Achieving Critical Mass……..Why? How often have you heard a chemical company say in one form or another that it needs to "achieve critical mass"? One of the main ways to achieve critical mass is via acquisition, and as illustrated above, this does not always make for a chemical company that is a lean, mean cash machine. Why is achieving critical mass a strategy heard so often in today’s chemical industry? Is bigger necessarily better? Can bigger be worse? In the article that follows, we will explore this subject in more detail. Achieving Critical Mass……..Why? Financial Critical Mass A major reason why companies seek to achieve critical mass is because the market will very often place a higher multiple on the earnings of a larger company compared to a smaller company. If a business with sales of x is valued at a lower multiple than a business with sales of 2x, then it may make sense to grow via acquisition in order to be valued at a higher multiple. But is also may not make sense. If an acquisition dilutes the earnings of a business, then it could reduce value even if the business has doubled in sales and carries a higher multiple. In addition, it is a dangerous proposition for public companies to make business decisions that are tailored to the investment community and Wall Street analysts, where opinions can be fickle, and the prevailing thought can shift dramatically over a short period of time. It is rational that a smaller company carries a lower multiple than a larger company, everything else being equal? Certainly not. But this is a fact of life. It should not however, be the dominant motivation behind an acquisition strategy. Operational Critical Mass Achieving critical mass in an operational sense, as opposed to a financial sense, is a also a common reason for making acquisitions. The rationale here is that a larger company may be able to compete more aggressively, reduce costs, sell better or more, enhance R&D efforts, etc. than it could if it was smaller. This assumption that bigger is better needs to be looked at critically. Exactly why is bigger better? There are scores of strong, profitable, well-managed companies that have sales of $10 million or $50 million or $100 million in the chemical industry. There is also a history of acquisitions of these types of businesses by larger companies which squash the very culture that makes the business so strong in the first place. Once again, a strategy to achieve critical mass in the operational sense also needs to be challenged and understood before acquisitions are pursued. Some Examples Many major acquisitions were made in the past 2 years in the chemical industry. How have the buyers fared? Results are mixed. See some examples below. How much of this post-acquisition stock performance is attributable to the deal? This is a tough question to answer with precision, but a very important one nevertheless.