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Our outlook for M&A activity in the second half of 2024 is trending more optimistic, reflecting recent observations and industry data. While economic uncertainties, higher interest rates, and global tensions continue to present challenges, several factors are exerting pressure for increased activity in the chemicals sector. A renewed focus on domestic industrial policy and global supply chain realignment, coupled with increased private equity exits, will likely help drive deal activity. The U.S. is becoming a more lucrative destination for chemical M&A following the shift to re-shoring, attractive economic incentives, advanced energy infrastructure, and the advantage of access to key raw materials.
Significant reserves of debt and equity capital remain available to fund acquisitions. Corporations are re-evaluating their global footprints and updating business strategies, leading to increased divestiture and carve-out activity. An aging base of private business owners is contributing to increased sales activity, and private equity funds experiencing prolonged hold periods are facing pressure to sell their investments. Strategic buyers are expected to remain active participants in the M&A market, pursuing acquisitions to bolster their market positions, improve margins, and drive geographic expansion, particularly in North America.
Key themes shaping the M&A landscape include:
- Global Asset Re-Positioning: The shift from outsourcing to re-shoring, near-shoring, and friend-shoring is driving M&A activity as companies re-evaluate global operating and supply chain footprints.
- Portfolio Realignment: Companies are acquiring strategic assets and divesting underperforming ones to strengthen market positions, improve margins, and free up capital.
- Aging of Private Company Owners: Sales of privately owned and family-owned businesses are increasing, driven by the aging Baby Boomer population in the U.S.
- Sustainability and ESG: The search for Earth-friendly and health-friendly technologies continues to drive M&A, especially for chemical and industrial companies.
- Interest Rates: While current high interest rates and economic uncertainties have slowed activity, the latest CPI data showing a moderation in inflation has increased the likelihood of the Federal Reserve easing monetary policy sooner than expected. Markets are now pricing in an 87% probability of a rate cut by September. The odds of two quarter-point rate cuts before the end of this year have also increased to 85%. If the Fed follows through with anticipated rate cuts and economic conditions improve, this could spur increased M&A activity in 2024.
- Focus on Strategic Fit: The market in 2024 has shown a disparity, with “A Quality” assets often flooded with bids while others may see more targeted strategic interest.
Companies are being very strategic about their portfolios, acquiring assets to improve returns, realign global positioning, enter new markets, and drive growth. They are also considering divestitures and carve-outs to improve capital productivity and liquidity positions.
Private equity firms are more selective and careful in pursuing opportunities, often competing aggressively for attractive targets. Higher interest rates have been a significant factor, limiting how much private equity will pay for acquisitions and sometimes creating a valuation gap with sellers. When the Fed starts cutting rates, it could help bridge this gap, making capital cheaper and potentially increasing M&A activity.
One notable trend in M&A deal value is the fluctuation observed over the past eight quarters. Every couple of quarters, there is a bump in M&A value, with an average value of $15 billion. However, the dollar values have been trending downward recently. Following historical performance, there could be a potential shift in the market. The recent value suppression could be usurped by higher values, potentially driven by more favorable economic conditions in the second half of 2024.
Public Company Performance and M&A
In Q2-2024, U.S. chemical companies experienced mixed performance, trending below the S&P 500 for the prior quarter. This overall divergence is more attributable to the strength of the S&P 500, particularly due to the surge in artificial intelligence-related stocks. While top-tier chemical companies managed to keep pace with the S&P 500, the overall sector lagged, with more than half of the stocks in the agriculture and chemicals industries being undervalued.
Similarly, both EV/EBITDA and EV/Revenue ratios for the S&P 500 outperformed those of the overall chemical industries. The mixed performance and valuation gaps within the chemical sector create opportunities for strategic acquisitions. Companies with strong balance sheets may pursue M&A to enhance market share, diversify product lines, and gain technological advancements.
The U.S. chemicals public market sector presents itself as an investment opportunity for buyers, being undervalued in comparison to the broader market.
Stage Appears Set
Strategic buyers are anticipated to remain active participants, pursuing acquisitions to strengthen their market positions, improve margins, and expand geographically – particularly in the North American region. Private equity firms, though more selective, will also play a significant role, competing aggressively for high-quality targets. Sustainability and ESG considerations continue to be a key theme, influencing both buyer preferences and seller portfolios. The stage is set for a potential resurgence in chemicals M&A activity, contingent on continued economic improvement in the coming months
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