M&A Deal Volume in Global Chemicals Sector for Year-to-Date 2010 Jumps 20% Over Full Year 2009, According to PwC

Total Large Deal Value Reaches $66.6 Billion for Year-to-Date 2010; Average Deal Value Climbs to $90 million in Q3 2010

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Nov 04, 2010, 01:11 ET

NEW YORK, Nov. 4, 2010 /PRNewswire/ -- Merger and Acquisition (M&A) deal volume through the first three quarters of 2010 has demonstrated strong momentum, increasing 20 percent compared to full year 2009, according to a new PwC US report, Chemical compounds: Third-quarter 2010 global chemicals industry M&A analysis. This spike in deal volume is a reflection of the general improvement in the economy, increased profitability within the chemicals sector, as well as an emerging trend of companies placing greater emphasis on growing core operations via complementary acquisitions and strategic integration.

In Q3 2010, deal value increased significantly when factoring in a pending mega-deal valued at $39.8 billion. Excluding the mega-deal, the underlying total deal value in the third quarter was $11.3 billion while year-to-date total deal value has already exceeded that of 2009. M&A activity in the sector is trending back toward larger deals, as the average deal value in Q3 2010 reached $90 million (excluding the impact of the aforementioned mega-deal) compared to $82 million in 2009.

"Since early December 2009, we've seen a considerable uptick in deal activity. This momentum stems from strategic buyers that emerged from the downturn with strong balance sheets and an appetite for smaller bolt-on acquisitions for their core businesses," said Tracey Stover, global chemicals leader for PwC. "The type of deal activity has changed, as seen in the gradual increase in deal size, as well as the growing level of private equity activity in the deal process. As we go forward and the deal market strengthens, the growing number of companies searching for good acquisition candidates may present a challenge."

Large deal activity in the chemicals sector is showing strong upwards momentum. Three large deals with values greater than $1 billion were announced in the third quarter of 2010, bringing the total for 2010 to 10 deals with a value of $66.6 billion. This value is dominated by the previously mentioned, pending mega-deal. Excluding this deal, large deals totaled $27.6 billion for year-to-date 2010, which surpasses the total large deal value for all of 2009.

Strategic investors continue to outpace financial investors. As expected, financial investor deal activity remains lower than the pre-downturn period. While the financial markets continue to recover, it will take time for the flow of debt financing to return to historical levels or prove more advantageous to financial investors.

"As the economy improves, we expect to see financial investor activity on the sell side, as some look to sell investments they were forced to hold during the economic downturn," added Stover. "We encourage companies to analyze the portfolio of private equity investors for potential acquisition candidates, as it can be assumed that many of the companies will be available for sale in the foreseeable future."

From a regional perspective, the third quarter distribution of deal activity by volume and value has been influenced by deals in the Asia Pacific region. Increased deal activity within Asia is expected, with all but one deal announced being within its regional borders. At the country level, approximately one-third of the deals were cross-border deals with the other two-thirds being deals within country. This level of cross-border deal activity in Q3 2010 is consistent with total deal activity since 2006.

Curate's egg: The changing deal environment

The third quarter Chemical compounds report takes a closer look at a global economy characterized by instability and its impact on the M&A deal environment. Today's global economy is like a curate's egg. Economic expectations are good and bad, positive and negative.

The concept of a mixed bag is especially relevant to the chemicals industry's M&A market. On the positive side, the volume of deals announced during the third quarter of 2010 shot up significantly from the previous year, an indication that the global economy is stabilizing. The downside is that worries about a protracted economic recovery or another recession have many global buyers and sellers taking a wait-and-see approach to deal making.

Due to increased uncertainty, companies are structuring deals in new ways and handling them differently. Specifically, many are avoiding large, staged auctions, except in cases that involve a sizable, high-profile asset. Instead, companies are trending toward one-to-one negotiations in off-market deals, where the buyer proactively identifies and approaches the target. Additionally, chemical companies have become more cautious and diligent about what they are buying. They no longer favor diversification as a global M&A theme but rather are looking for deals that can provide new strategic opportunities.

More than ever, deals today must fit strategically and commercially with existing operations and drive synergistic growth.

For information on Chemical compounds and to access the full report, including the special section on the changing deal environment in the chemicals sector, visit: http://www.pwc.com/us/industrialproducts.

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SOURCE PwC