When it comes to acquisitions in the Coatings Industry, buyers must beware
There have been rumours circulating about a significant acquisition in the speciality chemical area. Some commentators in the trade press have forecast that mergers and acquisitions activity in the chemical industry is likely to peak this year and one begins to wonder whether the Coatings sector will follow a similar path?
Over the past five years, growth in the Coatings Industry has been greater than GDP and the industry has increased enterprise value faster than major stock market indices. Some of that premium has come through consolidation by acquisition as well as organic growth and innovation. The Coatings Industry has recovered well from the economic recession of 2009 and stock market valuations are high enough to attract sellers as well as buyers. Looking to the future, what would be the motivation for acquisitions in the Coatings sector?
Days of the viable niche strategy are dying
Some of the answers can be found in the history of recent major trade takeovers. There are PPG’s purchases of AkzoNobel North American Architectural Coatings and Comex in Mexico and Central America; Hempel’s acquisition of Schaepman in the Netherlands, Crown Paints in the UK and the Jones-Blair Company in the USA; together with Sherwin Williams’ purchase of Becker Acroma Industrial Wood Coatings of Sweden and Leighs Paints in the UK. These strategic moves have been driven by the desire to expand the product, industry sector and/or geographic mix of existing companies as well as demonstrate to the investment community a record of consistent revenue and asset growth.
A T Kearney has argued that the days of the viable niche strategy are dying and that further consolidation of the Coatings industry is inevitable. This is particularly the case in the Asia-Pacific market (excluding Japan) and the global industrial paints sector, driven by the need for improved efficiency of operations, the acquisition of proprietary technologies and the wider exploitation of existing technologies in growth markets. Also, given the need to invest in new IT systems and cater for increasingly demanding legislation around the world, it pays to apply new management control systems to as wide a group of business activities as possible to maximise the benefit of significant infrastructure investment.
Path to Hell is paved with promises of synergy savings
However, what looks good in strategic terms may be an operational nightmare which dilutes the anticipated benefits of an acquisition. The financial press often reports claims of anticipated synergy savings as a major element in the justification of an acquisition, although others warn that ‘The path to Hell is paved with promises of synergy savings’.
I have seen business models and cultures radically altered to meet the norms of the acquiring organisation only to lose the inherent value of the acquisitions in the process. I have experienced the disappointment of combining procurement spend maps, only to find that ingredient specifications are so different that there are only limited possibilities to leverage increased volumes of purchases to deliver savings without costly expenditures to reformulate products.
The streamlining of internal supply chains as acquired manufacturing sites and warehouses are absorbed can require significant investment to restructure or even shut down units. These supply chain-related costs are often not anticipated at the time of purchase.
Critical component of success in the paint industry
One critical component of success in the paint industry is the management of working capital. Expanded operations can improve operational flexibility and help reduce overall stock levels. However, there is often a marketing imperative to retain original brand names. Gliddens decorative paint is marketed now in North America alongside other PPG brands; Crown Paints continues as a brand within Hempel and even the ICI logo still appears on some AkzoNobel trade paint cans. More than likely, this increases the number of SKUs, limits efficiency improvements and increases working capital.
I guess at the end of the day, the historic advice ‘caveat emptor’ or ‘buyer beware’ will be just as relevant tomorrow as it has been in the past.