GRACE MATTHEWS INSIGHTS

Grace Matthews’ Winter 2021 Chemical Newsletter, which we published in January 2021, outlined our confidence and optimism surrounding M&A activity in the chemicals & materials industry in the year ahead. Our tagline in the publication read: ‘Catching Our Breath Heading Into 2021’. On the horizon, we saw the underpinnings for a “perfect storm” of M&A activity. Reflecting on 2021, the opportunity to catch our breath was short-lived.

Whether looking at deal volume, valuations, or buyer interest from both strategic and financial acquirers, 2021 M&A activity set records and exceeded expectations. Global M&A approached $4.2 trillion in total deal value in 2021, representing a 50%+ increase from 2020.(1) Private equity dealmaking bolstered M&A as well, with PE firms accounting for an aggregated $1.2 trillion in transaction values in 2021, also increasing more than 50% from the year prior.(2) Key drivers of the strong year are generally consistent with recent periods, such as: strong, and growing, cash positions on strategic buyers’ balance sheets, together with record levels of capital raised by the private equity community; liquid debt markets with lending accessible to both strategic and financial buyers coupled with historically low interest rates; and, in 2021, the prospect of meaningful tax changes motivating sellers, even though these potential tax changes now appear to be far less impactful than originally contemplated. We also saw large multinationals continue to focus on portfolio management, which contributed to an increase in the number of divestitures / carve-out transactions. Put simply, multiple factors increased both demand (buyers’ appetite for acquisitions) and supply (business owners exploring sale processes), which led to a highly robust M&A environment.

We at Grace Matthews focus entirely on the material science and chemical industry, and these same dynamics, noted above, drove M&A activity in our sector throughout 2021. Almost paradoxically, we saw companies in our industry navigate unprecedented challenges, as virtually every client we worked with experienced some combination of surging raw material prices, freight / logistics challenges, tight labor markets, the continued impact of COVID-19, and, of course, inflation (more on this soon). The fact that a record number of transactions were completed despite these challenges speaks to the tremendous appetite in the M&A market right now. 

Make no mistake—we understand it is strange to write about a strong outlook for M&A activity continuing into 2022 with the S&P dropping 5.3% in the first month of the year, supply chains remaining constrained, labor markets tightened, and inflationary pressures continuing to drive cost and margin challenges. However, barring a sweeping change in sentiment, we see both buyers and sellers eager and willing to navigate these obstacles to execute transactions.  In some ways, the challenges faced by the market may actually be supporting M&A interest and engagement, as strategic buyers use acquisitions as a tool to strengthen their business—such as shoring up source(s) of supply, leveraging a talented work force, and / or expanding physical presence into new geographies.