A study of Industrials & Chemicals M&A activity by mergermarket, in association with Squire Sanders

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

2012

Published by:

02

CONTENTS
Foreword Industrials & Chemicals Overview M&A Spotlight: Chemicals & Materials Q&A: Cipriano Beredo, Squire Sanders About Squire Sanders About mergermarket 03 04 13 18 20 22

GLOBAL M&A SERIES CONTENTS

FOREWORD
Welcome to the second report in Squire Sanders Global M&A Series. Here we examine the driving forces behind M&A in the global industrials & chemicals sector, with a detailed review of specific industry subsectors and a spotlight feature on chemicals and materials transactions.
On the whole, 2011 and the start of 2012 have marked an encouraging rebound from some exceptionally difficult years. Globally, deal value reached US$354.7bn the highest annual level on record since 2007 driven by companies crossborder expansion efforts, private equity exit activity and lingering distress in the manufacturing and automotive industries. Internationalisation of business played an important role in boosting the volume of cross-border deals, which are coming to represent an ever-larger slice of total M&A. In 2011, 42% of all announced deals were cross-border in nature, up from 40% in 2010 and just 37% in 2009. Looking at the rationale behind some of these transactions brings these figures to light: the acquisition of US-based Thomas & Betts Corporation (TNB) by Swiss industrials group ABB Ltd, for example, aimed to strengthen the acquirers presence in the North American market, whilst the US$6.4bn acquisition of French chemical giant Rhodia SA by Belgium-based Solvay SA is focused on growth in emerging markets. Even domestic deals had an international flavour in 2011: the $4.6bn acquisition of Solutia Inc by Eastman Chemical Company in the US is a case in point, as the combined entity will pursue aggressive expansion into the Asia-Pacific region. Multi-billion dollar mergers notwithstanding, the heart of the industrials & chemicals market seems to lie in the mid-market. Small to medium-sized businesses still form the backbone of the US economy and the German Mittelstand, and this is clearly reflected in the numbers. Deal making in the US$15m to US$500m range rose by over 18% from 2010 to 2011, and twothirds of all deals announced in 2011 came from the US$5m to US$100m range. Looking at specific segments of the industrials & chemicals market, industrial products and services is the most active subsector by far, with 1,230 deals valued at US$168bn, followed by chemicals and materials with US$43bn. Chemicals and materials deal announcements were up over 16% in 2011 compared to 2010, making it one of the fastest growing industry subsectors over that period. Industrials & chemicals is an expansive sector, covering a broad range of industries industrial products and services, industrial electronics, industrial automation, chemicals and materials, manufacturing and automotive meaning it will always be among the liveliest markets for M&A. This report seeks to unpack the sectors various different parts to uncover the key drivers, challenges and opportunities that characterise the market today. We hope you find this second part of our Global M&A Series both useful and informative, and as always we welcome your feedback.

03

William Downs Partner Global Practice Group Leader, Corporate and Corporate Finance Squire Sanders william.downs@squiresanders.com

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

04

INDUSTRIALS & CHEMICALS OVERVIEW

Merger activity in the industrials & chemicals space has closely mirrored trends in the global business cycle in recent years. The post-crisis recovery in economic growth saw a revival in industrials & chemicals dealmaking, which peaked in 2011 even amid the sovereign debt market jitters with 2,692 transactions collectively valued at US$354.7bn coming to market, marking the highest yearly level of aggregate deal value since 2007. Small- and mid-sized industrials enterprises form a cornerstone of the global economy and the mainstay of the sectors deal market: transactions in the US$15m to US$100m deal size segment accounted for every two in three announced deals with a disclosed value in 2011. Clearly, the financial health, growth ambitions and access to capital for small- and mid-sized enterprises (SMEs) is crucial for the vitality of the overall industrials & chemicals deal market, but the headline-grabbing, transformational tie-ups and takeovers brokered by the worlds largest industrial groups have also been a key feature in the post-crisis M&A landscape. In 2011, the number of transactions valued at US$1bn or more rose by 13% to the highest level in four years at 60 transactions. The stronger corporate appetite for large-cap M&A has been a boon for vendors and private equity funds looking to dispose and mature portfolio assets have not been left out in this regard. In total, there were 307 exits worth US$69.3bn undertaken last year, accounting for 20% of overall industrials & chemicals deal value and the highest annual value for exits in the sector tracked by mergermarket. Some of these deals were blockbuster divestments with large industrial packaging groups on the buyside, including Blackstones sale of Pennsylvanianbased Graham Packaging for US$4.3bn to New Zealands Reynolds Group Holdings and Clayton, Dublier & Rices exit from Wisconsin-headquartered Diversey Holdings to New Jerseys Sealed Air Corp for US$4.3bn; these two transactions rounded off the top 10 deals undertaken globally in the sector between Q2 2011 and Q1 2012. Fresh investments into industrials & chemicals companies by buyout houses also proved robust with transaction activity and value growth outpacing the sector as a whole by posting increases of 25% and 44% to a total of 495 transactions worth US$42.2bn. The largest buyout Industrials & Chemicals M&A trends
900 800 700 200,000 250,000

Value of deals US$m

Number of deals

600 500 400 300 200 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 0 50,000 150,000

100,000

Number of deals

Deal value US$m

Industrials & Chemicals deal size splits by year

3,500 3,000 2,500 93 165 661 1,500 342 1,000 500 0 1,018 1,271 1,381 1,300 922 80 133 227 810 190 122 213 866 100 176 733 469 347 77
101

88

Number of deals

2,000

52 111 442 314 37

150 550

72

121 116 181 560 365

452

342

1,109

1,349

2005

2006

2007

2008

2009

2010

2011

Industrials & Chemicals deal size splits by quarter

800 700 600 20 10 82 65 7
24

19 23 15 14 29 126 72 11 43 139 85 16
25

39 27 41 18 166 93

33 25 37 155 86

36 33 44 124 93

33 33 49 128 95

25

51

Number of deals

500 400 300 200 100 0

15 3 32 114 11

38 148 81

37 119 92

153 91

24 26

23

8 17

115 70

98 77

91 252 250 271 282 306 328 339 330 352 337

257

222

191

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Key for above two graphs: Not disclosed US$101m-US$250m

<US$15m US$251m-US$500m

US$15m-US$100m >US$500m

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

05

Private equity exits

120 30,000

Private equity buyouts

250 45,000 40,000

100

25,000

200

35,000

Value of deals US$m

Value of deals US$m

Number of deals

Number of deals

80

20,000

30,000 150 25,000 20,000 15,000 50 10,000 5,000

60

15,000

100

40

10,000

20

5000

0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12

0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12

Number of deals

Deal value US$m

Number of deals

Deal value US$m

Top 10 Industrials & Chemicals Deals Q2 2011 - Q1 2012

Announced date Sep-11 Status P Target company Sumitomo Metal Industries Ltd (90.6% Stake) Goodrich Corporation Nalco Holding Company MAN SE (26% Stake) Rhodia SA Pentair Inc Solutia Inc SAIC Group (independent auto components assets); SAIC Group (auto service and trading business); SAIC Group (new energy auto business) Graham Packaging Company Inc Diversey Holdings Inc Target sector Industrial products & services Industrial products & services Industrial products & services Automotive Chemicals & materials Industrial products & services Chemicals & materials Automotive Target country Japan Bidder company Nippon Steel Corporation United Technologies Corporation Ecolab Inc Volkswagen AG Solvay SA Tyco Flow Control Eastman Chemical Company SAIC Motor Corporation Ltd Bidder country Japan Seller company Seller country Deal value US$m 22,474

Sep-11 Jul-11 May-11 Apr-11 Mar-12 Jan-12 Apr-11

P C C C P P C

USA USA Germany France USA USA China

USA USA Germany Belgium USA USA China Shanghai Automotive Industry Corporation (Group) China

17,861 8,138 7,651 6,446 5,230 4,600 4,365

Jun-11 Jun-11

C C

Manufacturing Industrial products & services

USA USA

Reynolds Group Holdings Ltd Sealed Air Corporation

New Zealand USA

Blackstone Group LP Clayton, Dubilier & Rice LLC; Johnson family

USA USA

4,332 4,262

C = Complete; P = Pending

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

06

INDUSTRIALS & CHEMICALS OVERVIEW

saw Bain Capital and Hellman & Friedman club together to move on the Swedish alarm solutions manufacturer Securitas Direct in a US$3.3bn secondary buyout from Swedens EQT. Bain was also active in the automotive space, which witnessed a brisk uptake in private equity investment last year as the number of buyouts rose by more than half to 61 deals, while total value rose more than three-fold to US$4.7bn. Bain teamed up with GIC, the Singaporean sovereign wealth fund, through its BC India Private Investors II fund to invest US$999m for an undisclosed stake in Hero Investments, the Indian investment holding company with interests in motorcycle manufacturing. Hero Investments used part of the proceeds from its private equity backing to pay down debt after acquiring a 26% stake in Hero Honda Motors from Honda Motor Co for US$853m. Subsector M&A volume
3,500 108 3,000 2,500 101 182 2,000 1,500 1,000 500 0 1,017 1,389 308 349 402 1,560 252 318 416 498 506 116 272 330 457 118 232 306 369 402 84 154 254 256 279 1,306 851 1,075 1,230 122 296 2011 2012 YTD 104 182 283 352 328 129 197 345 409 382

Number of deals

42 45 83 100

2005

2006

2007

2008

2009

2010

Industrial products & services Automotive

Manufacturing Industrial Electronics

Chemicals & materials Industrial automation

Industrials & chemicals industry snapshots

Industrial products and services Industrial products and services, the largest subsector with 1,230 transactions worth US$168bn registered in 2011, was a bulwark for dealmaking. The tailwinds of strengthening factory output in industrial powerhouses such as the US and Germany, as well as the momentum of a tentative global economic recovery, helped sustain deal flow throughout the year with a high of 331 transactions brokered in the fourth quarter (the highest level since mid-2008) even in the face of increased economic volatility in the second half of the year. Iron and steel producers, which have seen a rapid spree of consolidation following the drought of deal activity during the crisis period, saw the largest industrials & chemicals deal of the Q2 2011 to Q1 2012 period come to market with Nippon Steel taking over its rival Japanese counterpart Sumitomo Metal Industries in a US$22.5bn transaction. Whereas distress in the wake of the crisis provided a spur to consolidation in the past, steel manufacturers are now looking at the burgeoning levels of output from Chinese rivals and combining to cut costs, gain synergies and achieve greater competitiveness. Chemicals and materials Globally, there were 409 deals worth US$93.8bn in the chemicals and materials subsector, with

Subsector M&A value

600,000 12,675 500,000 16,264 47,958 7,142 35,542 33,023 27,929 10,429 9,684 200,000 32,643 21,240 61,221 89,033 0 2005 2006 2007 72,521 57,124 4,808 118,960
17,957

Value of deals US$m

400,000

300,000

3,543 26,021 25,122 38,313 69,125 1,553 19,160 23,699 71,164 119,620 27,164 40,999 2009

7,123 24,703 24,273 31,330 60,029 110,034 2010

27,254 42,945 93,765

100,000

217,747

265,398

167,962

825 2,294
16,015

31,199

9,204 5,629

2008

2011

2012 YTD

Industrial products & services Manufacturing

Chemicals & materials Industrial Electronics

Automotive Industrial automation

almost half of these taking place in North America. This comes as little surprise given that the US holds several of the industrys global giants including The Dow Chemical Company and E. I. du Pont de Nemours and Company. Businesses of this size and scope (or their subsidiaries) have historically offered a steady supply of asset sales and 2011 was no exception: notable examples from the year include the US$340m sale of Dows polypropylene business to Brazil-based petroleum based chemicals producer Braskem SA and the sale of Dow AgroSciences European dithane fungicide business to Indiabased Indofil Chemicals Company for US$50m.

The predominance of the US highlights the chemical sectors close ties to the energy sector. High commodity prices and extended volatility are at least partly reflected in the sale of Dows polypropylene unit, and more activity of this sort could emerge in 2012. At the same time the worldwide shale gas frenzy has put the spotlight on North America, where expansive shale plays have spawned high hopes for inexpensive raw materials particularly in the US. Manufacturing In the manufacturing sector, the shift of production in labour-intensive industries from advanced economies to emerging markets such as China, has

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

07

done little to dampen the thriving M&A markets of Western Europe. The region is by far the most active in terms of manufacturing, accounting for roughly 40% of the 382 deals transacted globally in 2011. With a strong backbone of SMEs active in areas such as packaging, pulp and paper, printing and binding as well as the production of business products, hardware and textiles particularly within the German Mittelstand it is not surprising that small and mid-cap deals predominate in Western Europe; the region garnered less than 15% of the US$27.3bn in manufacturing deal value last year. While manufacturing deal activity benefitted from relative stability in the first half of last year, distress in the textile, printing and other manufacturing segments was more apparent than in recent years: the number of insolvencyrelated manufacturing transactions tracked by mergermarket rose to the highest level at 26 deals worth US$195m. The German economy, which has been a buttress for the eurozone during a time of pronounced uncertainty, had a number of insolvency-related transactions in 2011 in the textile and printing niches. The bankruptcy of schlott gruppe and subsequent selloff of its different divisions was one of the most prominent examples of overcapacity in the print industry and falling demand stemming from technological innovations and the Internet. Automotive Despite the prevailing uncertainty last year, the automotive industry witnessed the fastest rate of increase in deal flow across the industrials & chemicals space, rising by over 20% to 345 deals worth US$31.3bn. The surge in private equity investment was a boon for automotive sector M&A, but while financial investors such as Bain Capital and GIC boosted transaction flows, consolidation among big automotive players such as Volkswagen and MAN, Fiat and Chrysler and transactions in the Chinese market drove sector activity. In the largest automotive deal last year, Volkswagen upped its stake in MAN by 26% to take a controlling share of the German truck manufacturer for US$7.7bn. The deal sets the stage for Western Europes largest carmaker, which already owns several of the regions best known brands such as Seat, Audi and Bentley, to expand into the truck manufacturing space against rivals such as Daimler and Volvo. Fiat, meanwhile,

Manufacturing M&A by Region

2005-2010 Number of deals Western Europe Asia-Pacific North America Latin America Central & Eastern Europe Sub-Saharan Africa Middle East & North Africa Total 704 427 489 60 95 17 7 1,799 2011-2012 YTD Value of deals US$m 20,779 16,249 10,543 496 469 24 14 48,574

Value of deals Number of deals US$m 95,240 42,736 99,232 3,009 4,744 556 1,583 247,100 171 124 93 14 20 2 4 428

pushed into the North American market. Its chief investment came as the company exercised call options for a combined 24% stake in Chrysler Group, spending a total of US$1.8bn to bring its holding in the formerly bankrupt US carmaker to 52%. Across the Pacific in the worlds largest and fastest growing automotive market, Chinas SAIC Motor Corporation acquired a number of auto component, new energy and automotive service assets from SAIC Group for US$4.4bn. An established car market in Japan with leading international carmakers as well as rising demand for automobiles among the Chinese and Indian populations have helped to make the Asia-Pacific region the second largest market for automotive M&A with 104 deals worth US$14.9bn, behind Western Europes 131 transactions valued at US$18.1bn. Industrial electronics M&A in the industrial electronics niche was busiest in the Asia-Pacific region, particularly in China and Japan although Taiwan, for its economic size, is a booming market for dealmaking. Across the world, industrial electronics counted 197 deals worth US$18bn, with the Asia-Pacific region accounting for 37% and 41% of deal activity and value. Deal activity has been driven by a number of factors, including sector consolidation, strategic acquisitions and portfolio rationalisation by electronics groups. Several of the sectors heavyweights were active last year with Samsung Electronics, Hitachi, Schneider Electric, General Electric and Toshiba Corporation, all on the buy-

side of deals. Samsung acquired a 50% stake in S-LCD Corporation, the South Korean LCD panel maker, from Sony Corporation for US$943m as the Japanese electronics giant sought to monetise its holdings in the firm and secure a steady supply of LCD screens from Samsung. Another leading Japanese electronics firm, Hitachi, took control of its battery subsidiary for US$465m, while Frances Schneider increased its presence in the Chinese market with the acquisition of Beijing Leader & Harvest Electric Technologies, the countrys largest supplier of energy efficiency enhancing devices for electric motors, for US$650m. Private equity buyouts, which have declined from over one in five of every acquisition in the sector in 2007, now account for a paltry 9% of industrial electronics M&A. Mature portfolio companies are now coming up for exit, however, and last years two largest transactions saw private equity firms on the sell-side. In the largest deal, Allianz Capital Partners and a consortium of financial investors exited Landis+Gyr, the Swiss maker of energy management products and services, for US$2.3bn to the Toshiba Corporation, which is seeking to beef up its energy management solutions business. Elsewhere, the France-based investment group Wendel exited Deutsch Group, the French maker of electronic connectors for the aerospace and computer sectors, to Switzerlands TE Connectivity, the worlds largest manufacturer of electrical connectors, in a US$2bn transaction. Wendel backed the management of Deutsch Group in

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

08

INDUSTRIALS & CHEMICALS OVERVIEW

a buyout of the firm in 2006 for US$1bn; the firm will use proceeds of the sale to deleverage. Industrial automation With a total of 129 transactions announced worth US$4.8bn, 2011 saw a 24% surge in deal volume in industrial automation and a 33% drop off in deal value compared to the previous year. Looking more recently, deal flow in Q1 2012 matched the same period last year with 35 transactions announced globally, though aggregate value is slightly depressed at US$637m compared to US$947m in Q1 2011. Behind the charge is Western Europe, where deal flow increased by 68% from 37 in 2010 to 62 in 2012 and total value rose by 50% from US$1.1bn in 2010 to US$1.7bn in 2011. This surge more than made up for flat activity in Asia-Pacific and a decline in North America; although US companies showed a continued appetite for European assets with 12 deals worth US$353bn compared to 9 worth US$388bn in 2010. Globally the number of crossborder deals taking place in Q1 2012, at 57% of total deal flow, marks the highest quarterly level since the second quarter of 2008, when 61% of all industrial automation transactions involved buyers and sellers from different countries. Last year also saw an uptick in private equity activity, which made up approximately one third of all dealmaking activity in industrial automation. The number and value of buyouts and exits rose significantly on the year prior so that total private equity deal flow was up 72% and value up 13%. A particularly positive indicator for the industrial automation segment is a tripling in the number of secondary buyouts in 2011 compared with 2010, illuminating the abundance at present of latent value.

Regional perspectives
In volume terms, Western Europe remains the top target region for industrials & chemicals transactions globally, with two in every five mergers and acquisitions taking place in the region. However, the scale of the North American markets and the presence of some of the worlds largest industrial groups have helped bolster its aggregate regional deal value to the top place, contributing just under 40% of total industrials & chemicals deal value in recent times. Notably, while the Asia-Pacific region has seen a slight increase in its share of global deal volume

M&A volume split by target dominant region

M&A value split by target dominant region

1%

1%

1%

1%

4% 4% 2% 1% 1% 23% 22% 27%

2011 - 2012 YTD 2005 - 2010

2% 2%

2011 - 2012 YTD 2005 - 2010

5%

5% 24% 16%

3% 1% 1% 40%

30%

38%

39%

34%

40%

32%

North America Asia-Pacific Latin America Sub-Saharan Africa

Western Europe Central & Eastern Europe Middle East & North Africa

North America Asia-Pacific Latin America Sub-Saharan Africa

Western Europe Central & Eastern Europe Middle East & North Africa

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

09

in the sector to almost a quarter, the region has seen a much stronger rise in its share of global deal value with an eight percentage point increase comparing the periods 2005-2010 to 2011-present. On the buy-side, the shake-up in the global economy has seen substantial regional shifts in bidder activity. As a bidder region, North America witnessed a strong increase, jumping 12 percentage points in its share of global industrials & chemicals M&A value to account for 44% of the market. The Asia-Pacific region has also seen a sharp rise in its share of deal value, surpassing Europe to become the second largest bidder market after North America with a 29% share since the start of 2011 to present from 20% historically. The uptick in transformational deals in North America and Asia-Pacific has seen Western

Europes share of global industrials & chemicals deal value shrink by 16% over the period even as it remained the worlds most active area on the buy-side with a 40% share of total bidder activity.

Cross-border
Growing competition in the global economy is propelling ever greater numbers of strategic and financial investors to scout overseas markets for new acquisition opportunities. In the industrials & chemicals sector this trend is much the same with multinationals looking to break into far-flung markets to reach new customers, capture international innovation, benefit from greater productivity, better cost structures and fast-growth markets with longterm prospects.

Combined, these factors helped fuel cross-border transaction flows in the sector last year to the highest level in recent years with 1,144 deals valued at a combined US$137.1bn. Furthermore, cross-border dealmaking increased as a proportion of overall industrials & chemicals M&A, accounting for 42% and 39% of deals announced in the year. While the markets of the western world have subdued economic growth compared to the rapidly growing emerging economies, these countries are still the top target markets for doing deals: seven of the top 10 target markets over the past 18 months have been located in North America or Western Europe. True, these markets remain top destinations for deals in part due to their more mature deal markets but they have been losing ground to emerging markets in recent years with

M&A volume split by bidder dominant region

M&A value split by bidder dominant region

1% <1%

1% <1%

3%

2%

2011 - 2012 YTD 2005 - 2010

3% 2%

2011 - 2012 YTD 2005 - 2010

3% 23% 20%

2% 21% 1% 1% 40% 41% 3%

4% 1%

3%

32% 44%

37%

32%

20%

29% 31%

Western Europe Asia-Pacific Latin America Sub-Saharan Africa

North America Central & Eastern Europe Middle East & North Africa

North America Western Europe Central & Eastern Europe Middle East & North Africa

Asia-Pacific Latin America Sub-Saharan Africa

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

10

INDUSTRIALS & CHEMICALS OVERVIEW

their share of total industrials & chemicals M&A falling from 80% to 70% from 2005 to the Q1 2011-Q2 2012 period. On the buy-side, the picture is not much different. Advanced economies are the top international acquirers and US acquirers are the most impressive in this regard. The number of outbound acquisitions by US acquirers has nearly matched the number of inbound deals and dollars spent by two to one since the start of 2011. Industrials & Chemicals cross-border M&A trends
350 300 250 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0

Value of deals US$m

Number of deals

200 150 100 50 0

Outlook
The outlook for industrials & chemicals M&A is mixed across the different areas of the sector. Despite a buoyant 2011, volatility associated with the European sovereign debt crises has affected global markets, making access to credit more difficult and dampening the appetite for M&A among some firms. Despite this general backdrop for the dealmaking outlook, the picture is heterogeneous across the different geographies and industrial subsectors. Globally, commodity and energy prices remain high by historical standards, putting pressure on margins for manufacturers dependent on these raw materials for the production process. With businesses across the board looking to cut costs in the face of uncertain demand, industrials firms acting as suppliers in the lower part of the production chain may begin to be squeezed further by their clients. These factors could spur consolidation in mature industries facing low growth or decline such as automobile manufacturing in Europe, where buyers with deep pockets from the US and China are tipped to be prime bidders for quality assets coming to market. US carmakers, which remain in a relatively good position due to Washingtons provision of funding during the crisis in 2008 and 2009, are well placed to move on these opportunities. Players from China will also be interested in acquiring the technology, skills and intellectual property of overseas brands. Industrial automation has been affected by high energy prices and demand too, with increasing consolidation in the pumps and valve segment driven by heightened demand for flow control products. Propelled by this buoyancy, businesses are looking beyond their own borders to expand capacity and

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12

Number of deals

Deal value US$m

Cross-border share of Industrials & Chemicals M&A

60%

% of overall Industrials & Chemicals M&A

50%

40%

30%

20%

10%

0%

2005

2006

2007

2008

2009

2010

2011

2012 YTD

Volume

Value

enter growing markets, as exemplified by UK-based engineering group IMIs two acquisitions in February: one of family-owned Italian valve manufacturer Remosa for US$131m and the other of Brazilian valve maker Grupo InterAtiva for US$35m. The scene shifts on a regional basis as well. In Europe, valuations are thought to be comparatively attractive at the moment, which could pique buy-side interest, although misaligned price expectations could be a stumbling block on some transactions. Nonetheless, in both North America and Western Europe lower value-added metal bashing industrial outfits, facing stiff competition from emerging markets, may find 2012 a good time to sell.

Additionally, there are increasing numbers of distressed and insolvency-related deals coming out of Europe already this year, with Wirthweins acquisition of fellow automotive parts supplier ttb and metal processors L. Possehhl & Cos takeover of manrolands press business serving as prime examples. Positively, the palliative measures undertaken to soothe volatility from the sovereign debt crises have provided a degree of stability. But austerity measures have also triggered severe backlash in some cases, making investors understandably cautious. Upcoming elections in major industrial countries such as the US may cause investors to retreat from dealmaking through the autumn,

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

11

Top 10 Cross-border Industrials & Chemicals deals, Q2 2011 - Q1 2012

Announced date Apr-11 Jun-11 Status C C Target company Rhodia SA Graham Packaging Company Inc Thomas & Betts Corporation Securitas Direct AB Inoxum SPIE SA Target sector Chemicals & materials Manufacturing Target country France USA Bidder company Solvay SA Reynolds Group Holdings Ltd ABB Ltd Hellman & Friedman LLC; Bain Capital LLC Outokumpu Oyj Clayton, Dubilier & Rice LLC; AXA Private Equity; Caisse de Depot et Placement du Quebec Nippon Steel Corporation; Tenaris SA; Ternium SA Colfax Corporation Toshiba Corporation; Innovation Network Corporation of Japan Bidder country Belgium New Zealand Switzerland USA Finland USA EQT V Ltd ThyssenKrupp AG PAI Partners Sweden Germany France Blackstone Group LP USA Seller company Seller country Deal value US$m 6,446 4,332

Jan-12 Jun-11 Jan-12 Jul-11

P C P C

Industrial products & services Industrial products & services Industrial products & services Industrial products & services

USA Sweden Germany France

3,770 3,268 3,119 2,972

Nov-11

Usinas Siderurgicas de Minas Gerais (14.63% Stake) Charter International plc Landis+Gyr AG

Industrial products & services

Brazil

Mexico

Votorantim Industrial SA.; Caixa dos Empregados da Usiminas; VBC Energia SA

Brazil

2,871

Sep-11 May-11

C C

Industrial products & services Industrial Electronics

Ireland (Republic) Switzerland

USA Japan Allianz Capital Partners GmbH; DLJ Merchant Banking Partners; Sofina SA; Dubai International Capital LLC; Propel Investments Pty Ltd; Marinya Holdings Pty Ltd; Sir Douglas Myers (Private Investor); Sir Anthony OReilly (Private Investor) Svenska Cellulosa Aktiebolaget SCA USA

2,421 2,300

Jan-12

Svenska Cellulosa Manufacturing Aktiebolaget SCA (packaging division)

Sweden

DS Smith plc

United Kingdom

Sweden

2,027

C = Complete; P = Pending

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

12

INDUSTRIALS & CHEMICALS OVERVIEW

especially as recent French elections have been a stark reminder that leadership changes can quickly change a countrys business-friendly profile. In Asia-Pacific there are rumblings of discontent too: in the wake of the Fukushima nuclear disaster and the ensuing rise in energy costs, Japanese manufacturers in industrial electronics are seeing margins squeezed at the same time that they face ever greater competition from rising stars in South Korea and Taiwan. They are also contending with a strong yen, global economic volatility and subdued external demand in key product and export markets. Given these global economic pressures, the most attractive assets will be high value-added, niche industrial manufacturers that have the latest technology and healthy margins. However, competition to acquire such businesses will be steep, with cross-border acquisitions more commonplace than ever, and the outlook for private equity activity back to strength. This will add fire to the valuation debate, elevating the challenge for acquirers and their advisors as they seek opportunities for growth amidst a still volatile global economic environment. Global economic growth
10

Year on year % change

-2

-4

-6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12

World

Advanced economies

Emerging economies

Source: IMF, World Economic Outlook April 2012

Heat Chart
Industrial products & services Asia-Pacific Western Europe North America Central & Eastern Europe Latin America Middle East & North Africa Sub-Saharan Africa Overall 394 178 56 59 19 11 2 719 Chemicals & materials 143 28 44 20 10 2 2 249 Manufacturing Automotive Industrial Electronics 109 16 14 6 3 2 1 150 66 Industrial automation 36 16 6 3 4 Overall

Key
Hot

84 76 26 15 13 7 1 222

80 37 31 6 6 1 1 162

846 351 177 109 55 23 7 1,568

120 100 80 60 40 20 0 Cold

The Heat Chart is based on 'company for sale' stories tracked by mergermarket over 01/01/2012 to 27/04/2012. Opportunities are tracked according to the dominant sector and geography of the target.

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

M&A SPOTLIGHT: CHEMICALS & MATERIALS

The global chemicals and materials sector was hit hard by the drying up of the credit markets in 2009. M&A came to a virtual halt that year, with volume falling 31% against 2008 and value falling 61% to reach its lowest point on record since 2005. The decline was even more pronounced for private equity, with buyouts and exits both dropping 48% in volume terms from 2008 to 2009. The chemicals and materials sector which covers an eclectic mix of subsectors including petrochemical bases and derivatives, agrochemicals, fine chemicals and food additives is notoriously cyclical, so investors retreat from the industry in 2009, and the resulting decline in M&A, come as little surprise. But fortunately, neither does the slow and steady recovery underway since then: in 2011 chemicals and materials M&A increased 16% in volume and 56% in value from 2010 to reach 409 deals worth a combined US$93.8bn globally. Private equity buyouts totalled 55 worth roughly US$6.7bn in 2011, up 34% in volume and 56% in value from the previous year. Chemicals and materials M&A trends
140 70,000

13

120

60,000

100

50,000

Value of deals US$m

Number of deals

80

40,000

60

30,000

40

20,000

20

10,000

0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12

Number of deals

Deal value US$m

Annual buyout and exit volumes

90 80 70 60

Number of deals

50 40 30 20 10 0 2005 2006 2007 2008 2009 2010 2011

Buyouts

Exits

GLOBAL M&A SERIES CHEMICALS & MATERIALS

14

M&A SPOTLIGHT: CHEMICALS & MATERIALS

Top 10 Chemicals and materials, Q2 2011 - Q1 2012
Announced date Apr-11 Jan-12 Jan-12 May-11 Feb-12 Status C P P C P Target company Rhodia SA Solutia Inc ExxonMobil Yugen Kaisha International Specialty Products Inc Baoyin Special Steel Pipe Co Ltd (58.5% Stake); Baoshan Iron & Steel Co Ltd (Special steel assets); Shanghai Baosteel Special Metal Materials Co Ltd; Shanghai Wugang Gas Co Ltd (94.5% Stake); Zhonghang Special Materials Industry (9.71% Stake) Jul-11 Dec-11 Aug-11 Apr-11 Nov-11 C C C C P Arch Chemicals Inc Taminco NV Minudobreniya JSC Orion Engineered Carbons Group Vale Fertilizantes SA (15.63% Stake) USA Belgium Russia Germany Brazil Lonza Group Ltd Apollo Global Management LLC Laguz Management Ltd Triton Partners; Rhone Capital LLC Vale SA Switzerland USA Russia USA Brazil CVC Capital Partners Ltd Yara International ASA Evonik Industries AG United Kingdom Norway Germany 1,472 1,435 1,300 1,299 1,267 Target country France USA Japan USA China Bidder company Solvay SA Eastman Chemical Company TonenGeneral Sekiyu KK Ashland Inc Baosteel Special Steel Co Ltd Bidder country Belgium USA Japan USA China Baoshan Iron & Steel Co Ltd China ExxonMobil Corporation USA Seller company Seller country Deal value US$m 6,446 4,600 3,926 3,200 2,697

C = Complete; P = Pending

Regional insights
From a regional perspective, more than one-third of M&A targets came from Western Europe (34%) in 2011 and 2012, followed by the Asia-Pacific region with 28% and North America with 22%. Looking at the most active bidders, Western European and North American acquirers both accounted for 32% of announced deals, while the Asia-Pacific region accounted for just under one-quarter.

Top 5 target and bidder countries by chemicals and materials M&A volume, 2011 - 2012 YTD
Target countries USA Germany China Japan France Number of deals 149 39 35 35 29 Deal value US$m 58,059 634 9,268 5,354 1,723 Bidder countries USA Germany China France United Kingdom Number of deals 129 40 40 29 27 Deal value US$m 49,027 6,315 5,059 8,030 2,406

GLOBAL M&A SERIES CHEMICALS & MATERIALS

15

M&A volume split by target dominant region

1% 1%

M&A value split by target dominant region

<1% 2%

6% 8% 4% 6% <1% 33% 2% 34%

2011 - 2012 YTD 5% 2005 - 2010

3%

2011 - 2012 YTD 2005 - 2010

4% 2% 8% 18% <1% 32% 46%

26% 28%

20%

28% 26% 22%

33%

Western Europe North America Latin America Sub-Saharan Africa

Asia-Pacific Central & Eastern Europe Middle East & North Africa

North America Asia-Pacific Latin America Sub-Saharan Africa

Western Europe Central & Eastern Europe Middle East & North Africa

M&A volume split by bidder dominant region

1% 2%

M&A value split by bidder dominant region

<1% 3%

3% 6%

2011 - 2012 YTD 2005 - 2010

4%

2011 - 2012 YTD 2005 - 2010

5%

3% 3% 32% <1% 36%

15% 8%

8% 4% <1% 21%

24%

26% 54% 20% 38% 24% 27%

32%

Western Europe Asia-Pacific Latin America Sub-Saharan Africa

North America Central & Eastern Europe Middle East & North Africa

North America Western Europe Latin America Sub-Saharan Africa

Asia-Pacific Central & Eastern Europe Middle East & North Africa

GLOBAL M&A SERIES CHEMICALS & MATERIALS

16

M&A SPOTLIGHT: CHEMICALS & MATERIALS

Whats driving the recovery?
Strategic acquirers appetite for growth in emerging markets has been a defining feature of the chemicals and materials industry in recent years, and is illustrated quite clearly by some of 2011s largest transactions: the US$6.4bn acquisition of French chemical giant Rhodia SA by Belgium-based Solvay SA aims to strengthen the combined entitys presence in emerging markets, which account for 40% of its aggregate sales, while the US$4.6bn acquisition of Solutia Inc by US-based Eastman Chemical Company is part of its strategy of expanding into the Asia-Pacific region, where Eastman is forecasting a compound annual growth rate of up to 10% for the next several years. Emerging market players have been active acquirers in their own right. Cross-border M&A increased by 9% in volume and 152% in value from 2010 to 2011, and Asia-Pacific investors particularly state-backed entities with an insatiable appetite for raw materials, technology and innovation played an important role in boosting these figures. In one of 2011s most notable deals, China National Agrochemical Corporation, a full subsidiary of China National Chemical Corporation (ChinaChem), acquired a 60% stake in Israel-based Makhteshim Agan Group (MAI), the branded off-patent agrochemical producer, from Koor Industries, the Israeli investment group. Three months after the MAI-ChinaChem announcement, MAI still 40% owned by Koor Industries paid an undisclosed amount for the non-mixture diuron herbicides business of E. I. du Pont de Nemours and Company (DuPont), highlighting the combined entitys ambitious expansion efforts and the increasing competition from emerging players. Cross-border share of global chemicals and materials M&A
80%

% of overall Chemicals and materials M&A

70% 60% 50% 40% 30% 20% 10% 0%

2005

2006

2007

2008

2009

2010

2011

Volume (%)

Value (%)

DuPont and The Dow Chemical Company or Germany-based chemical giant BASF SE, and in many cases going into the hands of foreign strategic buyers. Dows continuous deleveraging strategy serves as a case in point. Shortly after its acquisition by Dow in 2008, Rohm and Haas sold Morton International Incorporated, its consumer and industrial de-icing salt subsidiary, to Germanybased fertiliser company K+S Aktiengesellschaft for US$1.7bn in April of 2009, and its powder coatings unit to Netherlands-based Akzo Nobel NV for an undisclosed amount the following November. More recently, in 2011, Dow sold its polypropylene business to Braskem SA, the Brazilian petroleum chemicals producer, for US$340m. In an even smaller transaction, Dow AgroSciences sold its European dithane fungicide business to India-based Indofil Chemicals Company for US$50m. Private equity portfolios are also providing a good source of acquisition targets. Two of the past years largest M&A deals involved private equity-backed businesses, including German specialty chemicals company Sued-Chemie AG, a portfolio company of US-based private equity firm One Equity Partners in which Swiss specialty chemicals company Clariant AG acquired a 96.2% stake valued at US$2.6bn. UK-based Permira and Austria-based VCP Vienna also sold a 58% stake in Hungary-based plastic raw materials company

BorsodChem Zrt to Wanhua Industrial Group, the Chinese polyurethane company, in a US$1.7bn deal. Another signal that buyout groups may finally let go of their holdings is strong secondary buyout (SBO) activity, with SBO volume totalling 15 worth US$4.5bn in 2011 and two SBOs featuring among the top ten largest chemical deals globally. These include the sale of CVC Capital portfolio company Taminco NV, a Belgium-based producer and marketer of alkylamines and alkylamine derivatives, to Apollo Global Management in a US$1.4bn deal. In another secondary buyout, the black carbon business of Evonik Industries AG, a diversified specialty chemicals company based in Germany and also a portfolio company of CVC Captial, was sold to Triton Partners and Rhone Capital in a US$1.3bn deal with each acquirer holding a 50% stake.

Deal size trends

While the multi-billion dollar deals naturally draw the most media attention, the most substantial amount of M&A activity can be found in the lower mid-market, defined here as US$15m to US$100m, where deal volume in 2011 totalled 88, up from 74 in 2010. And it is these deals that demonstrate just how fragmented the market remains and just how many opportunities exist for mid-market acquirers, both strategic and financial. Even in the boom years, there has always been a steady stream of smaller-scale M&A taking

Corporate disposals, private equitybacked businesses top targets

MAIs acquisition of the DuPont herbicides business also brings to light another important element of the chemicals and materials landscape, which is the importance of corporate disposals. Corporate disposals generated roughly half of all M&A targets between 2005 and 2011, coming mostly from major players like US-based

GLOBAL M&A SERIES CHEMICALS & MATERIALS

17

Chemicals and materials deal size split by year

500 450 400 350 27 17 47 110 56 46 159 169 69 39 27 34 119 109 48

14 33 11 10 22 63 41 154 156 2 24 18 30 73

Number of deals

300 250 200 150 100 50 0

26 16 27 105

27 15 37 87 59

for instance, DuPonts purchase of Danisco, Ashlands purchase of ISP and Solvays purchase of Rhodia and going forward could translate into smaller scale acquisitions of specialty chemical companies and product lines. Other segments such as petrochemicals will be sensitive to energy sector developments. High and volatile commodity prices will likely detract from the overall appeal of petrochemicals companies, with Dows sale of its polypropylene unit to Brazil-based Braskem being a case in point, while the development of unconventional sources like shale gas will contribute to the appeal of North American targets. In this respect, the shale phenomenon has been a game changer, says Buller: Up until recently, the center of the global chemical industry seemed destined to be moving to the Middle East and away from Europe and the US, driven by the abundance of relatively inexpensive oil feedstock in the Arab World. This idea has now been turned on its head, as the shale gas phenomenon has created an abundance of ethylene and its derivatives, and set the stage for an abundance of inexpensive raw materials in the US. This is likely to translate directly into M&A opportunities for the remainder of 2012 and beyond, particularly as commodity price swings of the past few years and political upheaval in oil rich nations have made energy independence a top priority. As Buller notes, Two years ago no one would have predicted new refineries being built or old refineries reopened in the US. In 2012, its become a common story.

51 6 184 18 58 2010 2011 2012 YTD 2 4 12

129

118

2005

2006

2007

2008

2009

Not disclosed US$101m-US$250m

<US$15m US$251m-US$500m

US$15m-US$100m >US$500m

place against the backdrop of mega-mergers and these deals often serve as a helpful guide for where the market is headed. In 2007, for instance, Rohm and Haas established a joint venture with South Korea-based SKC Incorporated, valued at US$183m, to manufacture and market advanced optical and functional films used in the flat panel display industry. More recently, some of the larger chemicals and materials deals have included lower-profile players like One Equity Partners, a US-based private equity group focused on the mid-market who sold portfolio business Sued-Chemie in a US$2.6bn deal. Even more recently in 2012 another mid-market specialist, Aurelius AG, a German private equity firm targeting corporate spin-offs and medium-sized independent companies, acquired a manufacturing site for crop protection products and specialty industrial chemicals from chemicals giant Bayer Cropscience AG for an undisclosed amount.

Strategic interest in Sued-Chemie AG and other private equity-backed companies in 2011 is a welcome sign that the exit market is growing more favourable, and private equity firms willingness to exit their holdings suggests the gap between buyer-seller expectations are finally starting to narrow. In one of the most recent exits of the year so far, Danish venture capital group Novo A/S acquired an approximate 26% stake worth US$708m in Chr. Hansen A/S, the Danish natural food ingredient company, from French private equity house PAI Partners. Of course, there are other industry-specific dynamics to consider going forward. While agrochemicals M&A has been dominated largely by opportunistic deals, the specialty chemicals sector is likely to be driven by an appetite for increasing market share. A decade ago, specialty chemicals presented the promised land of higher margins and less capital investment, and many companies rushed to significantly increase their specialties investments. The result is no surprise: specialties are now seeing pressure on margins as the competition to increase market share has become more intense, says Carolyn Buller, Partner and Global Head of Squire Sanders Chemicals Industry Practice. This focus on increasing market share is at least partly reflected in some of the years larger deals

Outlook
Corporate disposals and private equity exits should continue to drive chemicals and materials M&A through 2012, particularly if eurozone uncertainties are eased. The year so far has seen 100 chemicals and materials deals worth US$16bn globally, with about 43% of total deal volume coming from the US$15m to US$100m range.

GLOBAL M&A SERIES CHEMICALS & MATERIALS

18

Q&A
CIPRIANO BEREDO, GLOBAL INDUSTRY GROUP LEADER, INDUSTRIAL PRODUCTS, SQUIRE SANDERS
growing economies in the region, are also important markets for investment by industrial companies. Finally, diversified industrial companies are not going to abandon Europe, although, when evaluating their investments and operations in that region, they may focus their M&A strategies on countries that are considered to be comparatively safer markets in which to expand or invest, such as Germany and the UK. European deals generally might take longer, require more diligence and involve more negotiation of contingencies than they have in the past, but they are still getting done. Were also seeing strong activity in countries like Russia and Poland. Most people are familiar with the growth Russia has experienced, but Poland still tends to be under the radar. Its been one of the most resilient EU economies throughout the crisis with an economy that has grown by more than 15 percent in the past three years. So even within Europe, there are markets that are attracting M&A activity in this sector. facilities and considerations of transportation costs and delivery times. MM: Which segments of the diversified industrial sector (e.g. manufacturing, automotive) are experiencing the most change? CB: Well, change has been the norm across all industrial segments for a while, but to do a deeper dive into one particular area, I would say the automotive segment has experienced some of the most significant changes. Here you have global businesses that have felt the impact of both the positives and the negatives of the economy during the past few years. We all witnessed a very precipitous decline in the automotive segment after the great recession followed by numerous bankruptcy filings, which peaked a few years ago. Since then what has emerged is an automotive industry that has undergone a great deal of restructuring and is poised for both M&A growth (particularly cross-border) and further market consolidation over the next few years,

Cipriano Beredo regularly advises public and private companies on international mergers and acquisitions. He has particular experience advising industrial companies in complex multijurisdictional acquisition and divestiture transactions. He has completed transactions in more than 30 countries and routinely manages teams of professionals across the globe. MM: How has global economic volatility affected diversified industrial companies M&A strategies? CB: Diversified industrial companies have responded to global economic volatility by pursuing M&A strategies to broaden their geographic coverage and reduce their reliance on any one particular market. As industrial companies search for growth opportunities around the world, we are seeing renewed interest in the United States, which was the most active market for deal making in the first half of 2012. There has been slow and sustained growth in the US, and while thats not incredibly exciting, its still attractive when you consider it in light of what were seeing in other developed markets. The Asia-Pacific region remains a focus for industrial companies as well. China remains critically important and, although there is some concern about its ability to maintain current growth rates, the expansion there still outpaces anything were seeing in the US or Europe. You also have China and India outbound investment, which is increasingly becoming a driver of M&A activity in this sector. Many established Chinese and Indian industrial companies are looking to increase their product offerings, improve their technology and expand their global footprint, not only with acquisitions in the Americas, but also in Europe, Australia and elsewhere in Asia. And the Asia-Pacific story is by no means limited to China and India. Japan, Korea and Australia, and Singapore, which provides a gateway to other rapidly

Companies in this sector are focused on pursuing deals that drive growth and allow for expansion into new and emerging markets. Technological advancement is also a key deal driver, particularly with respect to smaller bolt-on acquisitions.
MM: Which types of deals have diversified industrial companies been most eager to pursue? CB: While there have been a handful of very significant mega-deals in this sector so far in 2012 - Eaton Corporations recently announced US$11.9bn merger with Cooper Industries being the largest and most prominent example - smaller deals continued to make up the majority of diversified industrial transactions. Companies in this sector are focused on pursuing deals that drive growth and allow for expansion into new and emerging markets. Technological advancement is also a key deal driver, particularly with respect to smaller bolt-on acquisitions. The need to continue reducing manufacturing costs and concentrate headcount in low-cost countries are also important deal considerations; however that desire is often balanced against the need to be close to end markets and customers production particularly given anticipated expansion in the light vehicle markets and in Chinese and Indian businesses expanding their reach into the US and Europe. While M&A activity in this segment will still be contingent on the resolution of many macro-economic factors, some recently announced transactions, like Visteons sale of its lighting business to an Indian buyer, Varroc, may signal the beginning of increased automotive deal activity. MM: Cross-border deals are coming to represent a larger share of total M&A deal volume in the industrials sector globally. What do you see as the driving forces behind cross-border M&A at the moment? CB: There are several important factors at work here. First, we see many diversified industrial companies in mature markets like the US and Europe that may have already maximized the opportunities in their existing markets, so they

GLOBAL M&A SERIES Q&A

19

...all companies need to anticipate that financial reforms will limit the global pool of potential lenders and therefore the availability of funds. Even the hypothetical industrial company, whose profits and cash on hand may be sufficient generally to fund its M&A program, must pay attention to these developments.
need to seek growth from M&A activity outside of their traditional strongholds. Second, many diversified industrial companies are large and this tends to drive cross-border activity because their acquisitions need to be bigger in order to move the needle and have an impact on their financial results. The larger targets they seek are often multinational corporations themselves doing business in multiple jurisdictions. Finally, there are an increasing number of large, well-funded companies from China, India and other emerging markets that are stepping up their cross-border M&A activity. And as there are more successful examples in the diversified industrials sector of outbound investments by Chinese and Indian buyers, and as management teams and employees at target companies become more accustomed to being directed by management operating out of Shanghai or Delhi, these deals will only become more prevalent. MM: Widespread financial reforms, including higher capital adequacy requirements for US and European banks, have put pressure on lending activity and restricted access to M&A financing. To what extent have financial reforms affected financing availability in the industrials sector? CB: To make a broad generalization, corporate profits for diversified industrial companies have been relatively solid recently, meaning that some companies in this segment have cash on their balance sheets to pursue certain transactions with little or no borrowing. So in a sense you could say that M&A activities for these companies have not been so heavily affected by financial reforms. That said, a lot of the companies were talking about here are both sellers and acquirers they make acquisitions, but they also sell non-core businesses. So when youre looking at the pool of potential buyers for an asset private equity buyers, or anyone else who might participate in your auction process and thinking about how robust a sale process you can run and the multiples you might get in a sale, the availability of financing for potential acquirers becomes a big issue. And the truth is that its really too soon to gauge the full impact of financial reforms on global M&A activity. A lot of the reforms in Europe are still in the process of coming online, and those reforms will inevitably result in an increase in the cost of borrowing. Further deterioration of the banking sector in the hardest-hit eurozone countries could result in even more regulatory activity. Certain marginal loans arent going to be made, youre going to be adding some time to the borrowing process, and as a result adding time to the overall acquisition process. So when it comes to the availability of funds for M&A, all companies need to anticipate that financial reforms will limit the global pool of potential lenders and therefore the availability of funds. Even the hypothetical industrial company, whose profits and cash on hand may be sufficient generally to fund its M&A program, must pay attention to these developments. Because there will be instances where it may want to pursue a transformative acquisition thats large enough to require borrowing, and the availability of financing will suddenly be a matter of critical importance.

MM: How closely are acquirers monitoring developments in the eurozone? How will Europes limited growth prospects over the next few years affect diversified industrial companies outside of the region? CB: Acquirers are monitoring the eurozone very closely and keeping an eye on how things are taking shape, and its impacting their decision making. But companies in the industrial sector will continue to actively pursue M&A because in mature industries, M&A is a significant and necessary driver of growth. These industrial companies likely have operations throughout the eurozone, and they understand the growth prospects for Europe will be flat or even negative in the short term and that there will likely be a period of economic and political turmoil. But I dont see them engaging in a fire sale theyre not going to divest or walk away from Europe or sell their businesses or assets in the region at a deep discount. So what are their options? They could scale back their projections for growth. But that course is not terribly attractive, particularly for industrial companies under pressure to deploy assets. So an alternative is to aggressively pursue M&A in higher growth regions in part to help balance out the eurozone risk. This strategy may fuel M&A activity in North America, Asia, and those regions within Europe that are considered safer, and more generally in emerging markets, because companies will have to continue to pursue those markets to use their capital and find growth during the next few years.

European deals generally might take longer, require more diligence and involve more negotiation of contingencies than they might have in the past, but they are still getting done.

GLOBAL M&A SERIES Q&A

20

ABOUT SQUIRE SANDERS

Squire Sanders is one of the worlds leading commercial legal practices, with over 1,300 lawyers in 37 offices located in 18 countries. We have more than 350 transactional lawyers globally, who provide expert multijurisdictional and local M&A legal advisory services. Our lawyers work through more than 20 specialized industry groups from energy and natural resources to life sciences, healthcare, chemicals and communications. Our transactional lawyers are resident in our offices around the world, providing on-the ground resources for all of our clients across the Americas, Asia Pacific, Europe and the Middle East, and in all of the worlds major political, financial and regulatory hubs. With a deep-rooted knowledge of the many complexities involved in any corporate deal, such as regulatory laws and flaws, financing structures, environmental concerns, tax matters and more, we are able to assemble optimal and fully integrated teams dedicated to attaining your goals. In brief, we help our clients to complete successful M&A transactions. Cipriano Beredo Partner, Cleveland +1 216 479 8280 cipriano.beredo@squiresanders.com Carolyn Buller Partner, Cleveland +1 216 479 8528 carolyn.buller@squiresanders.com Don Hughes Partner, Columbus +1 614 365 2734 don.hughes@squiresanders.com Steven Harris Partner, Houston +1 713 546 5845 steven.harris@squiresanders.com Alan Waxman Partner, New York +1 212 872 9831 alan.waxman@squiresanders.com Nick Unkovic Partner, San Francisco +1 415 954 0275 nicholas.unkovic@squiresanders.com Timothy Smith Consultant, Rio de Janeiro +55 21 2586 6261 timothy.smith@squiresanders.com Alejandro Pea-Prieto Partner, Santo Domingo +1 809 289 4923 alejandro.penaprieto@squiresanders.com Joachim Heine Partner, Frankfurt +49 69 1739 2400 joachim.heine@squiresanders.com Richard Hunt Partner, Leeds +44 113 284 7224 richard.hunt@squiresanders.com Rafael Alonso Partner, Madrid +34 91 426 4842 rafael.alonso@squiresanders.com GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS Darren Warburton Partner, Manchester +44 161 830 5069 darren.warburton@squiresanders.com Stephen Nelson Partner, Moscow +7 495 363 1671 stephen.nelson@squiresanders.com Charles Fabry Partner, Paris +33 1 5383 7400 charles.fabry@squiresanders.com Kevin Connor Partner, Riyadh +966 1 276 7372 kevin.connor@squiresanders.com Peter Swiecicki Partner, Warsaw +48 22 395 5508 peter.swiecicki@squiresanders.com Sungbo Shim Partner, Beijing +86 10 8529 86923 sungbo.shim@squiresanders.com Francis Li Partner, Hong Kong +852 2103 0368 francis.li@squiresanders.com John Poulsen Partner, Perth +61 8 9429 7562 john.poulsen@squiresanders.com Daniel Roules Partner, Shanghai +86 21 6103 6309 daniel.roules@squiresanders.com Ignatius Hwang Partner, Singapore +65 9618 9619 ignatius.hwang@squiresanders.com Stephen Chelberg Partner, Tokyo +81 3 5774 1800 stephen.chelberg@squiresanders.com

William Downs Partner Practice Group Leader, Corporate and Corporate Finance +44 20 7655 1743 william.downs@squiresanders.com www.squiresanders.com

AS GLOBAL AS A CROSS-BORDER TRANSACTION AS LOCAL AS THE OPPORTUNITIES IT CREATES

Squire Sanders has the experience, the reach and the expertise to help clients complete successful M&A transactions, locally and across jurisdictions.

37 Offices in 18 Countries squiresanders.com

22

ABOUT MERGERMARKET

mergermarket is an unparalleled, independent mergers & acquisitions (M&A) proprietary intelligence tool. Unlike any other service of its kind. mergermarket provides a complete overview of the M&A market by offering both a forwardlooking intelligence database and a historical deals database, achieving real revenues for mergermarket clients.

Remark, the events and publications arm of The Mergermarket Group, offers a range of publishing, research and events services that enable clients to enhance their own profile, and to develop new business opportunities with their target audience. To find out more please visit www.mergermarketgroup.com/events-publications/

For more information please contact: Ben Thorne Head of Publishing Sales EMEA, Remark The Mergermarket Group Tel: +44 (0)20 7059 6341 Email: Ben.Thorne@mergermarket.com

GLOBAL M&A SERIES INDUSTRIALS & CHEMICALS

Part of The Mergermarket Group

www.mergermarketgroup.com
11 West 19th Street 2nd fl. New York, NY 10011 USA t: +1 212.686.5606 f: +1 212.686.2664 sales.us@mergermarket.com 80 Strand London WC2R 0RL United Kingdom t: +44 (0)20 7059 6100 f: +44 (0)20 7059 6101 sales@mergermarket.com Suite 2001 Grand Millennium Plaza 181 Queens Road, Central Hong Kong t: +852 2158 9700 f: +852 2158 9701 sales.asia@mergermarket.com

Disclaimer This publication contains general information and is not intended to be comprehensive nor to provide financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any investment or other decision or action that may affect you or your business. Before taking any such decision, you should consult a suitability qualified professional adviser. Whilst reasonable effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed and neither mergermarket nor any of its subsidiaries or any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at the users risk.