Target Search in the Chinese Chemical Industry

Dr. Kai Pflug, Management Consulting – Chemicals, and Dr. Werner Heil, Heil Yang Group
With the ever-increasing importance of the Chinese market, there is an obvious strong
interest of foreign chemical companies to buy local players. As a consequence, China leads
chemical M&A activity in the BRIC countries, accounting for two-thirds of deal volume in the
first quarter of 2013, with six transactions worth more than US$50 million.
This is despite the many obstacles for acquisitions in China. Good target companies are
hard to find, and the majority of deals are initiated by proprietary networks and brokers. The
success rate for closing deals is much lower than in Western markets.
However, strategic investors – that is, companies already active in the chemical industry
as opposed to equity investors – have a variety of god reasons to acquire chemical
businesses in China. Buying a Chinese company may give an MNC access to local
production facilities as well as to local key accounts. In addition, Chinese companies often
have a low-cost distribution network, which is particularly important for mid-market products,
where distribution has a higher share of the total costs. Such an acquisition may also allow
execution of a two-brand strategy, such as done by DSM in their acquisition of ICD, a
domestic producer of UHMWPE. It helped DSM to fill some portfolio gaps and to add
different price segments. By taking over existing facilities as well as customers, growth via
acquisitions can be much faster than when done organically.
Overall, most of the recent acquisitions of Chinese chemical companies by MNCs were in
the core area of the MNC. Acquirers tend to be global leading players in the respective
areas, for example W.R. Grace, which in 2012 acquired the Chinese Nobelstar Catalysts,
expanding their production footprint in fluid cracking catalysts, or CABB obtaining local
production capacity through the acquisition (via JV) of monochloroacetic acid producer
Jinwei Huasheng. The overriding aim is to strengthen the local market position, add local
production capacity and to target lower-end markets. In contrast, chemical acquisitions by
MNCs are rarely used to enter completely new markets, or markets with weak starting
position. For example, before AkzoNobel bought Boxing Oleochemicals, it was already a
leading player in specialty surfactants.
Once the decision to search for an M&A target has been made, the selection criteria need
to be defined based on the company strategy. This will result in a variety of criteria that may
include, e.g.,
* Chemical sub-segment (as mentioned above, likely to be one in which the acquirer is
already active – few Chinese chemical companies are technologically attractive as stand-
alone targets)
* Customer base (in particular regarding overlap/synergies with existing customers of the
MNC – for example, AkzoNobel acquired Prime Automotive Coatings as this domestic
company served a lower market segment than AkzoNobel itself)
* Annual sales of the target (too large targets are not realistic while too small targets may
not be worth the effort, often resulting in a target sales range, e.g., US$10-100 million)
* Profitability (particularly relevant if acquiring company is margin driven)
* Regional focus (e.g., a foreign company may want to strengthen its business in the West
of China)
* Ownership type (private companies are more likely to be successfully acquired than state-
owned ones) * Company image and culture (as this will influence the later ease of integration)
Once at least a few basic criteria have been determined, one of the most difficult tasks in
the whole process is the preparation of high quality long lists of targets. China’s chemical
markets are notoriously fragmented and fast moving – the market participants change
rapidly, and it is not easy to get reliable data. The best approach is not to rely on a single
database but utilize a variety of sources, e.g., databases from different providers, sourcing
sites, market studies, expert interviews etc. Hints from the own sales staff may highlight
some particularly promising targets. On the other hand, the resulting long lists will contain a
large number of companies that are either only traders of the relevant chemicals or may not
even exist at all (not such a rare occurrence either).
The subsequent elimination process should first focus on those criteria that are an
absolute “must” and at the same time fairly easy to assess. For example, product groups or
annual sales of a domestic chemical company tend to be easier to evaluate than the
potential fit with the culture of a Western company. In the later stages (once only a handful
of target candidates remain), more specific checks are vital, e.g.,
* Site visits
* In-depth analysis of products (e.g., quality, portfolio)
* Talks with customers
* Factual checks of company data.
For example, for a specialty chemicals company we looked at about 2100 companies in a
specific chemical segment. Elimination of importers and traders brought the number down
to about 700, which based on more specific criteria (particularly minimum sales size) could
be reduced to about 50. Only at this stage some of the criteria that are more difficult to
assess (e.g., technology level, potential willingness to do a deal) were taken into account.
The top ten targets were then prioritized with the management of our client, leading to a
detailed profiling of initially five companies.
Finally, a word of warning based on our past project experience. It is unlikely such a
search will result in finding the perfect acquisition target. Often at least one aspect of the
target will be less than ideal. In particular, few Chinese chemical companies can be
integrated without major investment in HSE equipment. Only very few targets will be
attractive from a technology standpoint – and if so, they are likely to be part of larger, less
attractive operations. So a certain readiness for compromise is almost a precondition for an
acquisition to eventually happen.