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What About Organic (Growth)?
Posted on October 30th, 2015 by Christina Valimaki in Chemical R&D
On Tuesday of this week I had the pleasure of attending the Valence Group’s first Chemicals Industry M&A conference at the Langham Place Hotel in New York. It was a fantastic program, with 7 Chemical company Chairmen or CEOs presenting their stories, and lessons learned, on creating shareholder value through M&A in recent years.
Before I share more on why M&A must be complemented by a focus on organic growth, let me introduce myself. I’m Christina Välimäki, and I cover strategic marketing for the Chemicals Industry at Elsevier. I investigate the needs of Chemicals R&D leaders and practitioners, and help translate that insight into increasingly well designed and useful information solutions that Elsevier provides to them, to help them de-risk and speed new product through the R&D pipeline, and ensure market success. My business background and education speak to my practical side; I’m focused on how we can help our R&D customers, who are all both scientists and business people at the same time, increase the commercial success of innovation.
In recent years I’ve had the pleasure of working exclusively with our customers from the chemicals industry, the first science-based industry and the largest manufacturing sector in the world. This means getting much closer to our Chemical R&D customers and what they are facing as regulatory pressures increase, value chains move geographically East, and investors become more vocal. I’m always seeking to place and re-place the chemical innovation story, one of the greatest innovation spurts in our 30,000 year recorded human history, having produced all the materials we enjoy in daily life that are not pure wood or metal, in the context of our current economic forces. Specifically, why is innovation in chemicals important today and for the next 15-20 years, both for those of us who benefit from technical advancement in chemicals in our every day lives, and chemical firm investors? The short answer is the size of the opportunity. Sectors that will experience exponential growth rates and have a high demand for chemical technologies, from the mobile contentedness of people and things, to new methods in oil & gas exploration, to advanced materials for medical devices, will not grow at a linear rate – and capturing value from exponential growth of end-markets requires innovation-readiness in the form of talent, process, and tools.
Source: Miovision July 17, 2013 “The Internet of Things and Transportation”
I found it curious that of the chemicals leaders presenting the narrative of M&A as a tool for value creation on Tuesday, the importance of organic growth as a complementary vehicle for producing a meaningful return came up in fewer than half of the presentations. This is natural for a group focused on learning from each other how to better deploy M&A as a short to medium-term returns vehicle. Yet when we look at the portion of the investor population who is selecting chemicals for longer-term value holds, let alone the 7 billion+ human population the industry impacts through water purification advancements, electronics materials, or agricultural production efficiency, to name a few, the fundamental longer-term growth strategy has to come back to organic growth through innovation. New chemistry solutions for solving significant lifestyle challenges that will come about from climate change, for example, have to start in the lab, not at the investment bank.
While 2016 may see more than $100 billion in chemicals M&A transactions, once those companies are spun off or integrated, the focus must return to generating value through growing existing customer bases, or finding new ones, by offering new technologies to the exponential growth end markets. This requires innovation talent, a culture of rigor for assessing which end markets new chemicals should be developed for, and an express commitment from executive management to invest in making the innovation engine a high performing, fast to market production machine that will buoy investor’s returns from M&A with an underpinning of longer-term fundamental growth. If the current trends in M&A continue, within a few years consolidation in performance chemicals sectors will reach a point at which there is no better path than boosting top line performance, and it will take new technologies in high-demand markets to achieve it.
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