The chemicals sector has seen a wave of M&A activity from 2014 to 2018. This activity is consistent with the sector’s once-every-decade spike in M&A. Factors such as the need for vertical integration (1980s),
low growth as the result of oil and gas shifting capital from chemicals (1990s), and growth in emerging markets (2000s) spurred past decades’ M&A increases (exhibit).
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The recent spike in M&A activity reflects broad trends in the industry. First, M&A is a response to the need to focus on pure plays to better serve customers that expect deeper product expertise and to appeal to investors who increasingly value pure players. In addition, M&A is a major contributor to top-line growth among large companies, which use bolt-on acquisitions to access new geographical markets, market segments, products, and technical applications.
New, formidable competitors have also made M&A a strategically sound defense. Oil and gas companies have turned their attention to the chemical market in response to decreasing growth in the liquid fuels market—the largest increase in oil demand from 2018 to 2035 will come from chemicals instead of transport and power. At the same time, state-owned enterprises in the Middle East and China have moved into materials to access markets and technologies and to build their capabilities.
M&A has consistently helped companies in the chemical sector create value. In fact, large chemical companies that have pursued large-deal M&A generate an excess of 1.8 percent in total shareholder returns (TSR) compared with the general population of chemical companies; those that engage in programmatic M&A create an extra 1.7 percent in TSR.
To increase the odds of creating outsized returns for shareholders, industry players should build capabilities across all stages of M&A. Since the trends driving the current surge in M&As will persist, chemical companies should build distinctive capabilities across all stages of M&A and continue to look for opportunities to better serve customers and grow.