Mergers and Acquisitions in the Global Chemical Industry

By Weston, J. Fred; Johnson, Brian A. et al. | Business Economics, October 1999 | Go to article overview

Mergers and Acquisitions in the Global Chemical Industry


Weston, J. Fred, Johnson, Brian A., Siu, Juan A., Business Economics


POWERFUL FORCES OF CHANGE LEAD TO A HIGH RATE OF M&A

Mergers and Acquisitions (M&A) have performed a significant role in the adjustment processes of the chemical industry. This industry illustrates patterns of restructuring and M&As similar to those in industries generally (Weston, Chung, and Siu, 1998; Filippello. 1999; Weston and Chiu, 1996; Weston and Jawien, 1999; Siu and Weston. 1996). This paper will illustrate how these patterns have evolved in the chemical industry.

Forces of Change

Total M&A activity in the United States in 1998 reached $1.3 trillion, double the level of the previous year and accelerating the trend of earlier years. It is estimated that in the rest of the world M&As totaled $1.2 trillion, for a worldwide total of $2.5 trillion in 1998. M&A activity also is an index of restructuring, joint ventures, split-ups and spin-offs, share repurchases, etc., in the increased pace of the adjustment processes of firms and industries in the economy.

The major change forces that have propelled the increased pace of economic adjustment processes are technological change, the globalization of markets, and favorable financial and economic environments. The new technologies include advances in computers and related products transforming industrial processes, product proliferation, and new ways of doing business, illustrated by the Internet and "the Wal-Mart way." Improvements and cost reductions in communication and transportation have created a global economy. Industry boundaries have become blurred, with new competitive impacts coming from diverse and changing sources. These growing forces of competition have been reflected in deregulation in major industries, such as financial services, medical services, airlines, and other forms of transportation. Strong economic growth, relatively favorable interest-rate and financing environments, and rising equity and asset prices have facilitated the adjustment processes.

Characteristics of the Chemical Industry

While the adjustment processes have followed the same general patterns exhibited by other segments of the economy, distinctive characteristics have influenced changes within the chemical industry. A rich literature is available on the characteristics of the industry (see References).

"M&As" as a shorthand for adjustment and adaptive processes in firms are related to the economic characteristics of their industries. The U.S. chemical industry produces almost 2 percent of U.S. gross domestic product, making it the largest contributor to GDP among U.S. manufacturing industries (Arora, et al., 1998, p. 6). The chemical industry is a high tech, R&D-oriented industry that receives about 12 percent of patents granted annually. It produces over 70,000 different products. Few industries exhibit such diversity and complexity.

The industry characteristics we judge to be significant for an understanding of M&A processes within the chemical industries are: The industry has many distinctive segments, a number of which overlap with the oil and other energy industries as well as with pharmaceuticals and life-science products. Two major types of firms have been identified: "all-around" companies that operate in many areas, and "focused" firms that operate in downstream specialized segments.

R&D performs a key role in the long-term viability of chemical firms. Because new R&D discoveries often are not in the firm's core businesses, new products may require time to fit into organization effectiveness and may fail to achieve significant economies of scope. A series of R&D efforts that result in "dry holes" will negatively impact sales and profitability, causing vulnerability to takeovers.

In the chemical industry, innovations are imitated relatively rapidly by large competitors. The commoditization of products may occur relatively soon after innovations. …

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