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A High Point for Hedge Funds; a Low Point for Strategy
Posted on November 6th, 2017 by Nigel Davis in Chemicals Industry News and Analysis
The blocking of the Huntsman/Clariant merger marks a “high water mark for US activist investors, which have increasingly turned their attention to European companies,” according to the Switzerland and Austria correspondent for the Financial Times.
But it also represents a low point for careful, considered, industrial strategy.
Late last week (27 October), activist investor group White Tale had amassed enough Clariant shares to destroy the proposed $20bn merger between specialties maker Clariant and the more diversified Huntsman Corporation of the US.
The campaign by White Tale, which represents the hedge funds Corvex and 40 North, highlights the power that activists can wield very quickly if their views of value creation clash directly with those of management and the majority of shareholders.
The White Tale campaign to block the planned merger was begun in July.
In a stinging appraisal in September of the logic of the deal, White Tale, in an open letter to the Clariant board, said the proposed merger would immediately undo a decade of transformation at Clariant.
The focus on specialties would be lost, White Tale said, and Clariant would be taken back to being an “unfocused and commodity-oriented business with increased volatility and a lower market multiple”.
It is the focus on specialisation that is the cornerstone of the debate here.
Increasingly in the US, the trend in mergers and acquisitions (M&A) has been to split companies into ever smaller pieces in the expectation that the immediate release of value will be followed by a clearer investor and market perspective.
The churn can create short-term value for shareholders but many in industry believe that longer-term value is at stake. The prosperity of other stakeholders in the company, suppliers, customers and employees are exposed.
The proposed Huntsman/Clariant had promised cost synergies and longer-term value creation but the latter argument clearly was lost.
“We viewed this merger of equals as an opportunity to accelerate our downstream growth and for two great companies to become even better together,” said Huntsman CEO, Peter Huntsman.
“We are still convinced that the merger of equals would have created significant value for shareholders,” said Clariant CEO Hariolf Kottmann.
Clariant and Huntsman saw the merger as a means to achieve the size and clout that would have allowed the combined group to compete with upcoming competition over the coming decade.
That sort of view is widely held in industry and by Clariant’s peers. Managers are not in the business of actively seeking break-ups or wantonly destroying the company’s ability to create value over the long term.
Kottmann said he still does not know why White Tale wanted to block the merger, adding in a conference call that he had not heard a serious or logical alternative to it.
Clariant says it has closely investigated strategic options for the company with the help of investment banks and other external advisors.
Moreover, it has rejected the idea of a “transformational” acquisition and earlier this year saw a merger with a peer as a means to “accelerate and transform the development of the company”, Kottmann said.
Management is committed to making Clariant, in Kottmann’s words, a sustainable leader in the specialty chemical industry.
In all the detailed analysis of strategic options, the break-up or direct sale was never discussed, he said.
Clariant management will continue to look at strategic options for the group but the collapse of the proposed merger exposes the company.
The impasse between management and White Tale creates nothing and has the potential to destroy a lot.
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