Chemical M&A: a Market-driven Approach for Optimal Post-merger Integration

October 09, 2020

chemical machine

The number of chemical mergers and acquisitions (M&A) worldwide has dropped to 423 in 2020 from 967 deals in 2019, as the global economy absorbs the repercussions of COVID-19. Businesses that were low performers before the crisis and lack a clear USP will have tough time to survive. But others, even though, weakened by the crisis, will become viable M&A opportunities for companies in search of expansion, because they still offer solutions that meet important market needs.

We therefore anticipate an uptick in M&A activities in the chemicals sector as the economy meanders toward a “new normal” and a return to full swing when the COVID-19 pandemic subsides or a vaccine is found. This increase in M&A activity will occur across almost all chemical industry segments.

Five perspectives of a market-driven PMI approach

This begs an important and persistent question: how can companies derive the most value from their M&A activities? Cost synergies are certainly important for value creation, but article shows how a market-driven approach to post-merger integration (PMI) enables a company to seize opportunities in two areas. The first is topline improvement in the short and medium term, and the second is mitigating risks from sales cannibalization, customer retention, and price erosion. We will look at the market-driven approach from five perspectives: 

  1. Customers: How will the integration impact existing customer relationships? What are the right measures to secure business continuity
  2. Competitors: How will competitors react to the new market set-up? Would they see this as an opportunity to gain share by luring away key accounts?
  3. Product: What are the implications for the product portfolio? How big is the overlap? How should the combined entity capture the value of product synergies?
  4. Pricing: How big is the price risk at overlapping customers of the combined entity? What are the best ways to mitigate that risk?
  5. Sales: What are the synergies and value creation opportunities from optimizing the sales approach?

Market-driven PMI at its best: 3 examples

Perfecting sales and pricing

Imagine the acquisition of specialty chemical company by a bulk chemical company. This created a clash between the upstream bulk-chemical operating principles and the downstream requirements of the specialty chemicals business. The “bulk” model was slow, lacked flexibility, and had IT infrastructure that was unable to handle greater business complexity. Furthermore, the business was already very lean, with optimized production costs. When this business was up for sale again it was clear that the value creation would come from the market side and not primarily from the cost side. Adapting the sales operating model and professionalizing the pricing process to the business needs accounted for 68 percent of the total value creation of the deal.

The “new company” took several steps to generate that value. First, it realized that the market for both suppliers and customers had become increasingly fragmented. Identifying homogenous customer segments had become more difficult, but was therefore more important and required higher levels of efficiency in the sales department. Second, the main sources of growth opportunities were customers who were dissatisfied with their current suppliers. Winning them over would require close cooperation between sales and operations to demonstrate superior quality. Another source of growth would be price increases, but the existing processes to raise prices had been neither fast enough nor effective enough to offset rising input costs over the last three years. Improving these processes and boosting the sales teams’ confidence generated additional revenue.

Avoiding customer churn

In another case, the sixth-largest base material supplier merged with the second-largest one to build a new market leader in terms of capacity. Securing customer retention was vital to this merger’s success, as some customers feared a one-sided dependency on such a powerful supplier. So how did the merged entity succeed in keeping customer churn to less than ten percent? It took a streamlined and systematic approach to developing a customer retention plan. First, it identified the customers most at risk and assessed them in terms of risk level and customer value. This resulting segmentation enabled the organization to develop customized account plans for the most important customers, including communication, sales visits, client engagement workshops, and retention bonuses. It also introduced KPIs to measure customer retention and closely tracked them during the merger period, in order to take immediate countermeasures where needed.

Broadening product offering

The third case for a successful market-driven approach to commercial PMI involves a merger of equals in terms of size. But the firms had complementary product portfolios and different regional footprints. The PMI plan therefore took a broad and diverse approach to go-the-market strategies, supplemented with an upgrade and professionalization of pricing and with cross- and system-selling based on the new, broader product offering. The plan also called for additional regional penetration. The value creation through these commercial measures clearly outperformed the cost synergies and savings. Figure 1 shows the impact of the individual levers.

Figure 1: Impact of commercial levers in post-merger integration

Digitalization is another significant opportunity in market-driven PMI. The level and scale of digitalization typically varies significantly between the two parties. The merger creates a strong incentive to accelerate the digitalization process and adopt best practices.

Typical approach to commercial or market-driven PMI

The successful integration of commercial functions mirrors the three steps in any post-merger integration process. In Step 1, the first 100 days, the goals are to stabilize the business, outline the target design of the new commercial organization, and set the objectives. Step 1 also includes the baselining for measurement. Step 2 is all about detailing the target design, i.e. establishing new processes and new ways of working with respect to products, customers and pricing. Step 2 also involves defining new commercial functions and the new organizational set-up, with the goal of initiating and supporting topline and bottom-line growth. In larger mergers, Step 2 is done in pilots and then rolled out to the rest of the organization. Once Step 2 finishes, the organization will “go live” in Step 3.

We support you in successfully mastering these three steps, shown in Figure 2.

Figure 2: Approach

Summary: Market-driven PMI grows top and bottom lines

Following the right process to integrate commercial functions can generate significant value in PMI. Although M&A activity in the chemical industry has declined so far in 2020, we expect an increase in deals across several segments for the rest of the year and for 2021. Using a market-driven approach to PMI, we were able to successfully help several companies in integrating their commercial functions and delivered significant strategic uplift to the businesses by growing the top and bottom lines.