The year 2007 has been a big year for acquisitions among large companies in the European coatings sector. But it has also been a busy period of consolidation among medium and small companies in the production of coatings and their raw materials.
Next year there could, however, be a slowdown in mergers and takeovers as managers concentrate on the integration of new acquisitions into their existing businesses.
Furthermore, an expected downturn in the European coatings market, due to reduced economic growth and a decline in house sales, which will affect sales of decorative paints, could delay the divestment of paint businesses. Private equity funds are also expected to be less willing to invest in mergers and acquisitions because of the squeeze on credit in North America and Europe.
"The current cycle in mergers and acquisitions in coatings has now reached a peak, particularly in Germany," said Stephan Hinterwaldner, a partner in Hinterwaldner Consultancy, Kirchseeon, Germany. "It seems only to make sense that there should now be fewer acquisitions. There have been so many recently that companies are realizing that they need to think about making their enlarged operations more efficient."
In countries like Germany fewer family-owned coatings producers are being put up for sale because there are no longer any relatives interested in managing the business. The lack of successors to manage family companies has been a major factor in the rise of merger and acquisition deals in Germany in recent years.
"A lot of the family-owned coatings companies have had difficulties finding money for new equipment and other investments or have run into succession problems," explained Hinterwaldner. "But most of these companies have now found buyers or have managed to restructure themselves so that they can become efficient enough to stay in business."
On the other hand the need for cross-border expansion will still be a major driving force towards greater consolidation among small- and medium-sized operators (SMEs) in the European coatings sector. It will provide much of the momentum behind acquisitions in the coatings market and among raw material suppliers for the next several years.
Moving into foreign markets through acquisition is often a more attractive way of increasing profits in the short to medium term for coating companies than setting up new enterprises abroad, according to Michael Gerstenberger, managing director of Cheminvest, a merger and acquisition consultancy in Walldorf, Germany.
"European mid-sized coatings companies have already picked up the message that they have to look eagerly for suitable (cross-border) mergers or partnerships in order to survive," Gerstenberger said.
Among the leading international coatings players, Akzo Nobel and PPG Industries have been strengthening their presence not only in Europe but globally through their acquisitions this year of ICI and SigmaKalon respectively.
Through its $3 billion takeover of Europe's second largest decorative paint producer, PPG will be gaining a significant position in architectural coatings not only in Western but also Eastern Europe, where SigmaKalon has made a series of acquisitions in recent years. The deal will also make PPG a relatively big operator in the Asian marine coatings market.
For Akzo Nobel, the merger with ICI will give it a platform for global leadership. "This is about building leading positions in existing markets in Europe, in the U.S., but also from benefiting from the high growth areas throughout the world including Asia, Latin America and Eastern Europe," said Hans Wijers, Akzo Nobel's CEO.
But he also makes clear the company now has to focus on achieving net savings and synergies of €2.5 billion ($3.7 billion) from the merger. "We'll take a three-year period to realize most of those synergies throughout the company," said Wijers. "After three years the vast majority will be realized."
Smaller Western European coatings companies are now reinforcing positions in Eastern Europe gained through acquisitions by directing their efforts at creating distribution networks in the region. Tikkurila of Finland, now a big coatings operator in Eastern Europe, has been channelling resources into logistics in the area, particularly in Russia.
Meffert AG has been establishing itself as market leader in the Romanian coatings market, while also being a producer in Hungary, Ukraine, Russia and Lithuania. This year it switched its attention back to its home market of Germany by acquiring J. Albrecht GmbH & Co., a Mainz-based producer of decorative and industrial coatings.
Among SMEs some of the most active predators of takeover candidates have been producers of industrial coatings, particularly protective paints. The impetus for mergers and acquisitions in this segment has been a desire not only to enlarge businesses geographically but also to gain control of new technologies.
"The protective coatings sector in Europe has been quite ripe for further consolidation because it is still fairly fragmented," said Terry Knowles, an analyst at the coatings market research organisation IRL, London, UK.
"This gives coatings companies an opportunity to obtain access to a greater variety of technologies because protective coatings is a technology-driven segment," Knowles added.
Over the past year many buyers of coatings SMEs in Europe have been based outside the region, particularly the U.S. where companies making European takeovers do not seem to have been deterred by the dramatic depreciation of the U.S. dollar against the Euro.
Some of the U.S. acquirers have been large players. Valspar bought Teknos Nova Coil, a Finnish coil coatings producer. WR Grace has extended its Darex coatings and sealants range with the takeover of Grupo Sistiaga, a Spanish supplier of coatings for aluminium containers.
3M has purchased E Wood Holdings, a UK-based manufacturer of high-performance protective paints for the oil, gas, water and transportation industries. E Wood has an innovative technology for an interior coating for the repair of water pipes, on whose development it has an alliance with Bayer MaterialScience.
Some observers believe that soon Indian, Chinese and other producers from emerging Asian countries will be among coatings and raw material companies seeking acquisitions in Europe.
"Merger and acquisition projects in the coatings business will not just be one-way streets for companies in Germany and elsewhere in Western Europe to move into China, India and other countries," said Gerstenberger. "Western companies used to buy their way into developing countries but now the reverse is happening. Groups and enterprises from other parts of the globe, such as Asia, are currently looking very carefully for purchasing opportunities within the overall European scenario."