Unpredictability May Define Chemical Mergers and Acquisitions in Near and Medium Term

The debate about chemical merger and acquisition (M&A) activity in 2011 is fairly evenly divided between those who say that the chemical sector growth and levels of M&A activity reached in 2010, which neared peak 2006 levels, will continue, and those who say unpredictability will reign in the chemicals sector and thus throw mergers and acquisitions firms off simple forecasts.

The first argument can be represented with a series of relatively simple reductions; credit, cash, confidence, and private equity are expanding and improving, and the continued economic recovery will drive continued growth and effective consolidation in the sector, all of which will result in more and larger chemical M and A transactions. This prediction hinges on the prediction that trends and circumstances from 2010 will remain relatively constant through 2011 and into the medium term.

The cautionary tale of potential instability and a year of sluggish recovery punctuated by uncertainty is not quite as straight forward. First, there is a minority consensus among players in the chemicals M&A sector that CEO confidence has not rebounded as resoundingly as others would suggest. Tempered by experiences during the recession including deals suddenly falling through, the drying up of credit, and the bottom falling out of previously high-value assets, the high level of caution that remains among some top decision-makers may be surprising. This will, in turn, keep a lid on the number of transactions and on competitive bidding, and may in fact promote continued attempts to sell off assets.

Coupled with feedstock price volatility, unpredictable and rapidly changing exchange rates, and some erratic behavior by firms in and from BRIC and VISTA markets, this raises the difficulty of forecasting chemical and M&A activity in 2011. In this vein, understanding China remains a key piece to accurately predict how 2011 and the medium term will shape up, as high demand there has aggravated already low supplies. As the country's already nearly insatiable appetite continues to grow, while at the same a somewhat mitigating supply of domestic business creates an opposing force on the market, the activities and results of Chinese firms and business opportunities will ultimately have a significant but currently unclear impact on transaction volume.

Finally, as many U.S., European, and Japanese firms seem poised to trim their portfolios, the Middle East, India, and China are flush with cash-handy buyers looking to acquire healthy assets. The resultant shift in activity and sector composition remains murky, leaving the medium-term character of chemical M and A activity unclear.

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