M&A: How Do Companies, Advisors and Investors Look at it?
INTRODUCTION
In a bid to decode the intricate world of mergers and acquisitions (M&A), Chemistry Today embarked on a journey to glean insights from industry leaders representing companies, advisors, and private equity (PE) funds. We sought to unravel the diverse approaches employed in strategic acquisitions through interviews with key stakeholders, and shed light on the underlying principles guiding these endeavors.
Our investigation revealed three distinct perspectives: the companies’ focus on adapting to market changes and delivering long-term results, the advisors’ emphasis on the efficacy of the M&A process, and the investors’ relentless pursuit of favorable financial outcomes. These insights are captured in Table 1 and underscore the multifaceted nature of M&A and offer valuable lessons for navigating the complexities of strategic acquisitions in today’s dynamic business landscape.
DISCUSSION
The Companies’ Perspective
Industry executives continually seek insights from successful mergers and acquisitions (M&A) while navigating the intricate web of challenges unique to their sectors. We interviewed Luca Caironi of Olon Group, Thomas Galvain of ProductLife Group, Joyce Fitzharris of SK pharmteco, and Theresa Ledbetter of Evonik Health Care, each bringing forth invaluable experiences from their respective organizations. As we delve into their perspectives, this article unearths common industry trends and contrasting points of differentiation, shedding light on the multifaceted nature of strategic M&A.
Across these interviews, several common threads emerge, reflecting shared concerns by industry operators in the M&A process:
- Strategic Alignment: All four executives also stress the paramount importance of strategic alignment in M&A activities. Whether it’s aligning acquisition targets with long-term organizational goals, understanding cultural differences, or transitioning to a new business model, strategic coherence emerges as a guiding principle.
- Post-Merger Integration: Post-merger integration (PMI) assumes central importance in realizing deal value. Caironi, Galvain, Fitzharris, and Ledbetter highlight the necessity of meticulous planning, effective communication, and cultural alignment to navigate the complexities of PMI successfully.
- Cross-Functional Integration: Integration emerges as a cornerstone for success in M&A endeavors across all sectors. Caironi, Galvain, Fitzharris, and Ledbetter underscore the criticality of seamless integration processes, such as cross-selling opportunities, and maximizing operational efficiencies post-merger.
While commonalities provide a foundation for understanding industry trends, points of differentiation offer nuanced insights into the unique approaches adopted by each organization: - Different Scope and Focus: Olon Group, exhibits a broad scope with acquisitions spanning diverse geographical regions and compound specialties. ProductLife Group, emphasizes a focused approach, aligning acquisitions with the organization’s core competencies. Finally, SK pharmteco, underscores technological synergy and talent retention as pivotal factors driving success. Ledbetter’s insights from Evonik Health Care highlight the transformation of Tippecanoe Laboratories into a cornerstone location for contract manufacturing, leveraging its capabilities for complex active pharmaceutical ingredients (APIs) and intermediates.
- Different Deal Origination Strategies: Caironi prioritizes pre-emptive opportunities over auctions, leveraging industry expertise to identify strategic targets. Galvain emphasizes peer-to-peer discussions and relationship-building, nurturing long-term partnerships. Fitzharris underscores the importance of research and due diligence in identifying targets aligning with long-term goals and market opportunities. Ledbetter highlights the importance of assessing cultural fit and welcoming new colleagues into the strategic vision with clear plans and communication.
- Different Negotiation Approaches: Caironi adapts negotiation strategies based on counterparty type, emphasizing direct collaboration with a network of entrepreneurs or advisors. Galvain focuses on projecting good faith and transparency, with advisors involved for valuation testing. Fitzharris emphasizes collaboration and value creation, leveraging due diligence to address potential obstacles early in the process. Ledbetter stresses the value of transparency and communication in negotiations, prioritizing the retention of existing expertise and procedures.
Insights from industry stalwarts like Caironi, Galvain, Fitzharris, and Ledbetter offer invaluable guidance for navigating the complexities inherent in strategic acquisitions. While common industry trends underscore the significance of integration, strategic alignment, and PMI focus, points of differentiation highlight the diverse approaches adopted by organizations to achieve M&A success. By synthesizing these insights and embracing a nuanced understanding of industry dynamics, executives can chart a course towards sustainable growth and value creation in an ever-evolving landscape.
The Advisors’ Perspective
The insights from M&A advisors offer a complementary perspective, shedding light on the process of identifying actionable targets and aligning client capabilities with market opportunities. Matthew Wise from CCD Partners and Daniel Murad, President and CEO of The ChemQuest Group, Inc., provide invaluable insights into the strategic nuances and evolving landscape of the chemical industry.
Robust value thesis: Both Wise and Murad emphasize the importance of developing a robust value thesis as the foundation of growth strategies. Understanding diverse chemical sub-sectors and client technologies is pivotal, allowing for the formulation of a value thesis that aligns with targeted markets. This approach integrates market dynamics with client competencies, providing a roadmap for potential success.
Validation of value thesis: Validation of the investment thesis is a crucial step in the strategic process. Murad highlights the importance of comparing successful businesses in targeted markets with client attributes, ensuring alignment with strategic objectives. This validation process aids in generating a target long list, facilitating decisions on organic or inorganic growth strategies.
Methodic Approach: A systematic approach is imperative in identifying potential acquisition targets. Wise advocates for a methodical process involving a scorecard and expert evaluation to navigate through a large pool of specialty businesses. This approach ensures that targeted acquisitions align closely with client objectives and market dynamics.
Collaborative approach: Murad emphasizes the collaborative approach adopted by The ChemQuest Group, Inc., highlighting the significance of cross-functional support in enhancing client bottom lines on the sell side. From refining business strategies to conducting thorough due diligence for successful deals, this approach underscores the importance of comprehensive support throughout the M&A process.
In crafting effective growth strategies for chemical businesses, the insights from M&A advisors Matthew Wise and Daniel Murad offer a holistic perspective. By integrating market understanding with client existing and desired capabilities organizations can navigate the complexities of the M&A process with confidence. As the industry evolves, the importance of strategic alignment and comprehensive support becomes increasingly evident, ensuring sustainable growth and value creation in an ever-changing landscape.
The Investors’ Perspective
The biopharmaceutical industry stands at a pivotal juncture, as insights from the recent DCAT Meeting 2024 reveal a landscape characterized by renewed optimism and cautious anticipation. Amidst the complexities of market recovery and evolving regulatory landscapes, private equity (PE) funds such as Edgewater Capital Partners play a crucial role in navigating M&A investments, leveraging insights from industry gatherings to inform strategic decisions.
Market Segmentation: Attendees at the DCAT meeting noted varied experiences across segments in Contract Development and Manufacturing Organizations (CDMOs), with stability favoring CDMOs serving established companies. This observation underscores the importance of sales stability and resilience in target companies, factors that PE funds meticulously assess in their investment strategies. Also, early-stage demand for services remains challenging but at least is not deteriorating compared to the previous year. To stimulate demand for services from contract research organizations (CROs) and contract development and manufacturing organizations (CDMOs), we need an influx of initial public offerings (IPOs) and/or venture capital (VC) funding. This is why significant changes are not expected despite an anticipation of a gradual improvement over the next 3-4 quarters.
Regulatory and Geopolitics: The discussion surrounding the BIOSECURE Act highlights concerns and shifts in stance regarding the impact on US-China biopharma relationships. For PE funds like Edgewater Capital Partners, staying abreast of regulatory developments is paramount, as regulatory shifts can significantly influence investment decisions and portfolio management strategies.
Innovation: The emphasis on therapeutic modalities such as Antibody-Drug Conjugates (ADCs), nuclear medicine, and bi-specifics underscores the industry’s commitment to innovation. PE funds actively seek opportunities that align with emerging therapeutic trends, capitalizing on innovation to drive value creation within their portfolios.
Reshoring: Surprising investments in US-based Active Pharmaceutical Ingredient (API) manufacturing reflect efforts to bolster domestic production capabilities. PE funds like Edgewater Capital Partners carefully evaluate investment opportunities in API manufacturing, recognizing the strategic significance of domestic supply chains in ensuring resilience and security.
Insights from the DCAT conference provide invaluable guidance for PE funds navigating the intricacies of M&A investments in the biopharmaceutical industry. As Brian Scanlan, Operating Partner at Edgewater Capital Partners, can attest, the evolving landscape necessitates a nuanced approach, balancing optimism for market recovery with vigilance towards regulatory shifts and a keen focus on innovation. By leveraging insights from industry gatherings like DCAT, PE funds can position to capitalize on growth opportunities and drive value within their portfolios, ultimately contributing to the advancement of healthcare innovation and patient care.
CONCLUSIONS
The exploration into the world of mergers and acquisitions has illuminated a rich tapestry of perspectives from the main players in the M&A ecosystem: investors, advisories, and companies. Thanks to our contributors we have unearthed invaluable insights that underscore the nuanced dynamics and strategic imperatives driving success in the realm of strategic acquisitions.
From the companies’ steadfast focus on adapting to market changes and delivering sustainable long-term results to the advisors’ meticulous attention to the efficacy of the M&A process, and the investors’ unwavering pursuit of favorable financial outcomes, each stakeholder brings a unique lens to the table. These diverse perspectives converge to form a holistic understanding of the multifaceted nature of M&A and provide a well-rounded guidance for navigating the complexities inherent to the M&A process.
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THERESA LEDBETTER
Director of Key Account Management and Sales Evonik Health Care
Acquisitions are more than assets – people and culture are key
One of the most successful and significant acquisitions for the Evonik Health Care business was the purchase of Tippecanoe Laboratories from Eli Lilly in 2010. Before this acquisition, I was a young engineer working for Eli Lilly at the site. In this short panel discussion article, I will give a snapshot of what made this acquisition successful, why there was an extremely high retention rate of staff at the acquired company, and how this strategic step is benefiting Evonik nearly 15 years later.
Purpose and strategic rationale of the acquisition
The goal of the acquisition was to transform Tippecanoe Laboratories from a captive pharmaceutical manufacturing site into a cornerstone location for Evonik’s contract manufacturing (CDMO) business. Captive pharmaceutical manufacturing is when a pharmaceutical company produces their own products in-house using their own equipment. The manufacturing site is, therefore, a cost-center for the company. Evonik wanted to strengthen its CDMO business to meet the demand for increasingly complex active pharmaceutical ingredients (APIs) and intermediates, and was seeking a large, multi-purpose facility, capable of providing support for highly specialized, challenging projects. Tippecanoe Laboratories fit the bill – but in order to succeed, it would need to transform from a cost center into a customer-focused, profit center.
The strategic focus of Evonik’s Tippecanoe acquisition was to establish production capacities for APIs, and specifically for highly potent APIs (HPAPIs), in the U.S. Acquiring an API site from a pharmaceutical company was very favorable at that time, because many companies had built up excess capacity that they no longer needed for their new products and were offering them for sale.
Acquiring a culture and workforce
From my perspective, Evonik did a lot of things right with this acquisition. First, Evonik made it clear that it wasn’t purchasing equipment – the whole Tippecanoe package was part of the deal. That meant the people, business processes, and the culture were integral to the acquisition. The entire employee base at Tippecanoe was offered the same positions they had at Eli Lilly with Evonik. Under Eli Lilly, the site had developed a culture focused on what was important to pharma and had already built up a long history of manufacturing high-quality products. The site also had a strong reputation with global regulatory agencies. Rather than immediately jumping into changing the site, Evonik spent time getting to know what already worked well, and only then started to integrate the site into the company’s wider business model.
Evonik management also made sure that the people at Tippecanoe felt welcomed and appreciated. They visited the site often during the first years, and spoke openly regarding the business goals, plans for the site, and financial targets so that everyone understood their place in the company. Evonik understood that retaining people and knowledge was the key to success.
Benefits brought by the acquisition
The acquisition brought Evonik significant benefits in terms of assets, know-how and large API manufacturing. The Tippecanoe assets essentially tripled Evonik’s manufacturing capacity for APIs and complex intermediates, and the site is now one of the world’s largest facilities for HPAPI manufacturing. The site also has a notable number of flexible, differentiating capabilities, such as cryogenic reactions, transition metal catalysis and hydrogenations. The site also came with strong cGMP policies that were used to strengthen Evonik’s culture across the globe. Evonik was able to capitalize on some “quick wins,” such as converting an existing engineering facility into a flexible pilot plant for cGMP and high potent manufacturing.
From a people perspective, the site came with an educated, experienced, and loyal workforce that took pride in making medicine. New opportunities opened up to the former Eli Lilly employees at Tippecanoe because they were now part of a large specialty chemicals company under a new business model. Job complexity and creativity increased significantly. For example, I started as a process engineer at Lilly. After the acquisition by Evonik, new positions were needed that weren’t required before, and over the course of 14 years I moved from engineering to new business analysis, to client project management, to supply chain and production planning, and I am now responsible for managing the accounts of some of our largest customers. It’s safe to say that my career opportunities widened because of the acquisition by Evonik.
Changing to a B4B mentality
Evonik came in with a very transparent business model. In a captive manufacturing model, you are a cost center, so there is less emphasis on cost and manufacturing efficiency. By changing to a CDMO, we became a profit center, and we had to think more seriously about costs and efficiency. Becoming a service provider required a completely new mindset. Evonik purposefully brought in people with a customer service mindset to lead the business model change. It was necessary to have people with the business-for-business (B4B) mindset to help everyone understand where the business is going. I remember one manager giving explicit everyday examples to illustrate why customer experience is so important. We were encouraged to reflect on what made this experience so good. Through this approach, we learned that we needed to be strong communicators, that customers have certain expectations and the importance of anticipating these and communicating effectively – especially when things don’t go exactly to plan.
What didn’t go to plan
No strategies are perfect. After the acquisition, everyone had expectations that we could start right away with late phase, large-volume projects. We learned quickly that it was more practical to start with smaller projects and build trustful relationships, before moving on to the larger projects. This ability to pivot was essential. The site was intentionally designed to go from clinical to commercial scale, so we started by bringing in earlier phase programs. We worked with an intentional focus on being successful with earlier phase (small volume) programs to grow with those customers through their commercial launch.
Advice for managing acquisitions
When considering an acquisition, take your time to make sure the culture is a fit. Remember that you are not just acquiring equipment, you are buying a business that is operated by people who have existing values and follow existing procedures. There should be a match, or you will likely be left disappointed. I can’t emphasize enough: don’t assume you know more than the people who are already there. Make the new colleagues feel welcome, teach them how they fit to the new strategy. A good way to do this is start with some good news. Make it clear that there is a plan and communicate this transparently. Evonik did this well and in the first few years after the acquisition a majority of staff stayed on at the site.
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LUCA CAIRONI
Head of M&A and Strategic Development, Olon Group
Can you share an example of a successful M&A acquisition you did in the past that enhanced your market share and profitability?
There were two noteworthy acquisitions between 2019 and 2020:
a) The acquisition of Olon API India, located in Mahad (south of Mumbai), was a manufacturing plant within the Sandoz network, primarily dedicated to captive consumption. This acquisition enhanced our market share in a specific compound, where we are currently the market leader. It also provided us with the opportunity to be back integrated on advanced intermediates, ensuring the reliability of the supply chain to our customers, as well as competitive position on products with proprietary process.
b) The Capua site, now integrated into Olon S.p.A., was formerly the site of DSM. This acquisition facilitated growth in the Biotech business unit, establishing Olon as a market leader in terms of capacity and capabilities for working with microbial fermentation.
What factors do you attribute to its success, especially ones that were unique to the fine and specialty chemicals sector?
The key success factor for every acquisition is integration, which is the most critical aspect of M&A for a strategic acquirer. Successful integration allows for leveraging cross-selling opportunities and seizing new business opportunities.
Can you provide an example where an M&A acquisition strategy did not go as planned? What valuable lessons did you learn from this experience, and how have they influenced your approach to M&A in subsequent deals?
In past experiences, all acquisitions have reached the expected targets. Sometimes, more time than expected was spent delivering results due to the delayed integration of the sales department. The key success factor is promoting the entire offer as part of your group, taking into account the new add-ons brought by the recent acquisitions.
What challenges or obstacles did you encounter during M&A activities, especially ones that were unique to the fine and specialty chemicals sector? How did you overcome these challenges?
In recent years, competition has significantly intensified due to the keen interest of private equity funds, which have identified our sector as highly resilient during the pandemic period and with an interesting outlook. When comparing a strategic company to a private equity firm, a distinction arises in their investment rationale—the first being a long-term investor, while the second operates on a short-term basis. This combination has increased multiples into the high double digits, creating a highly competitive scenario, all the while taking into account the current cost of capital.
How did you form the deal team internally and what external resources did you hire to facilitate the M&A process? What were the main roles played by internal and external resources in fostering a successful M&A event and how did they provide value?
We have opted for a lean organizational structure, incorporating the M&A function into the strategic development department. To facilitate sourcing activities, we have engaged a network of advisors operating on a non-exclusive basis, with geographical separation.
This approach ensures comprehensive coverage of our target areas while minimizing overall effort.
How did you approach deal origination in your M&A process? What criteria do you use to identify potential M&A targets within the fine and specialty chemicals industry? How do you assess whether a target aligns with your company’s strategic goals?
We prioritize engaging in pre-emptive opportunities rather than participating in auction processes. As a strategic player, Olon leverages its robust expertise, market capabilities, and financial strength. The synergy of these two values positions us to accelerate the target’s growth within a short timeframe. This strategic approach sets us apart from private equities, as we are not merely financial players but bring a unique combination of industry know-how and financial robustness to the table.
How did you approach negotiations in your M&A transactions? What were the main aspects you focused during the negotiations process? What was the role of external resources (if any?) in supporting the negotiation process.
The approach varies depending on the specific case. In negotiations involving a sell-side entrepreneur, I typically prefer direct collaboration with them. Drawing from my extensive experience working with families, I understand their expectations, and the negotiation process often involves more direct and personal interaction. On the other hand, when dealing with a sell-side private equity, I prefer to involve an advisor at the forefront of the discussion. In these scenarios, negotiations may entail more strategic tactics and a nuanced approach, necessitating the expertise of an advisor to navigate complexities effectively.
How did you approach due diligence in your M&A transactions, considering the technical and regulatory complexities of your industry?
We handle technical and commercial due diligence internally by establishing a dedicated team for each project. Drawing on past experiences, we’ve found that managing these activities in-house yields more valuable outcomes compared to relying on external consultants. Our internal team possesses an in-depth understanding of the market, and this expertise allows us to conduct more insightful and customized assessments. Differently, for financial, tax, and legal aspects, I adopt a different approach by coordinating a team of external resources. This ensures a comprehensive and specialized examination of these critical areas, leveraging the expertise of external professionals. This combination of internal and external management optimizes the due diligence process for a well-rounded assessment.
Could you share your approach to post-merger integration? What steps did you take to ensure a smooth transition and maximize the value of the acquired company?
On day one of the integration process, two priority areas demand immediate attention: commercial and IT. The first focus involves crafting a unified offer to capitalize on cross-selling opportunities. This synergy allows for a streamlined and cohesive approach to the market. Simultaneously, the second area of emphasis is IT integration, which is essential for gaining a comprehensive understanding of production costs. By successfully achieving these targets, a significant step is taken toward a successful integration.
Have you ever considered divesting or exiting a business within your portfolio? What were the key factors that influenced this decision, and how did you go about executing the divestiture successfully?
No, and Olon is always looking at the market for new capacity to add to its network.
What advice would you offer to fellow industry executives who may be considering M&A activities on the buy and on the sell side for the first time?
Before embarking on a buy-side M&A activity, it’s crucial to have a well-defined strategy in place. Understanding your objectives, target criteria, and overall goals is essential for a successful acquisition. This preparation helps streamline the process and enhances your ability to identify and evaluate potential targets that align with your strategic vision. Similarly, for those considering a sell-side approach, taking the necessary time to prepare is key. Ensuring that all relevant information is organized and readily available before initiating the process is vital. This includes financial documents, operational details, and any other pertinent data that potential buyers may require. This proactive approach contributes to a smoother and more efficient sell-side process, increasing the likelihood of a positive outcome.
How do you see recent geopolitical events affecting your M&A strategy and reallocation of resources around the world?
The recent geopolitical scenario did not affect our strategy.
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THOMAS GALVAIN
Head of M&A / Corporate Development, ProductLife Group
Can you share an example of a successful M&A acquisition you did in the past that enhanced your market share and profitability?
In 2021, we acquired ELC group, which was made of 140 employees, distributed across Czech Republic, Romania and India. It was a relatively small acquisition in terms of revenue, but it was significant in enabling PLG to scale up, industrialise its services, and increase its competitiveness. This resulted in large commercial contract renewals and new client wins down the road. The most rewarding M&As are not necessarily the biggest ones but those with the highest operational impact.
What factors do you attribute to its success, especially ones that were unique to the fine and specialty chemicals sector?
The key is to spend a lot of time with the founders and their management teams, on building trust and transparency, on the rationale behind the transaction, on the project and what the future will look like, as well as on what each party’s role and responsibilities will be.
If you don’t arrive at a strong level of trust before the deal, there’s very little chance you will achieve this post transaction. In the case of ELC Group, the success of the integration came from the very robust rationale and strong synergy potential behind the deal. Because we both stood to gain considerably from the merger, everyone worked towards the same objectives. The acquired teams quickly understood the WHY behind the acquisition, making things obvious for everyone. We also spent a lot of time trying to better understand what cultural differences we could come across during the integration process, which contributed to its success.
Although it took a year and a half to finalise the deal, and sadly the founder died from cancer at the close of the transaction, it is testament to the work we put in that the transition was so smooth, and we were able to grow ELC’s operations very quickly. For instance, the Indian operation had 40 people when we took it over; it now has 150.
Can you provide an example where an M&A acquisition strategy did not go as planned? What valuable lessons did you learn from this experience, and how have they influenced your approach to M&A in subsequent deals?
I cannot think of any specific acquisition that didn’t go as planned, however what I can recommend, is never to do a deal purely for financial reasons. There should always be strategic reasons for a transaction: expanding the client portfolio; opening up new geographies; improving cost competitiveness; reinforcing expertise etc.
Another important consideration is how well the size of your acquisitions matches the size of your group. If you go too small, you’re unlikely to have the focus you need from the C-suite, reducing the chance of seamless integration. If you go big, on the other hand, you’ll need to be clear who will be in the driver’s seat and assess and manage your risk carefully.
What challenges or obstacles did you encounter during M&A activities, especially ones that were unique to the fine and specialty chemicals sector? How did you overcome these challenges?
There can be multiple obstacles. An M&A process is always a combination of strategy, financials, timing and trust. It can fall down in relation to any of these aspects. The biggest risk I see is when there are too many advisors so that direct contact is lost with the founders/sellers. There should always be direct touchpoints between the two teams, without any external party getting in the way, and you should create space for personal discussions. The more the M&A process is intermediated, the harder it is to build trust, and the more risk you’ll have during the integration phase.
How did you form the deal team internally and what external resources did you hire to facilitate the M&A process? What were the main roles played by internal and external resources in fostering a successful M&A event and how did they provide value?
We conduct most of the screening and outreach work internally. We’ve assembled a team of professionals across different countries, with intimate knowledge of our market. It’s extremely challenging to find good M&A professionals, as the role requires a very diverse skillset including strong business acumen, excellent soft skills, a robust financial background, a high level of curiosity, and a sales mindset. Experience also matters a lot. Since every deal is different, the more deals you have behind you the better. For every transaction, we also select a set of advisors to cover the financial, legal, tax and labour requirements.
How did you approach deal origination in your M&A process? What criteria do you use to identify potential M&A targets within the fine and specialty chemicals industry? How do you assess whether a target aligns with your company’s strategic goals?
People within the M&A team have an intimate knowledge of our services and expertise. This is the only way they can have a peer-to-peer discussion with company founders/owners and assess whether a target aligns with our strategic goals.
We manage our M&A pipeline the same way we would manage a commercial pipeline. Opportunities are assigned a value, a probability and a timeline and we consider our pipeline to be a good measure of our M&A performance.
The key in deal origination is to know your competition very well. It’s not only about connecting with potential targets, but also with investment banks, consultancies, market research organisations, and professional organisations.
Deal origination is an art more than a science – a balance between industrialization and personalisation. It’s very important to industrialise your outreach work to engage widely, and not to miss out on what could be an interesting opportunity. But at the same time each approach needs to be heavily personalised, in terms of language, context, approach etc. We try not to ‘outsource’ the origination work to ensure we don’t lose intimacy. It’s also important to understand that a good approach might not pay off for some years. M&A ‘sale cycles’ are long-term cycles. Haste usually translates into bad transactions. Target opportunities need to be nurtured. Our largest transaction to date, of Pharma D&S Group in Italy in 2023 (which at the time of purchase was the size ProductLife Group had been in 2020), took two years to close. That’s because of the time it took to build trust. We probably had four in-person meetings before the sellers were sufficiently convinced to launch a process.
M&A successes also call for additional successes. The faster you grow; the more curious people tend to become. They want to be part of the story and see what’s behind it. That applies to advisors, too. The more M&As you do, the more inbound calls you’ll receive.
Sellers will look for a good project, a good valuation, a good position within the company, and a company which will take care of their people. But even before that, they will be looking to join a reputed and successful company. They want to be able to tell a story to their relatives and their staff. They want to be proud.
How did you approach negotiations in your M&A transactions? What were the main aspects you focused during the negotiations process? What was the role of external resources (if any?) in supporting the negotiation process
We tend to run the negotiation process internally, although advisors might be involved for valuation ‘testing’ purposes. The key in a negotiation process is to project good faith, respect and transparency, and be well aware of the market dynamics. Education may also be needed before reaching an agreement.
You also need to be in a position where you can afford to lose the deal. If you not, you are in risky territory. This is where building a robust M&A pipeline is critical – you should never depend on one single opportunity, but rather retain the freedom to take any decision.
How did you approach due diligence in your M&A transactions, considering the technical and regulatory complexities of your industry?
Since most of our M&A takes place at an international level, we tend to use different advisors each time. If there is one lesson we’ve learnt from our last 16 acquisitions, it is not to skimp on the standing and fees of your advisors. Quality advice has a cost, which is how you avoid mistakes and delay.
It generally ends up being more costly to pursue the cheapest option. M&A is also about generating trust among your financial and legal ecosystem and environment. A seamless process can only happen with good advisors, and brand can also play a role into that.
Could you share your approach to post-merger integration? What steps did you take to ensure a smooth transition and maximize the value of the acquired company?
Post-merger integration (PMI) is more important than M&A. M&A is about finding attractive companies that meet your strategic objectives, and paying the right price. PMI is about making sure a good deal becomes a fantastic deal, and turning a poor deal into a good deal. At PLG, no excess of energy is spent on whether a deal was good or bad but rather on how to accelerate and make the best of the acquisitions we have closed.
Our integration team today is as big as the M&A team, but the profiles within it are very different. All of the integration team’s energy during the first few weeks and months, post-closing, is focused on communication, change management and storytelling.
PMI team members need solid project management competencies, interpersonal skills, and business acumen. If you lack the last element (business acumen), you could lose the spirit of the initial project and end up with a poor integration that is only concerned with ticking boxes. The team focus is therefore on integrating the businesses in a way that is (a) realistic (b) value-protective, and (c) beneficial for the new joiners, ensuring over-performance. This is what we call “smart integration”.
One thing I would recommend questioning before making any deal is this one: How easily will I explain the deal to my teams? If you struggle with the storytelling, it’s likely to be a bad deal which won’t ease the life of your people. The easier the storytelling is, the greater the synergies you can expect from the transaction.
Other tips include not being afraid of communicating frequently and repeatedly, organising regular in-person meetings, showing quick wins to get the teams’ buy-in, and celebrating successes.
Have you ever considered divesting or exiting a business within your portfolio? What were the key factors that influenced this decision, and how did you go about executing the divestiture successfully?
We thought about divesting a recently-acquired business, simply because the potential for integration and synergy was low. Instead of taking that route, we sat down with the management of the company and shared our feelings very transparently. We determined that the level of frustration was similar on both sides. This was a real turning point in the relationship. This company is now fully engaged in the project, we are achieving significant commercial synergies, and they even decided to invest further in the initiative. That gives an idea of the extent to which human factors matter in these transactions.
What advice would you offer to fellow industry executives who may be considering M&A activities on the buy and on the sell side for the first time?
I would offer three pieces of advice:
Be bold and accept a certain level of risk in every transaction. If you are risk averse, M&A is not for you. After 5 or 6 acquisitions, you will know exactly where the risks are in your M&A and integration processes, increasing your efficiency and win rate.
Engage good advisors but keep following your own instincts. Interests are never perfectly aligned.
And finally, always focus on the why, on the project and on your people. Poor rationale makes for poor integration.
How do you see recent geopolitical events affecting your M&A strategy and reallocation of resources around the world?
Events in the Middle East and the Ukraine inevitably have had a bearing on our M&A strategy. We had discussions underway with companies in both of those regions which have since been put on hold. Our decisions in each instance might be that we have chosen to deprioritise the country, or because the companies involved are negatively affected by the current context.
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JOYCE FITZHARRIS
President, Small Molecule, Europe – SK pharmteco
Can you share an example of a successful M&A acquisition you did in the past that enhanced your market share and profitability?
SK pharmteco has a track record of successful M&A acquisitions, and the BMS Swords facility buy was a prime example. It gave us a bigger footprint for making those specialized API’s and drug ingredients. Plus, we gained access to cutting-edge tech and a skilled team, supporting the initiation of new customer connections.
By bringing Swords on board, we ramped up production, streamlined processes, and offered clients more. It also boosted our product portfolio, attracting new customers and growing revenue. This deal shows how SK Pharmteco uses smart M&A to grow, create value for investors, and stay on top in the pharmaceutical manufacturing world.
What factors do you attribute to its success, especially ones that were unique to the fine and specialty chemicals sector?
Our acquisition of the BMS Swords facility was a win for several reasons. First, their tech fit perfectly with ours, making us more efficient at producing Small Molecule API’s. Second, we kept their skilled crew on board, which meant high-quality products from day one. Last, a strong platform to grow the pre-existing relationship was a bonus, as we’re always looking for new ways to innovate and expand our reach.
Can you provide an example where an M&A acquisition strategy did not go as planned? What valuable lessons did you learn from this experience, and how have they influenced your approach to M&A in subsequent deals?
No specific example comes to mind. However, here are some basic tenants:
Culture clashes can sink a deal, hurting morale and performance. The same goes for messy integrations—merging systems smoothly is key. Losing the acquired company’s best people is a big blow, so we have smart talent retention plans in place. And let’s not forget the market—things can shift, impacting revenue. That’s why we do a deep market analysis and plan for different scenarios upfront.
We take a thorough approach to M&A. We don’t just look at financials and operations; we assess cultural fit, talent retention strategies, and market trends. We also start planning integration early, figuring out how to blend cultures, operations, and talent. Finally, we stay flexible – the market changes, and we learn from each deal to adapt our strategies for future success.
What challenges or obstacles did you encounter during M&A activities, especially ones that were unique to the fine and specialty chemicals sector? How did you overcome these challenges?
M&A activities in the fine and specialty chemicals sector come with their own hurdles. Here’s how we’ve tackled some of the unique challenges:
Regulations are a maze. We do deep due diligence and stay squeaky clean throughout integration to avoid compliance headaches.
Tech can be a beast. We carefully assess target companies’ tech, train our teams, and bring in experts if needed. This ensures a smooth post-merger transition.
Supply chains can be tricky. We spread our bets with different suppliers, have risk plans in place, and keep a close eye on everything. This helps us avoid disruptions and keeps things running smoothly.
How did you form the deal team internally and what external resources did you hire to facilitate the M&A process? What were the main roles played by internal and external resources in fostering a successful M&A event and how did they provide value?
Putting together the right team for M&A deals is key. Internally, we tap our senior leadership for strategy and big-picture thinking. They’re joined by cross-functional teams from finance, legal, HR, and tech – all working together to assess potential targets, plan integrations, and keep everyone on track. Project managers keep things moving and make sure everyone’s on the same page.
We bring in external resources for specialized help. Financial advisors crunch the numbers, lawyers handle the legalese, and due diligence experts give the target company a thorough check-up. Integration consultants help us merge the two businesses smoothly, avoiding post-merger headaches.
How did you approach deal origination in your M&A process? What criteria do you use to identify potential M&A targets within the fine and specialty chemicals industry? How do you assess whether a target aligns with your company’s strategic goals?
First, we research trends and opportunities, keeping our finger on the market’s pulse. This helps us identify targets that align with our long-term goals and growth plans. We might want to strengthen our market position, add new products, or enter new regions.
Once we have our criteria, we screen potential targets based on financials, technology, and how well they fit our company culture. Building relationships with industry folks is key, too – they can tip us off to hidden gem deals not advertised publicly.
Before getting serious, we do our due diligence – a deep dive into the target’s financials, operations, and legal stuff. This ensures we understand the risks and make informed decisions. Most importantly, we assess how well the target fits our existing business. We want deals that create synergies, not headaches. Finally, we identify potential challenges and brainstorm plans to overcome them. By being thorough and strategic upfront, we find deals that benefit everyone.
How did you approach negotiations in your M&A transactions? What were the main aspects you focused during the negotiations process? What was the role of external resources (if any?) in supporting the negotiation process.
M&A negotiations are all about collaboration and smarts. Before diving in, we prep like crazy, figuring out what we want and what the other side brings to the table. Building trust is key – so you got to have a good feeling to reach a win-win. We focus on creating value for everyone, exploring ways to save money, grow revenue, and work together seamlessly.
Due diligence helps us address any potential bumps in the road early on. We’re flexible and willing to compromise a bit to find common ground, but always keep our goals in mind. By being thorough, collaborative, and adaptable, we navigate complex M&A negotiations and strike deals that benefit everyone.
How did you approach due diligence in your M&A transactions, considering the technical and regulatory complexities of your industry?
M&A due diligence isn’t one-size-fits-all. We tailor our deep dive to the specific deal and the chemical industry’s twists and turns. Here’s how we do it:
First, depending on the deal, we pinpoint the critical areas – financials, operations, and environmental. Then, we pull together a team of experts across the company, from finance whizzes to regulatory gurus. This ensures we don’t miss anything, especially the technical nitty-gritty. We also leverage external consultants to get industry-specific insights.
Since regulations are a big deal in our world, we ensure the target company is squeaky clean. We assess permits, quality standards, and any potential compliance issues. We don’t leave any stone unturned! Finally, we use everything we learn to craft a smooth integration plan, addressing risks and maximizing value. It’s all about making informed decisions and setting the stage for a successful merger.
Could you share your approach to post-merger integration? What steps did you take to ensure a smooth transition and maximize the value of the acquired company?
We know merging with another company is a big deal. To make it a win-win, we created a detailed plan for everything, from roles to tech. We keep everyone informed, from employees to customers. As our people are key, we offer incentives for a smooth cultural blend.
Merging means finding ways to work better together, save costs, and boost profits. Customers are our priority, so service and quality remain seamless. Integration is ongoing, with constant monitoring and adjustments. We build a strong team through activities and celebrate wins to motivate everyone. This approach unlocks the full potential of the merged company.
Have you ever considered divesting or exiting a business within your portfolio? What were the key factors that influenced this decision, and how did you go about executing the divestiture successfully?
We haven’t divested a company yet, but we keep all options on the table. Before divesting a company if it doesn’t fit our long-term vision, we would consider a few things: is it strategically aligned? Is it consistently hitting its targets? Is the market it’s in a good fit? Divesting can unlock shareholder value and free up resources for more promising areas.
What advice would you offer to fellow industry executives who may be considering M&A activities on the buy and on the sell side for the first time?
Buying a Company?
The first thing’s clear: be sure any acquisitions align perfectly with your long-term goals. Don’t get caught up in the moment; ensure it fuels your overall growth strategy. Next, thoroughness is key. Dive deep into the target company – financials, operations, legal nitty-gritty, and company culture. You don’t want any surprises down the road. Here’s a pro tip: start planning the integration early on. Figure out how to merge the two companies seamlessly to avoid future headaches. And lastly, don’t be afraid to seek guidance from experienced advisors.
Selling Your Company?
First, get your house in order. Ensure your financials are sparkling clean, operations are running efficiently, and you follow all the regulations. Next, craft a compelling narrative highlighting what makes your business unique and its exciting growth potential. To get the best price, get multiple valuations. Shopping around ensures you’re not leaving any money on the table. But it’s not just about the price tag. Find the right buyer who shares your vision and can help your company reach new heights. Don’t settle for the first offer that comes along. Finally, negotiate like a pro. Having other interested buyers gives you leverage. Be clear on your value, but also be realistic about the market.
How do you see recent geopolitical events affecting your M&A strategy and reallocation of resources around the world?
We’re closely monitoring market volatility and uncertainty, which may lead to a more cautious approach in deal-making. Regulatory changes and compliance risks are also top of mind, requiring us to conduct thorough due diligence and implement risk mitigation measures. Additionally, we’re reassessing regional market dynamics and currency fluctuations, adjusting our strategies accordingly. Supply chain disruptions are a concern, prompting us to diversify suppliers and localize production. Ultimately, our focus remains on agility, resilience, and proactive risk management to drive sustainable growth in a dynamic global landscape.
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Service providers: M&A Advisories
MATTHEW WISE
Head of Data, CCD Partners, Insight, Network, Execution
Developing an actionable growth strategy in complex chemical niches
Introduction
Developing an effective growth strategy for a chemicals business is a complex task. The chemical industry sells into a wide range of markets, from personal care to construction, which are constantly changing in terms of growth profile and attractiveness. As a result, it is relatively common for businesses to base their strategic ambitions around markets. Such an approach tends to involve understanding the client’s current market mix, evaluating potential markets for expansion, identifying untapped attractive markets, and drawing inspiration from successful competitors and macroeconomic trends. While this can be successful, two critical considerations are often overlooked: (a) the actionability of the target markets and (b) the client’s ability to “win” in those markets. We find that a process of developing and validating a “value thesis” helps to address these considerations and ensures their integration into the strategy.
Developing a Value Thesis
The chemical sector is characterised by hundreds of sub-sector niches, each with their own dynamics and market drivers. These differences are significant enough that an approach which is successful in one sub-sector will (most likely) not guarantee success in another. This is complicated further by each specialty chemical company having a unique set of technologies, chemistries, and products – similarly, what is successful for one business, will likely not be for another.
When developing a strategy, it is therefore crucial to understand the dynamics and drivers of each market, specifically the geographical profile, major chemistries and technologies, product and service types, typical target characteristics (size, ownership structure), and customer needs. A second workstream involves conducting an analysis of the client’s core chemistries and technologies, which will form the strategy’s backbone.
These two workstreams provide the pieces required to create a “value thesis”. The competency deep dive highlights the key areas to build on, while the market analysis provides a backdrop for this analysis. By putting the two together, you can identify the client’s potential ability to “win” in the selected markets. This is the “value thesis” and represents the initial view of the optimal strategic direction for the business.
Validating the investment thesis
Once the value thesis has been developed, the next step is to validate it using profiles of businesses that have been successful in the selected markets. This begins with a competitive landscaping exercise, which identifies the key innovators (both established and emerging businesses) in each market. A few successful “reference companies” are selected, and their key attributes are compared to the client’s (typically chemistries, technologies, customer needs, and product or service types). This comparative exercise helps determine tangibly whether the markets have synergistic attributes, and whether the client could see itself becoming a leader in these markets. The competitive landscaping exercise offers a secondary benefit – it produces a list of companies in the space (including the harder-to-find privately-owned players) which doubles up as the beginning of a target longlist. If there are sufficient targets fitting the right profile (e.g., in terms of size and geography), it supports the decision of whether an inorganic or organic approach would be the best fit for each market.
The outcome of this phase is a thesis which (a) confirms the client’s viability in the selected markets, (b) decides whether the entry route should be organic or inorganic growth, and (c) is rooted in the core competencies of the client, maximising the chance of success.
Identifying Targets
For markets earmarked for inorganic growth, the next step is to pinpoint potential targets. An efficient approach is to develop a “scorecard”, which summarises the most important acquisition criteria. This scorecard is then applied mechanically (i.e., compared against a large database of specialty businesses) to identify the ~100 highest scoring companies. This subset is subject to further evaluation by a team of market experts which identifies 30-40 businesses with the best perceived fit.
A multi-disciplinary team of experts
Although the benefits of this highly tailored approach are clear, it can be difficult to implement. A deep dive into different market segments relies on having access to a range of expert consultants, while the development of the final deliverables requires strategy, M&A, data analysis, and project management professionals. Typically, it would require:
- Market experts with a strong understanding of niche chemical markets.
- Experienced strategy professionals able to assimilate all the information and draw concise conclusions about the optimal strategic direction.
- Comprehensive data coverage of privately-owned businesses, which are typically local and difficult to identify.
- Access to a network able to initiate discussions with potential targets and ideally, enter discussions and provide execution services.
As mentioned at the beginning, developing an effective growth strategy in the chemical sector is a difficult task. It requires a deep understanding of the markets, in-depth analysis of the client’s capabilities, and development of a value thesis which brings everything together. However, it can be done with the right combination of chemicals-specific experts.
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DANIEL MURAD
President and CEO, The ChemQuest Group, Inc.
Chemical M&A 2024: Expert Advice from Industry Leaders
We are optimistic at ChemQuest that M&A activity will pick up in 2024. Whenever our clients are ready to move forward and explore options, whether on the buy or sell side, our unique structure and extensive specialty chemicals expertise put us in a position to help achieve the best deals possible.
Our success lies in the strength and collaborative nature of our four main business pillars: Business Strategy & Transformation, Operational & Manufacturing Efficiencies, Technology Development, and M&A Advisory. Each pillar is supported by subject matter experts with decades of experience across the specialty chemicals value chain, including Ph.D. chemists, senior technical managers, C-suite executives, and business owners.
Teams in these pillars work synergistically to deliver the highest value to our clients. For example, business strategy projects often uncover M&A opportunities, or our recommended operational improvements help a sell-side client net a higher sale price. In all cases, our experts work hand-in-hand as strategic thought partners with our clients to identify the best path forward for their business, as well as the specific steps they need to take along the way.
Increasing Strategic Activity in 2024
Multiples were down last year, by a couple of turns in some cases, and central banks around the world are trying to fight inflation with high interest rates. Indeed, the weighted average cost of capital went up from 5.5% to closer to 12% in one year. As a result, buyers were having to pay higher interest – which really put a damper on the market.
That said, M&A strategy differs quite a bit depending on the size of the company. Large public and global multinational companies have been making large-scale acquisitions for the past three years. In 2024, they are increasingly looking to realign their portfolios to focus on more strategic assets. They’re putting a microscope to their businesses and deciding what non-strategic elements should be shed. In so doing, they will use that cash to make more strategic acquisitions going forward.
In contrast, small- and medium-sized enterprises (SMEs) had a difficult year in 2023. Looking into 2024, SMEs are waiting out the economy and hoping to start demonstrating growth. For those that will then be in a position to sell, the latter part of 2024 is likely going to be the time when they start to act.
At the same time, a significant amount of money that has been raised for M&A is sitting on the sidelines. Private equity firms raised a lot of cash in 2021 and 2022, for example, and they haven’t been able to put it to use. Combined with positive economic trends, this sets the stage for an active 2024.
Cross-Functional Support
As previously mentioned, ChemQuest’s unique value lies in our multi-pillar collaborative approach. On the sell side, we work with business owners and management to improve their bottom line because we know that every dollar of savings that we bring to them results in a multiplier effect for the enterprise value. Our subject matter experts in manufacturing and operations improve clients’ overall processes, leading to gains in productivity and efficiency that feed directly to the bottom line.
We also work with clients to optimize both the intrinsic and strategic value of their business. Improving their earnings and balance sheet is of course vital, but our team’s deep industry knowledge and connections also enable us to uncover target growth markets, demonstrate the total addressable market, and identify industry trends and customer dynamics. Our subject matter experts in strategy and technology refine clients’ business strategies and fully understand their technologies, technical capabilities, and their pipelines. In so doing, we help clients focus on their ideal attractive markets, as well as the best pipeline for new product development and innovation.
At the same time, we apply the information developed during strategy development to work with investment bankers. We assist in preparing the company marketing materials, such as the confidential information memorandum, and our deep understanding of all the technologies, end markets, operational practices, and so on enables us to identify those buyers that would have the highest degree of synergies with our client. These types of buyers naturally have a higher valuation of the business because they better understand the strategic overlap and the synergies they would be able to capitalize on.
On the buy side, our work begins with refining the client’s business strategy. That information then informs the development of the client’s acquisition strategy, which is essentially designed to plug gaps that they may have in their strategic roadmap. For example, they might be struggling with limitations in expanding their regional focus, the inability to enhance their technology, or issues with their go-to-market strategy.
Once we have an M&A strategy in place, the next step is to develop an investment thesis that identifies the types of attractive candidates and how they would fill the gaps if they were to be acquired. During the deal sourcing process, we capitalize on our deep industry network and connections with CEOs and business owners to pursue those target companies and convince them to come to the table.
ChemQuest’s diverse subject matter experts thrive as key partners in our clients’ M&A teams, working with decision makers and CEOs to advise them on strategy, valuation, potential synergies, market comps, and so much more. We also conduct due diligence on all aspects – from manufacturing and technology to markets and commercial issues – and we shepherd the process all the way to a successful closing.
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BRIAN SCANLAN
Operating Partner, Life Sciences, Edgewater Capital Partners
Renewed Optimism, but Early Stage Demand Still Sputtering: Highlights from the DCAT Meeting 2024
If activity is any Indicator, the attendees at the recent DCAT meeting noted a remarkable level of engagement and activity at the conference, suggesting a renewed sense of optimism and anticipation for stabilization in 2024. Despite the uncertainty surrounding deal outcomes, the heightened activity across various sectors, including biotechs, investment banks, and market consultants, signals an encouraging outlook for the near future and likely a more significant rebound in 2025.
Several noteworthy themes emerged, providing insight into the current health of the biopharma market more broadly, and the pharma services sector more specifically.
Market Recovery is a Mixed Bag: The primary topic of discussion centered around the varied experiences within the market. While early-stage biotechs and the CRO/CDMOs supporting them continue to face challenges, those with mid-phase clinical to commercial assets are experiencing increased funding and IPO activity. This divergence suggests that the market recovery will be uneven, with stability and growth favoring CDMOs catering to more established biotechs with a more mature product portfolio (1).
BIOSECURE Act and BIO’s Abrupt Reversal: A significant point of contention was the BIOSECURE Act and the subsequent reversal by BIO, raising questions about the implications for biopharma’s relationship with China. The US Senate Homeland Security and Governmental Affairs Committee advanced the BIOSECURE Act, a bill aimed at restricting the activities of certain foreign pharmaceutical trials and manufacturing providers, citing national security concerns regarding Chinese biotech and genomics companies. Following the bill’s advancement, the Biotechnology Innovation Organization (BIO) reversed its stance and now openly supports the legislation. This signals a shift in perspective on its potential impact on the biotechnology industry. With a substantial portion of US biopharma relying on China-based CRO/CDMOs, there is concern about the impact of any abrupt changes on innovation and supply chains. The uncertainty surrounding this issue has already prompted US CRO/CDMOs to strategize and position themselves accordingly, while stakeholders ponder the implications for further offshoring decisions.
ADC’s, Nuclear Medicine, and Bi-Specifics all Hot: Therapeutic modalities such as ADCs, nuclear medicine, and bi-specifics garnered considerable attention during discussions, reflecting ongoing investment in infrastructure to support advancements in these areas. The focus on these modalities underscores the industry’s commitment to innovation and meeting evolving healthcare needs.
Big Surprise – Large Volume API Investments in the US: An unexpected highlight was the substantial investments in API manufacturing capacity to support very large volume API programs at some US-based CDMO’s including Grace. Despite the trend toward targeted therapies with lower volumes, there are, in fact still some NCE’s requiring very large production capacity, and major investments to support those are taking place. Do these investments reflect a strategic effort to bolster domestic production capabilities? Time will tell, but it may underscore the impact of 2022 bipartisan legislation to boost US domestic supply chains and reduce reliance on China for pharmaceutical supplies (2).
In summary, the insights gleaned from the DCAT conference underscore the complex dynamics shaping M&A trends in the pharmaceutical industry these days. While challenges persist in the business environment, there is cautious optimism regarding market recovery and new opportunities for growth and innovation in the years ahead.
References and notes
- post DCAT the Q1 private funding levels were released, suggesting continued recovery was indeed continuing. Biotech venture funding levels in the US and EU were just under 1Bn higher than any quarter in 2023.
- Advancing Biotechnology and Biomanufacturing Innovation for a Sustainable, Safe, and Secure American Bioeconomy signed on September 12, 2022.
