A look at the history of acquisitions and divestitures in the chemical industry reveals certain immutable truths and commandments.

The 5 Immutable Truths

1. M&A is more often a win-win endeavor than a zero-sum game - Why is it that both the seller and the buyer are smiling at a closing? Because each side has achieved their own, very different, objectives. Every deal will have an element of raw, zero-sum negotiation, but because each side has complementary goals, a deal can be fashioned that suits both parties. So unlike the world of sports, where there is a loser for every winner, the world of acquisitions and divestitures is normally a world where buyer and seller both end up smiling when a deal gets done.

2. There is a constant churning of businesses in the chemical industry - While a certain company may blow hot or cold doing deals over time, and M&A in a certain segment of the industry may be frenzied one day and dead the next, the industry as a whole is constantly being reshaped via acquisition and divestiture activity.

3. Timing can be everything - Particular chemical businesses can have sizable swings in profitability. Add to this the fact that valuation multiples and trends as a whole in the industry also exhibit significant swings over time. The resulting lesson: when you do a deal can be absolutely critical, more important than anything else.

4. M&A is high risk, high reward - The stakes in making acquisitions and divestitures are typically high, for both buyers and sellers. The chemical industry is rife with deals that have failed miserably for buyers who have paid too much. The industry is also rife with spectacular successes. And for many privately-owned chemical businesses, there is no more significant event than selling the company.

5. The chemical industry will always have room for small, nimble firms - Consolidation in the chemical industry has taken place over many years, in many segments and across many continents. Huge industry behemoths will always be there, getting larger and larger. However, for all the consolidation that has occurred, and that will occur, there is also a constant stream of small chemical companies, sprouting up and growing, (and in some cases being spun off from larger companies) doing what they do best and what the industry giants can not do or choose not to do.

The 5 Commandments
1. Thou shall not kill. Or more specifically, the buyer shall not kill the business it acquires. When a good business is acquired, buyers need to make sure they preserve the basis for that success. Tap into the good people of the acquired firm. Be humble and learn as much as possible from the previous manager or owner of the business. Retain the incentives and culture that motivated employees before the acquisition. Failure to do so is a recipe for disaster.
2. Beware of false synergies. There are synergies and then there are synergies. Some are relatively easy to quantify and achieve. When modeling post acquisition financials, buyers can take these synergies to the bank. But many synergies are more elusive, intangible. Buyers need to be careful about assuming these will be achieved post acquisition.
3. Beware of multiple multiples. There are two elements to this commandment. The first is a warning against comparing apples to oranges. Multiples take a variety of forms, and caution must be taken to make sure any comparison that is made is an apples to apples comparison. The second part of this commandment is to remember that you can always find some multiple to justify a valuation. While the appropriate use of multiples as a benchmark is a helpful exercise, the ultimate value of a business is determined in the marketplace, after a business gets a thorough showing to a wide cross section of potential buyers.
4. Beware of the hockey stick. Most buyers are well aware of the lack of credibility that accompanies a seller's rosy forecast. Sellers however also need to be cautioned against painting an unreasonably rosy scenario. It could come back to haunt them if the projections don't materialize before closing or if the buyer demands a contingent payment structure based on achieving the projections.
5. Have patience and perseverance. For buyers, it takes a long time and many, many looks at potential deals for every one that is consummated. And for sellers, the process also is one where batting averages are very low: while many potential buyers may look at your business, remember it only takes one to make for a right deal. Success in the M&A world comes to those with patience and perseverance.

... unlike the world of sports, where there is a loser for every winner, the world of acquisitions and divestitures is normally a world where buyer and seller both end up smiling when a deal gets done.