Chemical M&A: Prioritizing Strategic Fit Over Price
As Featured in the Wall Street Journal
In September 2020, Mike Huff, CEO of Ascensus Specialties, a chemical company headquartered in Bellevue, Washington, was speaking to investment bankers from KeyBanc Capital Markets (KBCM). They were discussing the merits of various potential opportunities that would best complement the company’s strategy, and one name stood out to him: Strem.
Strem Chemicals, a family-owned company at the time, is a global leader in high-purity, research-grade catalysts, ligands, organometallics, metal carbonyls and CVD/ALD precursors.
To Huff, these seemingly indecipherable words have a unique meaning. Strem’s capabilities could expand Ascensus’ position in life-science products, which was a key strategic goal. The potential social benefits—from making life-saving medicines to enhancing agriculture production—connected deeply to Ascensus’ mission to “make a difference in the world” and “simplify, optimize and advance life in every way.”
Strem’s owner was nearing retirement age and thinking about the future of his half-century-old company. “When we discussed Strem last summer before it came to market, we made sure we were engaged, even though we had a lot going on and it wasn’t an optimum time for us to dive in,” Huff says. “But we put some things on hold, and I’m glad we did.”
Ascensus, supported by equity partner Wind Point Partners, executed the Strem acquisition in April 2021, epitomizing a key M&A trend in the chemicals industry shaped by the COVID-19 pandemic: As the acquisition market heats up, companies are looking for targets that fit into the core of their business.
“When you encounter a significant challenge like the coronavirus pandemic, you are forced to consider what you really care about,” says David Ruf, managing director of the chemicals and materials investment banking practice at KBCM. “Companies did, and still are doing a lot of soul-searching. They are asking, ‘What is our core business? Where do we see our core growth coming from? What are our key strengths and culture?’”
The Specialty Play
Specialty chemicals, the arena that Ascensus plays in, is a complex business segment. It includes cosmetic additives, colors, fragrances and lubricants, which are used in finished products to improve manufacturing processes. “Specialty chemicals tend to be less cyclical, with higher margin and higher differentiation than commodity chemicals produced in bulk,” Ruf says.
As the pandemic took hold in early 2020, M&A deals in specialty chemicals declined substantially, with sale processes being put on hold. By the second half of the year, there was a significant uptick in deal volume. However, these transactions are taking on a different character than they had before the pandemic.
“Pre-COVID-19, there was less valuation distinction between assets,” says Christopher Hogan, managing director in the mergers and acquisitions group at KBCM. “You are now seeing a more nuanced market where people are making educated bets on where the future is heading. There is a widening gap between premier assets, which are at record valuation levels, and other acquisitions that may be stable performers but lack a top-tier growth trajectory.”
In many cases, those growth trajectories are being influenced by megatrends, like decarbonization. For example, chemical companies that formulate using environmentally friendly chemistries can command a premium price.
“There is a value premium associated with the specialty chemical area to begin with,” Hogan says. “If you are levered to compelling secular trends as well, that’s a differentiator that can unlock shareholder value as the markets become more nuanced.”
Not Looking at Everything Anymore
This complex blend of factors is causing chemical companies to prowl the landscape for acquisitions before they come to auction. The goal is not to find a lower price, which is unlikely in a market awash in an unprecedented amount of private equity dollars. Companies want their acquisitions to be truly strategic.
“A few years ago, if we were marketing a business, every potential buyer would look at everything,” Hogan says. “In today’s market, buyers are trying to pick their spots and are taking a more focused approach. Buyers are less likely to deeply evaluate every opportunity that comes across their desk. Rather, they are proactively identifying opportunities where they have a strategic angle and positioning themselves to move aggressively once those opportunities become actionable.”
This viewpoint can have far-ranging implications. Ruf says by focusing on acquisitions that were complementary to markets it already served, Ascensus was able to boost cash flow and fortify its talent base. The company now has nearly four times the number of Ph.D.s on staff than it did before the acquisition of Strem.
As Ruf puts it, “We’re starting to see more of that kind of focus than we used to. Buyers are saying, ‘That may be a gorgeous business, but if I think it will go to somebody else who’s more attuned to that sector, then I will keep hunting elsewhere, where I have knowledge, strategic fit, etc.’” This narrow viewpoint is strategic, keeping the momentum of the company rolling and accelerating with enhanced capabilities and a strengthened management team. Successful CEOs, like Huff, sweat the details on strategic fit and integration and not just growing revenues at any cost.