M&A of chemical companies creates value
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- Published date: February 22, 2021
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- Balod, Chhattisgarh, India
Our research shows that the total return of shareholders in transactions adopting best practices in M & a management is at least 6 percentage points higher than that in transactions not implementing these practices. Based on our extensive experience in the whole industry, we believe that there are some valuable and well proven methods that chemical companies can and should take advantage of their M & A activities to fully create value potential.
Build a strong value creation story and communicate it clearly
When developing a vision for a new company, senior managers should make full use of the discontinuity brought about by the deal and make bold plans. The convincing reason for the deal will focus on the value creation opportunities that the deal may bring, including a clear strategic view of the new company's development direction. Our goal should be to capture the strengths of the two companies and go beyond that to build a world-class entity. An ambitious compromise just to keep the new merged company going will not resonate with shareholders.
In our experience, in the chemical industry, the importance of communication in mergers is often underestimated. The high-profile role of activist investors in some recent deals they find unsatisfactory highlights the importance of this step: in the face of this situation, a high-profile, ambitious and clearly stated value capture plan may become a "shark repellent". At the same time, chemical companies themselves can learn from the perspective of activists, which can focus on what the transaction will get, not only show the short-term benefits of the transaction, but also explain their long-term commitment to create value.
Give full play to the synergy potential and don't ignore the transformation potential
It may sound simple, but a true understanding of the full potential of a deal is the key to its success. Consolidation should be used to fundamentally review the new portfolio and manage it to improve profitability and growth. The merger should also be used to discuss the organizational structure and operational setup of the new company. The potential for savings and synergies should be examined at three levels:
Combine overlapping activities. It is important to first determine the cost savings that can be achieved by merging these two businesses, and look at the product offering, customers and the markets they serve, as well as the overlap of technical capabilities and R & D projects. The review should also take into account regulatory requirements. These are typical synergies.
Independent improvement. In all the companies we've looked at, we've found the potential to manage them better. In theory, this potential can be captured in the absence of a transaction, but integrators are well suited to trigger a comprehensive review of the performance of the merging parties and deploy best practices from either party, which significantly increase the value creation of the transaction.
transformation. The third step is to provide transformation opportunities for the new company after the merger, so that it has a wider product range and geographical coverage, as well as the competitiveness after the merger. These opportunities often include improving performance standards by building on the functional strengths of the first two organizations and transforming Newco into a world-class performer in areas such as operations, procurement, sales and marketing. In a recent large-scale chemical transaction, the comprehensive review of production practice jointly conducted by both parties has substantially improved the performance of both parties, and the value creation is also much higher than the estimate when the agreement was signed.
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