The first blog analyzed the acquisition of Rohm & Hass by Dow Chemicals and Ciba by BASF. There was further analysis of other companies that could go about with a similar strategy of acquisition. A month later after writing that blog, Reliance Industries (the largest petrochemical company in India and one of the largest in the world) on November 24th announced its interest in acquiring financially burdened petrochemicals maker LyondellBasell. The acquisition is expected to make Reliance a leading chemical-manufacturer in the world. It will give Reliance access to 19 countries where LyondellBasell has its presence. It will also give Reliance access to Lyondell’s technology patents. Chinese company Sinopec earlier expressed interest in LyondellBasell acquisition but later backed out of it.
Reliance has quoted that it is willing to pay $12b for the acquisition. If the deal goes through, Reliance will be inheriting a debt of $19.3 billion and litigations faced by Lyondell from creditors and debtors. LyondellBasell has assets worth $27.1billion and debt of $19.3b. Reliance has the financial power to fund its acquisition. Unlike Dow which was relying on Kuwait Petroleum Authority deal to fund for its acquisition, Reliance has enough cash and fund-raising power by itself to fund for the deal.
Reliance revenues and EBIT from its three major sectors (refining, petrochemicals, Oil & Gas) are:
Sector Revenues EBIT
Refining 68.10% 28.80%
Petrochemicals 26.60% 46.80%
Oil & Gas 5.10% 24.30%
Source: October 2009 financial report presentation from Reliance Industry website
In the following table, percentage of revenue is shown per 1000 units and EBIT is calculated as percentage of this revenue.
Sector Revenue (per 1000 units) EBIT (units) EBIT/Revenue
Refining 681 196.13 0.29
Petrochemicals 266 124.49 0.47
Oil & Gas 51 12.39 0.24
This table shows that even though Refining is the major revenue and Earnings generator, it’s EBIT to revenue ratio is less. This sector is getting matured and is not going to be a major earnings driver. Oil & Gas sector is a promising growth sector where it contributes 25% of EBIT from just 5% of revenue. Petrochemicals sector is in between these two sectors and it is a good strategy for Reliance to find partners or go in for acquisitions in this sector to expand its revenue and market. For the near term, it is relying on domestic market demand for growth opportunities. However, this is not going to be enough in the long term.
In the current economic and industry scenario, companies are available for acquisitions in low valuations and this would be a good opportunity for Reliance to enter global markets. Acquiring LyondellBasell which is into petrochemicals will be a strategically good opportunity for Reliance.
Monday, December 7, 2009
Tuesday, November 17, 2009
Increasing Product development costs and decreasing length of Product Life Cycle
A major problem in chemical industry has been that product development costs are going up whereas the product life cycle is getting shortened. Especially in this industry which is heavily based on research, it is of a big concern.
Product development costs have gone up for reasons such as:
1. Increasing Research and Development costs. Chemical Industry is a research-based business. It requires massive investment for research and development. Specialty chemicals business in particular needs highly skilled labor and that requires paying higher than average salaries to maintain innovation and quality.
2. Increasing energy costs. Chemical industry is the largest consumer of energy
3. Increasing raw material costs. Commodity chemicals businesses rely heavily on oil and gas. Oil prices have fluctuated a lot in the recent past and is expected to do so in the future.
4. Increasing disposal and clean-up costs.
5. Increasing costs to oblige with regulations and comply with Safety, Health and Environmental (SHE) issues.
On the other hand, the product life cycle has got shortened for reasons such as:
1. Changing specifications for the end industries. For e.g. the changing requirements in sectors such as automotive, construction, packaging, paints, etc.
2. Increasing competition from other products introduced by competitors
3. Changes in product processing methods with changes in regulations
As a cyclical effect, when the product life cycle gets shorter the product costs further go up. This is because products that have shorter life-cycle have high R&D expenses, high marketing expenses, require high new product sales, high costs, high prices and a low degree of vertical integration.
It is all the more important now to be able to introduce new products at low costs and/or extend the product life cycle of existing products. Food Industries have extended the product life cycle by introducing frozen foods. Pharmaceutical companies are extending their products by getting into generics and collaborating with low-cost production facilities. Some ways to extend the product life cycle, generate more revenues and/or decrease costs are:
1. Making early promotions about the product
2. Releasing products with minor modifications through each stage of the product life cycle
3. Making substitute products in the maturity stage
4. Discovering processes to turn wastes into some other form of useful products (e.g. turn some organic wastes into fuel)
5. Developing low-cost waste disposal options
6. Collaborating with other players to share the costs and resources
7. Continuously monitoring customer needs and plan well-ahead about future products
8. Developing a product development process which will require no or very less modifications when external factors such as regulations change
9. Introducing existing products in new markets or for new purposes
10. Increasing automation of product manufacturing
Product development costs have gone up for reasons such as:
1. Increasing Research and Development costs. Chemical Industry is a research-based business. It requires massive investment for research and development. Specialty chemicals business in particular needs highly skilled labor and that requires paying higher than average salaries to maintain innovation and quality.
2. Increasing energy costs. Chemical industry is the largest consumer of energy
3. Increasing raw material costs. Commodity chemicals businesses rely heavily on oil and gas. Oil prices have fluctuated a lot in the recent past and is expected to do so in the future.
4. Increasing disposal and clean-up costs.
5. Increasing costs to oblige with regulations and comply with Safety, Health and Environmental (SHE) issues.
On the other hand, the product life cycle has got shortened for reasons such as:
1. Changing specifications for the end industries. For e.g. the changing requirements in sectors such as automotive, construction, packaging, paints, etc.
2. Increasing competition from other products introduced by competitors
3. Changes in product processing methods with changes in regulations
As a cyclical effect, when the product life cycle gets shorter the product costs further go up. This is because products that have shorter life-cycle have high R&D expenses, high marketing expenses, require high new product sales, high costs, high prices and a low degree of vertical integration.
It is all the more important now to be able to introduce new products at low costs and/or extend the product life cycle of existing products. Food Industries have extended the product life cycle by introducing frozen foods. Pharmaceutical companies are extending their products by getting into generics and collaborating with low-cost production facilities. Some ways to extend the product life cycle, generate more revenues and/or decrease costs are:
1. Making early promotions about the product
2. Releasing products with minor modifications through each stage of the product life cycle
3. Making substitute products in the maturity stage
4. Discovering processes to turn wastes into some other form of useful products (e.g. turn some organic wastes into fuel)
5. Developing low-cost waste disposal options
6. Collaborating with other players to share the costs and resources
7. Continuously monitoring customer needs and plan well-ahead about future products
8. Developing a product development process which will require no or very less modifications when external factors such as regulations change
9. Introducing existing products in new markets or for new purposes
10. Increasing automation of product manufacturing
Monday, November 2, 2009
REALIZING GROWTH IN INDIAN CHEMICAL INDUSTRY
Indian Chemical Industry is the 13th largest chemical industry in the world. As of 2008, its size is approximately $35b which is 3% of Indian GDP (Source: http://chemicals.nic.in/chem1.htm). The industry employs about 1million people. KPMG in its report released in the year 2002 assessed that under optimistic and realistic conditions the industry by 2010 can reach a size of $100b and $60b respectively. However, as of 2008, the industry size has only reached about $35b, just a $7b increase from the year 2002.
Here are a few thoughts on what could be done to improve the size of this industry. Please post your thoughts too in this blog.
1. CONSOLIDATION: The industry is highly fragmented with as many as 1900 companies. Consolidation will help to increase efficiency and reduce costs. Further it will also help in pooling money to invest in Research and Development which is a need for this industry.
2. EXPANSION TO GLOBAL MARKETS: Huge Domestic market size has helped Indian companies in the past and is continuing to do so in the current global scenario. However, this narrow focus will not allow increasing revenues in the long run. Aggressive expansion to global markets will be required to increase revenues. Further, it will also help to increase quality, efficiency and performance. Government on its part should not try to protect the industry. Free passage of goods should aid in strengthening quality and efficiency.
3. INVEST HEAVILY IN GENERIC DRUGS: Companies such as Ranbaxy, Dr.Reddy’s Labs are already holding patents for generic drugs manufacturing processes. The healthcare market is bound to increase all across the globe. Population is aging faster in western countries and at the same time the healthcare costs are increasing exponentially in those countries. Drugs should be affordable to cater to this market. Big global pharmaceutical companies will try to establish plants or get into joint venture agreement to manufacture generic medicines with Indian companies. Pfizer recently entered into Joint venture agreement with Wockhardt. Mylan Pharmaceuticals, the world’s 3rd largest generics drug manufacturer entered into agreement with Biocon. India has huge revenue growth potential in this business. Big pharmaceuticals have drugs whose patents are expiring in a few years. Establishing plants or collaborating with Indian companies will aid them in making revenue from these patent-expired drugs at a minimum cost.
4. FOCUS ON EXPLORING BIOFUELS: Indian government is spending on Jatropha research to exploit it as an alternative source of feedstock for ethanol. Jatropha is a toxic plant which grows in marginal lands in India and whose oil can be processed to bio-ethanol. Unlike other oils like corn oil, soybean oil, etc, the oil from Jatropha plant is not edible. So this will not compete with the edible oils’ resources. India right now is spending a huge amount on importing crude oil from Gulf countries. Exploring on Jatropha has benefits such as making India a front-runner in the world in biofuels, reducing costs on importing oil, realizing huge export and revenue opportunities & so on. Challenges do exist in this study but this should not lead to stepping back from this effort. So far about 500,000 to 600,000 hectare of land have been used to grow Jatropha. Government right now to encourage Jatropha research has increased import tariffs to 28% for vegetable oils, a feedstock for manufacturing bioethanol (not sure if this would work as it is again trying to protect this industry). Incentive programs need to be put in place to encourage farmers to grow Jatropha.
Here are a few thoughts on what could be done to improve the size of this industry. Please post your thoughts too in this blog.
1. CONSOLIDATION: The industry is highly fragmented with as many as 1900 companies. Consolidation will help to increase efficiency and reduce costs. Further it will also help in pooling money to invest in Research and Development which is a need for this industry.
2. EXPANSION TO GLOBAL MARKETS: Huge Domestic market size has helped Indian companies in the past and is continuing to do so in the current global scenario. However, this narrow focus will not allow increasing revenues in the long run. Aggressive expansion to global markets will be required to increase revenues. Further, it will also help to increase quality, efficiency and performance. Government on its part should not try to protect the industry. Free passage of goods should aid in strengthening quality and efficiency.
3. INVEST HEAVILY IN GENERIC DRUGS: Companies such as Ranbaxy, Dr.Reddy’s Labs are already holding patents for generic drugs manufacturing processes. The healthcare market is bound to increase all across the globe. Population is aging faster in western countries and at the same time the healthcare costs are increasing exponentially in those countries. Drugs should be affordable to cater to this market. Big global pharmaceutical companies will try to establish plants or get into joint venture agreement to manufacture generic medicines with Indian companies. Pfizer recently entered into Joint venture agreement with Wockhardt. Mylan Pharmaceuticals, the world’s 3rd largest generics drug manufacturer entered into agreement with Biocon. India has huge revenue growth potential in this business. Big pharmaceuticals have drugs whose patents are expiring in a few years. Establishing plants or collaborating with Indian companies will aid them in making revenue from these patent-expired drugs at a minimum cost.
4. FOCUS ON EXPLORING BIOFUELS: Indian government is spending on Jatropha research to exploit it as an alternative source of feedstock for ethanol. Jatropha is a toxic plant which grows in marginal lands in India and whose oil can be processed to bio-ethanol. Unlike other oils like corn oil, soybean oil, etc, the oil from Jatropha plant is not edible. So this will not compete with the edible oils’ resources. India right now is spending a huge amount on importing crude oil from Gulf countries. Exploring on Jatropha has benefits such as making India a front-runner in the world in biofuels, reducing costs on importing oil, realizing huge export and revenue opportunities & so on. Challenges do exist in this study but this should not lead to stepping back from this effort. So far about 500,000 to 600,000 hectare of land have been used to grow Jatropha. Government right now to encourage Jatropha research has increased import tariffs to 28% for vegetable oils, a feedstock for manufacturing bioethanol (not sure if this would work as it is again trying to protect this industry). Incentive programs need to be put in place to encourage farmers to grow Jatropha.
Monday, October 26, 2009
DOW’S ACQUISITION OF ROHM & HAAS
The article analyzes the acquisition of Rohm & Haas by DOW and the response of BASF to it. The article further looks into a possible third company which might respond with a similar strategy.
I. Overview of Chemical Industry scenario
Chemical Industry is a $3.2 trillion global enterprise. It is under heavy earnings pressure for a number of reasons. Some of those reasons are increasing raw material costs, feedstock price volatility, transportation costs, effect of economic downturn on a number of end markets, unused excess inventory, increasing fixed costs and under-utilization of plant capacities. Companies are reviewing their businesses to cut costs, reduce earnings volatility and increase product offerings & revenues.
II. Acquisition of Rohm & Haas by DOW Chemical Company
Background about the acquisition deal
DOW Chemical Company headquartered in Midland, Michigan reported sales of $57b in 2008. It delivers a broad range of products which are used by a number of other industries for providing water solutions, food, pharmaceuticals, paints, pigments and packaging products. It had a product portfolio which consisted largely of commodity chemicals. As part of its growth strategy, it wanted to modify its product portfolio with a bigger percentage of specialty chemicals. It therefore acquired Rohm & Haas (RH), a specialty chemicals business headquartered in Philadelphia, PA. RH reported revenue of $9b in 2008. The merged companies were to become the leading specialty chemicals and Advanced Materials company in the world.
DOW agreed to buy RH through cash purchase at $78/share. This was at a 74% premium. The total estimate of the deal was placed at $15b. It faced unexpected financial problems to pay for the deal when Kuwait-based Petroleum Investment Authority backed out from the joint venture agreement. It was planning on using the $7b cash flow that should have been generated from the joint venture. The deal has placed DOW under heavy financial pressure and it is questionable if it had to pay a 74% premium under the weak economic condition. However, this article does not delve into financial analysis of the deal. Instead, it focuses on discussing the strategy adopted for its business expansion.
Analysis of the acquisition strategy
The strategy is analyzed from the following points of view: (1) need for the acquisition by the two companies, (2) presence of complementary and overlapping products, (3) presence of synergies and growth opportunities, (4) access to new technologies and potential development of new products, and (5) access to geographic markets.
Need for the acquisition by the two companies: DOW wanted to become an earnings-growth company and was looking for a business to expand its portfolio to specialty chemicals. It was facing price cyclicality and wanted to move into products with higher profit and growth margin. On the other hand, RH was facing challenges with increasing raw material costs and economic downturn. It was becoming difficult for specialty chemicals business to operate efficiently with good economies of scale and realize profits. RH was looking for a big partner in the industry who could absorb its costs.
Presence of complementary and overlapping products: Dow has a broad range of products in basic chemicals, plastics, agricultural chemicals, seeds, traits, industrial coatings, building solutions, Oil & Gas and Automotive systems. RH’s products in Electronic materials, Architectural coatings, Powder coatings and adhesives are complementary to those of DOW’s products. RH expertise in these high growth products will benefit the new DOW. There are overlaps in products in Construction chemicals, biocides, paper and functional products, water solutions, household & personal care products, and packaging systems.
Presence of Synergies and Growth opportunities: The acquisition is estimated to produce cost synergies of at least $800M per year and raise additional revenue of $3b a year. Cost synergies exists in purchasing raw materials, manufacturing and supply chain, corporate governance and services, utilization of plant capacities, marketing and sales channels. The company as of July 30, 2009 is on track on realizing these cost synergies. Revenue opportunities exist from broader product portfolio and additional sales of RH’s higher profit-margin products in electronics materials, adhesives and coatings. A return of 20% on investment ($3b additional revenue on $15b acquisition investment) is a good investment. DOW has to be aggressive in realizing the additional $3b sales.
Access to new technologies and potential development of new products: The merged companies have invested $1.6b in opening up a R&D facility in China. Dow can gain access to RH’s technology expertise in Advanced Materials and Electronic products. RH can make use of Dow’s process efficiency, high-throughput capacity, leadership in polymer science and heavy investment done so far in Research and Development. There exist technologies which the two can combine to develop more differentiated products. Dow has developed state of the art technologies through its research and development programs in Coatings, Electronics and Adhesives. But it has not much products in these categories upon which it can implement these technologies. On the other hand, RH has leadership position in these areas and application of Dow’s technology on the existing RH products will help to enhance/broaden and develop more differentiated products for customers.
Access to geographic markets: Dow has higher sales presence in emerging Latin America region (Dow 11% of its sales, RH 5% of sales) and RH has higher sales in emerging Asia-Pacific market (RH with 24% of its sales and Dow with 12% of its sales). The two companies can leverage on their complementary strengths in these emerging markets. Dow has deeper inroads of marketing and sales channels which it can utilize to its full capacity.
Thoughts about the deal
Based on the above analysis and combining them with the current industry scenario it was a good strategy by DOW to expand its business by acquiring RH. First, it goes along with its growth strategy to move into specialty chemicals. Taking time to develop new products from the scratch will delay product offerings and sales revenues. If Competitors are quicker in getting new products to markets, then they lose their market share. Second, the two companies have complementary products, cooperative & complementary technologies and complementary geographic presence in emerging markets. The main attraction for DOW is on RH’s products in electronic materials, coatings and adhesives which it should use to its full advantage.
However, DOW should have anticipated the problems with the joint venture agreement with Petroleum Investment Authority. It should have also negotiated for less on cash purchase for acquisition. The heavy financial crunch from Joint Venture failure is delaying the realization of profits from the acquisition. It should handle the acquisition well to be able to manage the finances. Managing their finances is its number one priority.
III. Acquisition of Ciba by BASF
BASF Chemicals headquartered in Germany reported annual sales of €62 billion in 2008. It has a large proportion of commodity chemicals in its portfolio. Ciba is a specialty chemicals company headquartered in Basel, Switzerland. It reported sales of SFr 6.5b ($5.8 billion) in 2008. Ciba was struggling with financial problems and was looking into divesting some of its businesses. It was open for acquisition by another player in this industry.
When DOW announced its acquisition of RH and that it were to become the leading specialty chemicals and advanced materials company, BASF responded by announcing that it is acquiring Ciba for SFr 50/share at a 34% premium. The deal was estimated to be at SFr 6.1b ($5.4b) in cash and debt. BASF is concentrating on Ciba’s expertise in coating, adhesives and electronics just as DOW is placing on RH’s expertise in such products. Moreover, BASF is aggressive on expanding to Chinese market and Ciba has well-established plants in that region. Unlike DOW though BASF does not have financial problems related to the deal. The combined entity of BASF and Ciba were to make it the largest global supplier in plastic additives and second largest in coating materials. It’s estimating that it will have additional revenue of €2b from paints, pigments, inks and plastic additives.
IV. Possible third company with similar acquisition
The current economic downturn is causing financial hardships. Big companies such as Lyondell-Basell and INEOS are themselves struggling paying for their previous acquisitions. Bayer is doing better in its healthcare and pharmaceutical divisions but it is not apparent if it would want to get into an acquisition in response to DOW or BASF. Saudi Petrochemical has already announced its acquisition of NOVA Chemicals. Huntsman Corporation may decide to acquire Swiss-based Clariant Chemicals. Earlier in 2007 it was planning to acquire either Ciba or Clariant. It may respond to BASF move by acquiring Clariant Chemicals and strengthen further its specialty chemicals portfolio.
A few days back Clariant posted quarterly losses and announced job cuts. It is maintaining positive cash flow just by cutting costs and may have problems in the future like Ciba to function alone. With its impressive portfolio of specialty products, it is a good target for acquisition.
Written by Ramaa Sivashankar; ramaa.sivashankar@gmail.com;
October 21, 2009
I. Overview of Chemical Industry scenario
Chemical Industry is a $3.2 trillion global enterprise. It is under heavy earnings pressure for a number of reasons. Some of those reasons are increasing raw material costs, feedstock price volatility, transportation costs, effect of economic downturn on a number of end markets, unused excess inventory, increasing fixed costs and under-utilization of plant capacities. Companies are reviewing their businesses to cut costs, reduce earnings volatility and increase product offerings & revenues.
II. Acquisition of Rohm & Haas by DOW Chemical Company
Background about the acquisition deal
DOW Chemical Company headquartered in Midland, Michigan reported sales of $57b in 2008. It delivers a broad range of products which are used by a number of other industries for providing water solutions, food, pharmaceuticals, paints, pigments and packaging products. It had a product portfolio which consisted largely of commodity chemicals. As part of its growth strategy, it wanted to modify its product portfolio with a bigger percentage of specialty chemicals. It therefore acquired Rohm & Haas (RH), a specialty chemicals business headquartered in Philadelphia, PA. RH reported revenue of $9b in 2008. The merged companies were to become the leading specialty chemicals and Advanced Materials company in the world.
DOW agreed to buy RH through cash purchase at $78/share. This was at a 74% premium. The total estimate of the deal was placed at $15b. It faced unexpected financial problems to pay for the deal when Kuwait-based Petroleum Investment Authority backed out from the joint venture agreement. It was planning on using the $7b cash flow that should have been generated from the joint venture. The deal has placed DOW under heavy financial pressure and it is questionable if it had to pay a 74% premium under the weak economic condition. However, this article does not delve into financial analysis of the deal. Instead, it focuses on discussing the strategy adopted for its business expansion.
Analysis of the acquisition strategy
The strategy is analyzed from the following points of view: (1) need for the acquisition by the two companies, (2) presence of complementary and overlapping products, (3) presence of synergies and growth opportunities, (4) access to new technologies and potential development of new products, and (5) access to geographic markets.
Need for the acquisition by the two companies: DOW wanted to become an earnings-growth company and was looking for a business to expand its portfolio to specialty chemicals. It was facing price cyclicality and wanted to move into products with higher profit and growth margin. On the other hand, RH was facing challenges with increasing raw material costs and economic downturn. It was becoming difficult for specialty chemicals business to operate efficiently with good economies of scale and realize profits. RH was looking for a big partner in the industry who could absorb its costs.
Presence of complementary and overlapping products: Dow has a broad range of products in basic chemicals, plastics, agricultural chemicals, seeds, traits, industrial coatings, building solutions, Oil & Gas and Automotive systems. RH’s products in Electronic materials, Architectural coatings, Powder coatings and adhesives are complementary to those of DOW’s products. RH expertise in these high growth products will benefit the new DOW. There are overlaps in products in Construction chemicals, biocides, paper and functional products, water solutions, household & personal care products, and packaging systems.
Presence of Synergies and Growth opportunities: The acquisition is estimated to produce cost synergies of at least $800M per year and raise additional revenue of $3b a year. Cost synergies exists in purchasing raw materials, manufacturing and supply chain, corporate governance and services, utilization of plant capacities, marketing and sales channels. The company as of July 30, 2009 is on track on realizing these cost synergies. Revenue opportunities exist from broader product portfolio and additional sales of RH’s higher profit-margin products in electronics materials, adhesives and coatings. A return of 20% on investment ($3b additional revenue on $15b acquisition investment) is a good investment. DOW has to be aggressive in realizing the additional $3b sales.
Access to new technologies and potential development of new products: The merged companies have invested $1.6b in opening up a R&D facility in China. Dow can gain access to RH’s technology expertise in Advanced Materials and Electronic products. RH can make use of Dow’s process efficiency, high-throughput capacity, leadership in polymer science and heavy investment done so far in Research and Development. There exist technologies which the two can combine to develop more differentiated products. Dow has developed state of the art technologies through its research and development programs in Coatings, Electronics and Adhesives. But it has not much products in these categories upon which it can implement these technologies. On the other hand, RH has leadership position in these areas and application of Dow’s technology on the existing RH products will help to enhance/broaden and develop more differentiated products for customers.
Access to geographic markets: Dow has higher sales presence in emerging Latin America region (Dow 11% of its sales, RH 5% of sales) and RH has higher sales in emerging Asia-Pacific market (RH with 24% of its sales and Dow with 12% of its sales). The two companies can leverage on their complementary strengths in these emerging markets. Dow has deeper inroads of marketing and sales channels which it can utilize to its full capacity.
Thoughts about the deal
Based on the above analysis and combining them with the current industry scenario it was a good strategy by DOW to expand its business by acquiring RH. First, it goes along with its growth strategy to move into specialty chemicals. Taking time to develop new products from the scratch will delay product offerings and sales revenues. If Competitors are quicker in getting new products to markets, then they lose their market share. Second, the two companies have complementary products, cooperative & complementary technologies and complementary geographic presence in emerging markets. The main attraction for DOW is on RH’s products in electronic materials, coatings and adhesives which it should use to its full advantage.
However, DOW should have anticipated the problems with the joint venture agreement with Petroleum Investment Authority. It should have also negotiated for less on cash purchase for acquisition. The heavy financial crunch from Joint Venture failure is delaying the realization of profits from the acquisition. It should handle the acquisition well to be able to manage the finances. Managing their finances is its number one priority.
III. Acquisition of Ciba by BASF
BASF Chemicals headquartered in Germany reported annual sales of €62 billion in 2008. It has a large proportion of commodity chemicals in its portfolio. Ciba is a specialty chemicals company headquartered in Basel, Switzerland. It reported sales of SFr 6.5b ($5.8 billion) in 2008. Ciba was struggling with financial problems and was looking into divesting some of its businesses. It was open for acquisition by another player in this industry.
When DOW announced its acquisition of RH and that it were to become the leading specialty chemicals and advanced materials company, BASF responded by announcing that it is acquiring Ciba for SFr 50/share at a 34% premium. The deal was estimated to be at SFr 6.1b ($5.4b) in cash and debt. BASF is concentrating on Ciba’s expertise in coating, adhesives and electronics just as DOW is placing on RH’s expertise in such products. Moreover, BASF is aggressive on expanding to Chinese market and Ciba has well-established plants in that region. Unlike DOW though BASF does not have financial problems related to the deal. The combined entity of BASF and Ciba were to make it the largest global supplier in plastic additives and second largest in coating materials. It’s estimating that it will have additional revenue of €2b from paints, pigments, inks and plastic additives.
IV. Possible third company with similar acquisition
The current economic downturn is causing financial hardships. Big companies such as Lyondell-Basell and INEOS are themselves struggling paying for their previous acquisitions. Bayer is doing better in its healthcare and pharmaceutical divisions but it is not apparent if it would want to get into an acquisition in response to DOW or BASF. Saudi Petrochemical has already announced its acquisition of NOVA Chemicals. Huntsman Corporation may decide to acquire Swiss-based Clariant Chemicals. Earlier in 2007 it was planning to acquire either Ciba or Clariant. It may respond to BASF move by acquiring Clariant Chemicals and strengthen further its specialty chemicals portfolio.
A few days back Clariant posted quarterly losses and announced job cuts. It is maintaining positive cash flow just by cutting costs and may have problems in the future like Ciba to function alone. With its impressive portfolio of specialty products, it is a good target for acquisition.
Written by Ramaa Sivashankar; ramaa.sivashankar@gmail.com;
October 21, 2009
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