Acquisition Wave in the Fine Chemicals Industry (C): Degussa-Laporte Acquisition

Published 01 May 2006
Reference 5268
Topic Strategy
Industry Chemicals
Region Global
Summary

Most cases on M&As focus on the value of an individual deal (synergies, price, integration issues). In the case series "Acquisition Wave in the Fine Chemicals Industry", we take another perspective. We aim to describe how managers' decisions to make an acquisition and to determine the acquisition price are likely to be influenced by the merger activity in their industry and their competitors' actions. Driven by shareholder pressure to focus their portfolios, leading specialty and fine chemicals players such as Degussa, Clariant and Rhodia entered into major fine chemicals acquisition in 2000 and overpaid. Subsequently, this led to decreasing stock prices and financial turmoil. The fact that the other firms overpaid, despite publicly available signals from stock markets indicating the overpayment, and the nature of the chemicals industry and management, are clear indicators for irrational herd behavior.

Teaching objectives

The cases allow MBA and executive participants to analyze a series of deals in 2000 by comparing transaction multiples, average premiums paid, and acquirer stock performance compared with an earlier wave of deals that took place in 1998. Movements in the stock price of the acquirers after the acquisition announcements indicate the likely value creation of each deal and allow us to estimate what a fair price would have been for the targets. The discussion will ultimately lead to the question of why the managers overpaid and the role that irrational herd behavior can play in M&A transactions. This case can be used at an early stage of the course to illustrate how a deal takes place within an acquisition wave, when competitors’ actions are likely to influence both the decisions to make an acquisition and to determine the acquisition price. Or it can be used at the end of the course to illustrate irrational aspects and herd behavior associated with M&As.

Keywords
  • Mergers and acquisition
  • Herd behaviour
  • Merger wave
  • Merger premium
  • Acquisition overpayment
  • Chemicals industry
  • Industry consolidation
  • Acquisitive growth