Climbing Materials Cost Temper Chemicals M&A Advisory Firm Outlook

Chemicals M&A advisory firms saw increased action in 2010, on the back of a significant increase in activity in the sector - total deal value rose more than 100% compared to 2009 according to a PwC US report - but the outlook for the remainder of 2011 remains unclear. After remaining relatively constant for most of the year, materials costs have began to rise at the close of 2010 and don't show signs of slowing significantly in 2011, which ICIS reports is creating headwinds for M&A activity and for chemicals M&A firms.

Looking back at 2010, the strength of the chemicals sector in general, and of M&A activity specifically, was driven by a myriad of factors, including primarily the general economic recovery that made more private equity available to encourage more and larger deals than in 2009. This strength was seen across deal values, as small and large deal activity increased with mega-deals increasing by four times over 2009 levels. If favorable lending conditions continue and private investors remain a viable source of activity, 2011 may continue to see this level of activity. But a less mentioned factor is that it took most of 2010 for materials costs to begin to creep up, as prices lagged behind despite lower supplies and surging Chinese demand.

This increased size and volume was also accompanied by an increase the deal pace, according an M&A advisory expert quoted on PR Newswire. Hopefully, this is a sign of increased bidding competition, as it would be a further signal of sector health going into 2011. With the shortened deal timeline that has resulted, even if activity should stay steady or fall slightly in 2011, efficient chemicals M&A advisory firms may find their services in high demand as companies struggle to make the right choices with limited time and information.

Looking to the final three quarters of 2011, there is some concern that rising materials costs will cut into 2010 profit levels for both chemical companies and anyone working on M&A transactions. The primary reason is that if input costs decrease buyers' confidence that 2010 productivity levels are repeatable, sellers may struggle to find an active market. Further, these uncertain materials costs make accurately forecasting business activity among chemicals firms in the second half of 2011 and 2012 far more difficult.

However, this concern should be balanced against expansion into VISTA (Vietnam, Indonesia, South Africa, Turkey, Argentina), which may yield decreased production costs similar to those produced by the surge caused by the widespread establishment of operations in BRIC countries in the past two decades.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com