The smarty pants at BASF seem to have got it right again with their $6.1bn bid for Ciba Specialty Chemicals and rumours that they might also be after Clariant.
Talking about counter-cyclical investment is one thing, but doing it is quite another. You need to have built up the cash reserves to execute the obvious – and, of course, need the right product portfolio already in place to earn the money in the first instance.
BASF has made and continues to make a packet from its oil and gas business. It’s oft-repeated focus on integration and on getting out of the more cyclical commodities is also paying dividends. It was walking the talk about reducing exposure to such commodities long before a certain US-headquartered company jumped on the bandwagon.
Talking about stating the obvious of buying low and selling high, McKinsey does this – but with some useful numbers – in its report, M&A Strategies In A Down Market. Again this is from the consultancy’s excellent monthly newsletter, which is free once you have signed up.
The report’s authors have also written a book, The Granularity of Growth. It includes a database of 200 global companies that decomposes the most important sources of growth (market momentum, mergers and share gains). Sectors that suffered big upturns or downturns were then analysed in order to rank the importance of these growth sources – with the study also extending to individual companies strategies.
“Two sets of results stuck out,” write the authors.
“First, (I wish consultants would learn to write shorter sentences – my comments in italics) of the potential strategic moves companies can take to grow in a downturn – divest acquire, invest to gain a share – an effective acquisition strategy (defined as growth through M&A at a rate higher than 75 percent of a company’s pears) created significant value for shareholders (you can pause for breath now).
“During an upturn, on the other hand (surprise, surpirse), divestments created slightly more value that acquisitions did (this presupposes you can find some mug to buy your business at some ridiculously inflated price on the belief that the economic boom will last forever).
“Second, companies often behave in counterproductive ways. Fewer than half as many companies in the segments we studied made acquisitions in downturns rather than in periods of economic growth. Significantly more divested businesses in those market segments in downturns than in upturns.”
The global credit crisis and volatility in stock markets “could temporarily disrupt M&A activity and add risk to existing deals,” said Scott Anderson, senior economist at Wells Fargo – the US financial services company. He was speaking at the ICIS Chemical Purchasing Summit, which is taking place in Boston, Massachussets.
He added, however, that conditions were right for further consolidation in the chemicals industry as manufacturing customers become larger.
The Middle East has the cash, of course – as do the Chinese if they can be bothered. Sovereign wealth funds could be the vehicles, as well as the petrochemical companies themselves, for a wholesale shake-up of industry ownership.
And as I’ve already said, those clever people at BASF look likely to be involved. Being right and having senior executives with brains the size of a small planets is very annoying for those of less able (especially if they are also nice to children and animals, actively care about the environment, give a large proportion of their incomes to charity and are good at football when World Cups come round).