Anatomy of a Deal Seller: Ciba Buyer: Huntsman Business: Textile chemicals Sales: CHF 1.3 billion EBITDA: CHF 115 million Valuation: CHF 332 million Multiple of EBITDA: 2.9x Multiple of Sales: .26x Source: Chemical Market Reporter

There are a whole host of reasons why a company decides to sell and another one decides to buy, and so there is a constant stream of deals in the chemical industry.

Change is Constant

The recent announcement that Degussa is selling its construction chemicals business to BASF illustrates
a theme of merger and acquisition activity in the chemical industry that has withstood the test of time: i.e. that change is constant.  In March of last year, Degussa’s construction chemicals business was one of the company’s “core” businesses.  Less than one year later, it is on the block.  Because change is constant in the world of chemical industry M&A, there is a never-ending stream of deals.

Why is it that a company decides to sell and another one decides to buy?  There are a whole host of reasons.

In the article that follows, we will take a look at some of the reasons that give rise to this never-ending deal flow.

Some of the factors underlying the constant stream of deals in the chemical industry

• There’s a change in ownership:  When the ownership of a company changes, there will frequently be an increase in M&A activity, on the buy-side or the sell-side, and sometimes on both sides.  The Degussa deal highlighted above is a good example.  Between March of last year and March of this year, Degussa’s majority shareholder RAG announced its intended purchase of the rest of Degussa.  Observers have said that RAG’s need for cash to finance this purchase of shares precipitated the sale of the construction chemicals business that had been previously classified as a “core” business.
  
  
• There’s a new CEO:  Rarely will a new CEO come in and do nothing different.  In fact, most new CEOs make significant changes, whether for substantive reasons or in some cases, just for the sake of change.  A change in M&A activity can be one of the changes brought in by a new CEO.  In a similar vein, the long-time CEO close to retirement may also to look to M&A as a “swan song” to his/her career.
  
  
• Financial engineering/flipping:  The chemical industry has seen an influx of private equity groups making acquisitions.  These types of buyers don’t hold on too long, and so there will always be M&A activity as the financial buyer flips the business after a relatively short holding period.  The acquisition (from Hoechst) and sale (to Solutia) of Vianova by Morgan Grenfell in 1998 and 1999 is a good example.  The more recent acquisition of Celanese by Blackstone and subsequent public offering is also a good example of a quick flip by a private equity group.
  
  
• A herd mentality: Occasionally there are periods where one sector or another in the chemical industry is very hot.  In the 1999-2000 period, the industry was replete with aggressive buyers gobbling up “custom manufacturing” and “fine chemical” businesses. The acquisitions of Chirex by Rhodia, BTP by Clariant and Catalytica by DSM come to mind.  Needless to say, many of these deals were overpriced and were followed by large write-offs by the acquiring company.
  
  
• A company is hurting:  When times are bad, it is not uncommon for a company to seek some liquidity and sell.  For example, Huntsman was in some difficulty in 2001 and sold part of their interests to Maitlin Patterson.
  
  
• A company is flush:  Conversely, when times are good, it will often prompt a company to aggressively look for acquisitions.  BASF’s current acquisition spree (the bid for Engelhard and the acquisition of the construction chemicals unit from Degussa, for example) is no doubt being fueled by its record earnings and lofty stock price.
  
  
• Opportunistic deals:  Many a deal in the chemical industry is opportunistic, for the seller or the buyer.  A seller may not have a business up for sale, but if someone comes in and offers a very attractive price, the business may be sold.  And on the other hand, a buyer who may not normally be in the market to buy, may do so nevertheless if a good deal can be had. I am reminded of a statement made by a buyer at a dinner following their first acquisition:  ”We had a 10-point list of criteria that we wanted in an acquired business.  This deal met none of those 10 points……………………………..but it was available!”  The recent acquisition of Ciba’s textile chemicals business by Huntsman may very well be an opportunistic one for Huntsman.  It is doubtful they were looking to get into textile chemicals, but evidently a good deal was to be had.
  
  
• Retiring owner: With privately held companies run by a CEO/owner, age is often a factor in making a decision to sell.  If there are no family members ready to take over, the CEO/owner will have to sell the business at some point.
  
  
• Second generation wants out: And in a related scenario, it is not uncommon for a second or third generation owner or group of owners to decide that they do not have the love for the business that the founder had, and therefore they decide to liquidate their interests and go on to other things.
  
  
• It’s not always rational:  Deals happen for a lot of reasons.  But decision makers are only human.  Sometimes the reasons for selling are not always rational.  People and companies can be fickle.
  
  

The list of factors that underlie this constant churning of businesses in the chemical industry can go on and on.  But what is clear from all of this is that at any given time there are so many dynamics taking place in the chemical industry that there will always be a lot of deals in the offing.