Focus on your core—it’s all the rage in exercise class and it’s a strategy that’s fueling mergers  and acquisitions, too. So says, Andrew Walberer, a partner and leader of the Americas Chemicals Practice of A.T. Kearney, a global strategy and management consulting firm. The company recently published, “Chemicals Executive M&A Report 2015.”
 
“The biggest driver in deals is divestments to focus on core capabilities,” explained Walberer. “Companies are deciding what value chain to play, so they divest the parts that don’t fit that strategy or, they add on companies that do fit.”
 
For example, in 2014, Eastman Chemical acquired Taminco in a $2.8 billion deal. The reason behind the move, from Eastman’s point of view, was the opportunity to get its hands on Taminco’s world-class alkylamine technology.
 
Similarly, to build its already strong mineralogy, fine particle technology and polymer chemistry businesses, Minerals Technologies acquired Amcol International for $1.8 billion in 2014. That move, according to Minerals Technologies, brought together the global leaders in precipitated calcium carbonate and bentonite, to create a more robust US-based international minerals supplier.
 
According to the A.T. Kearney report, global chemical M&A deal value grew by 13% in 2014 and is expected to increase again this year. And one area of focus, according to Walberer, could be the personal care space.
 
“Personal care is above-average in terms of attractiveness to folks in the chemical business because of growth and margin,” explained Walberer.  “Buyers will pay for innovation and product capability.”
 
According to Walberer, personal care is a relatively attractive end-market for chemical companies because it has both an above GDP growth rate and an opportunity for higher product margins through differentiated products. Moreover, within the personal care market, chemical companies typically play in both volume segments where most competitors have similar offerings (e.g. SLES), and differentiated segments where competitors have unique offerings (e.g. non-ethoxylated replacement surfactants for SLES). As a result, it is not uncommon for chemical companies to make three to five times more margin on the differentiated products relative to the volume products. Which makes it easier for buyers to find those opportunities in chemical specialties such as personal care rather than in commodities such as polyethylene.
 
“There is innovation in personal care, and chemical companies want to get their ingredients into hair care and skin care products. Chemical companies are always on the look out for these opportunities.”
 
So, too, are private equity investors, who have come to see the potential in unlocking the value of chemical companies.
 
“A private equity owner can be pretty successful in improving the performance from a cost and commercial perspective,” noted Walberer.
 
According to data compiled by A.T. Kearney, financial acquirers have increased their focus on specialty and fine chemicals since 2012 and now represent nearly half of acquisitions by volume, compared to one-third just two years ago.
 
“Long story short, private equity’s gaze is turning toward specialty chemicals,” he added. “They see the margin potential and realize that they can deploy their playbook to improve it.”
 
Another reason for M&A optimism is cheap energy. Shale gas makes the US very attractive for C2 surfactant manufacturers. In fact, other than the Middle East, the US is the most cost-advantageous place for feedstocks. No wonder why 10 crackers have been built in the US or offshore during the past couple of years.  And the positive trends should continue.
 
More on the Way
 
In its survey of chemical industry executives, A.T. Kearney found that more than 80% of respondents expect portfolio divestments to drive M&A activity—making it the primary reason, but not the only reason, for making a deal. Seventy-four percent of executives expect strong investment by Western companies into emerging markets and 66% percent expect investment by emerging players in mature markets; in contrast, only half of respondents expect a push from Middle Eastern players.
 
With these trends acting as tailwinds, analysts expect 2015 M&A activity to continue to grow.