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gettyMerger and acquisition (M&A) activity in the global chemical industry wasn’t too inspiring in 2023. After dropping 16% compared to 2022, global M&A transaction volumes reached their lowest level in 10 years. With headwinds that included a high interest rate environment, lackluster revenue, and earnings performance amongst industry participants, and weak demand, most chemical companies spent the year inwardly focused on cost containment and working capital improvements.
Yet, despite these trends, 86% of chemical industry executives across sectors and geographies say they are either somewhat or very likely to undertake an M&A transaction in 2024. Accelerating first quarter momentum seems to bear them out. The challenge? After a couple of years of transactional inactivity, many chemical companies will likely need to rebuild their deal-making muscles. Here are some ways to get started:
Seize the moment
After a couple years of hunkering down, chemical companies interested in riding the cresting M&A wave will need to keep a careful eye on shifting market conditions. As most chemical value chains have finish destocking, chemical production volumes may be poised to rebound. In fact, the American Chemistry Counsel (ACC) expects global chemical volumes to expand by 2.9% in 2024, compared to 0.3% in 2023. At the same time, many private equity funds are pushing up against longer hold periods, which may drive them to bring their portfolio companies to market. This may bring higher-quality acquisition opportunities to the market just as the cost of debt comes down due to loosening monetary policy from the central banks. This confluence of factors could herald ideal conditions for transactional activity in 2024.
Chemical company executives may also want to pay attention to evolving global trends. For instance, the US still holds a significant feedstock cost advantage that makes it attractive to global chemical companies looking to increase their exposure to this low-cost production environment. In China, economic recovery is expected to spark major construction projects, boosting demand for chemical products. In Brazil, favorable economic indicators may drive higher M&A activity, with international investors already expressing interest in the country’s chemical industry. And in India, recent government policies specifically targeted at boosting the chemical industry could make local deals more attractive.
Think small
Although the chemical industry has remained resilient amid significant market turbulence, most companies have not emerged unscathed. This may explain why many are taking a constrained approach to inorganic growth, with acquisitions primarily driven by a company’s desire to expand its portfolio, technical capability, or geographic footprint. Similarly, among the chemical executives interviewed for Deloitte’s Global Chemical Industry M&A Outlook 2024, 53% ranked small strategic acquisitions as a top-three priority, pointing to a preference for smaller tuck-ins or bolt-on acquisitions versus large transformational deals. This impulse to think small may serve the industry well as M&A deals slowly begin to resurge.
On the flip side, the tendency to play it safe has seen environmental, social, and governance (ESG) goals shifted to the backburner. Only 20% of chemical executives surveyed said their M&A strategy was driven by their corporate sustainability objectives or to desire to offer customers carbon-neutral or sustainably produced products. Chemical companies serious about helping to drive the industry’s decarbonization agenda would be well-served to consider ESG drivers when exploring new deals.
Get proactive
With chemical companies increasingly seeking out strategic M&A opportunities, the need to rebuild internal M&A skills is coming to the fore. If active deal environments tend to hone management expertise, the reverse is also true: periods of transactional inactivity can lead to lost organizational knowledge. In recent years, many internal M&A functions have dwindled down and seen their people redeployed. Rather than scrambling last minute, the time is now ripe for chemical companies to rebuild their transactional bench strength, clarify their processes, and define their strategies. Management teams planning to engage in strategic deal-making may benefit from rebuilding their internal M&A capabilities and ensuring they have access to due diligence, valuation, integration, and synergy value-capture support.
Ready for the rebound
Despite the headwinds the global chemical industry has faced, the long-term outlook for chemicals remains strong. The prevailing sentiment among industry executives backs this up, with an underlying belief that a resurgence in M&A activity is a matter of when, not if. Chemical companies interested in creating outsized returns with the right M&A moves may consequently wish to prepare by monitoring evolving market conditions across geographies, exploring smaller strategic acquisitions, and proactively rebuilding their internal M&A capabilities. Those that lay the foundation now will likely be better placed to identify and execute on synergistic deals as they emerge.
