 80 09 pp. 25-28
ISSN 0009-2347
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DONE DEAL Dow and Union Carbide celebrate their completed merger at the New York Stock Exchange. DOW PHOTO

With fewer corporate buyers shopping for acquisitions, private equity firms are snagging more chemical assets offered for sale


The chemical industry was in a funk last year. It still is. Despite that, 2001 was a good year for mergers and acquisitions.

Chemical companies were more eager to sell businesses than to buy them. And because it's a buyer's market, financial firms such as AEA Investors, Ripplewood Holdings, and Apollo Management took up the slack and were able to snag assets--about a quarter of those up for sale last year--at prices corporate buyers were unwilling to pay.

Deal makers completed 81 chemical transactions last year valued at $37 billion, according to figures compiled by New York City-based investment banking firm Young & Partners. That was close to the record of $38 billion set in 1999 when 75 companies responded to the urge to merge. And it was a significant jump above the $33 billion value of the 82 mergers completed in 2000.

If it weren't for qualms that regulators voiced over General Electric's plan to buy Honeywell, 2001 could easily have been the biggest year on record for mergers and acquisitions. But European regulators quashed that deal, valued at more than $43 billion.

Concerns over competition in the aerospace industry killed the combination. It would only have been by accident that the new GE would have been one of the largest U.S. chemical makers, with more than $11 billion in sales of plastics and electronic materials.

As it turned out, 2001 started out as a much stronger year than it ended because the number of $25 million-plus chemical deals slowed during the second half of the year, notes Peter Young, president of Young & Partners.

Thirty-one companies completed mergers valued at $10 billion between July and December of last year, versus 50 mergers valued at $27 billion during the first half. By contrast, the second half of 2000 saw the number of mergers crest at 48, valued at $19 billion, compared with 34 deals valued at $14 billion in the first half of the year.

"Deals completed in the second half of 2001 were generally smaller, as was the number of transactions," Young says. What kept the numbers up in 2001 were the number of deals involving Dow Chemical during the first half.

First, Dow finally completed its acquisition of Union Carbide for $10.3 billion in stock and debt. The deal was announced in 1999, but regulatory delays postponed the expected 2000 closing to February 2001. And Dow completed a few sales it was required to make to get regulatory approval to buy Carbide: It sold its ethanolamines business to Ineos and Union Carbide's stake in the polyethylene venture Polimeri Europa to partner EniChem.

Then Dow went on another buying spree last year. It shelled out an additional $2.2 billion to add EniChem's polyurethanes business, Rohm and Haas's agrochemicals business, British fine chemicals producer Ascot, and the 50% of European automotive adhesives maker Gurit Essex that it did not already own.

In fact, Dow accounted for roughly 35% of the merger and acquisition activity Young tabulated last year. Put a little differently, 2001 would have seen only about $24 billion in chemical deals without the acquisitive giant's activities.

When Dow wasn't snagging deals, financial buyers were. For instance, Goldman Sachs purchased Cognis from Henkel late last year for $2.2 billion. AEA Investors purchased the former Goodrich Performance Materials division for $1.4 billion in February and renamed it Noveon.


SOME DEALS just missed going to financial investors. While Sasol won Condea for $1.2 billion, Kohlberg Kravis Roberts was not far behind in the bidding.

Young says financial buyers have only been "aggressively active" in the chemical industry in the past decade. And though "they have raised substantial funds in the past five years, their share of chemical merger and acquisition transactions only became significant in 2000."

In fact, financial buyers accounted for 20% of deals completed in 2000 and 23% in 2001, says Young. Corporate buyers repeatedly outbid financial buyers before 2000. "But after the 1999 peak in prices, valuations came down and financial buyers more often became winners," he says.

Another observer, David Ingles of London-based firm David Ingles Consulting, has discerned a similar trend. Based on his survey of chemical industry mergers and acquisitions, Ingles says financial buyers accounted for 26% of the deals completed in 2001, and since 1999 they have accounted for an average of 23% of deals, based on value. In 1997, financial buyers accounted for only 3% of deals.

Because their balance sheets "are generally very stretched," Ingles says, "corporations are not encouraged by their shareholders to be expansive when profitability has been squeezed as it was in 2001." At the same time, he says, financial buyers "remain flush with cash, looking for good investment opportunities. With corporations in cautious mode, there may be continued good opportunities for them in the market."

Charles A. Lorelli, president of Chapel Hill, N.C.-based investment advisers Lorelli & Co., agrees that financial buyers "are doing better because of less competition from strategic corporate buyers." And he says recent market concern over the quality of target company balance sheets in the wake of the Enron scandal should be of little concern.

"Enron snookered the public," Lorelli says. "If Exxon had gone in there to look over the books, they would have said 'no way.' Most people doing acquisitions don't get hoodwinked. They almost never rely on what people put in front of them."

But Young cautions that current economic uncertainties are likely to challenge not just corporate buyers, but financial buyers, too. Banks and bond buyers are more cautious about the quality of the debt they finance. And the flight to "quality" makes it more difficult for financial buyers to raise funds through lower quality high-yield debt.

Still, in the first two months of 2002, financial buyers continued to make headway. For instance, Goodyear sold its France-based specialty chemicals business to private equity firm Littlejohn & Co.; Avecia sold its Stahl leather finishing and coatings business to Investcorp for $330 million; and Lonza sold its polymer intermediates division to PPM Ventures, the private equity arm of British finance company Prudential.

Though Young predicts a slowdown in the number of chemical mergers this year, it won't be for lack of businesses available. Over the past few months, a number of significant assets were put up for sale.

Bayer, for instance, has a number of businesses on the auction block--among them flavor and fragrances expert Haarmann & Reimer and rubber additives maker Rhein Chemie. Bayer and its partner Degussa also want to sell their PolymerLatex joint venture. In addition, Bayer is looking for a partner in its basic, fine, and specialty chemicals business.

Other businesses may come on the market soon. Royal Dutch/Shell says it will sell its half of the Basell polyolefins joint venture with BASF if it doesn't improve profits. DuPont is planning to spin off its remaining nylon, polyester, and spandex fibers businesses into DuPont Textiles & Interiors.

"Enron snookered the public. Most people doing acquisitions don't get hoodwinked. They almost never rely on what people put in front of them."

AND ALREADY the year has three sizable transactions that are expected to close before the end of June. Bayer plans to buy the CropScience division of Aventis for $6.6 billion. Solvay expects to buy Ausimont from Montedison and a group of banks for $1.2 billion. The deal will double Solvay's fluoroproducts sales and make the company the second largest global fluorochemical maker after DuPont.

In the third deal, GE expects to enter the water treatment business through its purchase of Hercules' BetzDearborn business for $1.8 billion. BetzDearborn has been around the block a few times now. Publicly owned Betz Laboratories bought W.R. Grace's Dearborn water treatment business in 1996. Hercules bought Betz in 1998. The GE acquisition will mean the third change in ownership in just five years for some BetzDearborn employees.

The BetzDearborn experience shows that many times acquisitions don't work out. David Delvin, vice president for European process industries at the consulting firm Celerant, points out that "a lot of companies struggle to realize benefits from mergers and acquisitions. About 70% of all mergers and acquisitions are less successful than anticipated because of the difficulty of integrating businesses.

"The financial part of a merger is the easy part. The real challenge is bringing organizations together and retaining key people," Delvin says. The work to integrate a new business into an existing company should "mirror the hard work of financing and setting up a merger."

Though companies undertake due diligence before a merger, "their focus tends to be overly financial. They need to undertake a more dynamic and tactical focus on markets and personnel considerations," Delvin says. "If companies miss out on doing this up front, mergers could end up being a waste of time."

But wasting time is the last thing most companies have in mind when they undertake the hard work of a merger. And it is especially difficult to do that during tough economic times.

For instance, when Sunoco struck an agreement to acquire Aristech Chemical from Mitsubishi Corp. in late 2000, Sunoco Chairman, President, and Chief Executive Officer John G. Drosdick said, "The polypropylene and phenol businesses integrate well with our existing chemical operations and are a significant step in further upgrading Sunoco's portfolio."

Almost a year later, at the rededication of the former Aristech Pittsburgh Technology & Commercial Center, Drosdick acknowledged the difficult financial climate under which his company had to integrate Aristech into its own chemical operations. "We knew we wouldn't make money right away," he said. And then he added, "I only buy assets that make economic sense. I don't have enough time left in my career to make assets I overpaid for work."

But the economic conditions that even try the patience of managers of well-thought-out deals may be changing. Investment adviser Lorelli says the GE deal to buy BetzDearborn may be a signal that "things are turning around." Shrewd businesspeople, managers at GE may convince others the time is approaching to build up and not just sell off businesses.

Dow Chemical completed the most acquisitions in 2001

Abbott Laboratories BASF Knoll Pharmaceuticals $6,900 February
AEA Investors Goodrich Performance Materials 1,400 February
Allianz Capital Partners, Goldman Sachs Messer Griesheim, 67% stake 663 January
Alpek DuPont's 50% stake in purified terephthalic acid, bottle polymers, and polyester staple fiber 350 July
Apollo Management IMC Global salt and potassium sulfate units 640 November
Baxter International Degussa Astra Medica 470 November
BP Erdölchemie, 50% stake from Bayer na May
Bristol-Myers Squibb DuPont Pharmaceuticals 7,800 October
Degussa SKW na February
Degussa Laporte 2,020 March
Dentsply Degussa dental group 500 May
Dow Chemical Gurit Essex, 50% stake 388 January
Dow Chemical Union Carbide 10,300 February
Dow Chemical EniChem polyurethanes 367 April
Dow Chemical Rohm and Haas agrochemicals 1,000 June
Dow Chemical Ascot 444 June
EniChem Polimeri Europa, 57% stake from Dow 187 April
Ferro dmc2's ceramics, pigments, electronics materials from OM Group 540 September
Goldman Sachs, Schroeder Ventures Cognis 2,200 October
J. M. Huber Noviant na July
Huntsman Albright & Wilson surfactants na April
Ineos ICI Crosfield, chloralkali, chlorofluorocarbon replacers 470 January
Ineos Dow ethanolamines na February
Ineos Degussa Phenolchemie 378 April
OM Group Degussa dmc2 1,100 August
Ripplewood Holdings Shell Kraton polymers na March
Sasol Condea 1,150 March
Sunoco Aristech Chemical 695 January
na = not available.


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