The Indian Formula - Over the past decade, India has been an active market for M&A in the chemicals sector, and barring the economic slowdown period, deal activity has increased gradually.

However, the dominant M&A theme has been cross-border transactions as Indian companies seek access to international markets, products and technologies, and international companies seek to participate more actively in the domestic market.
Of the 33 outbound chemical deals announced between 2005 and 2011, the U.S. was by far the preferred market, followed by the U.K., Germany and emerging markets such as Brazil, China, Egypt and Malaysia. Most of these deals were characterized by key themes such as access to new products, access to new markets or strengthening market presence, capacity access, and strategic sourcing.
Underlying themes evident in the 14 domestic chemical deals announced between 2005 and 2011 were capacity access, private equity investments supporting high growth, and strengthening the product portfolio.
The 25 inbound chemical transactions between 2005 and 2011 were motivated essentially by India market entry and complementary product access.

Chemical Industry Growth Drivers
The $65 billion Indian chemical industry, growing at 9% per annum, comprises the following key segments:

• Basic chemicals, including organic and inorganic chemicals, petrochemicals, synthetic fibers, chlor-alkali, industrial gases and fertilizers
• Specialty chemicals, including colorants, paints, water treatment chemicals, personal care ingredients, construction chemicals, polymer additives, preservatives and other specialty chemicals
• Agrochemicals, including insecticides, herbicides and fungicides

Growth in the sector is being driven by:

• Rising consumption. Consumption levels in the Indian chemical industry are significantly lower than world averages. For example, pesticide consumption is 0.5 kg/hectare in India versus 16 kg/hectare globally. With sustained economic growth, India's consumption levels are expected to steadily align with global levels.
• Growth in downstream products. India's chemical industry consumes approximately 30% of its own production. High growth rates in industrial products like pipes, packaging materials and plastics are driving growth in the upstream chemical value chain.
• Reducing dependence on imports. India remains a net importer of chemicals, and the industry has historically focused more on meeting domestic needs rather than tapping the global market. This is beginning to change as domestic capacities are being built to reduce import dependence and increase exports.
• Inherent factor advantages. India has abundant availability of trained manpower and skilled technical professionals, who are available at a lower cost compared with those in mature markets. This makes the country an attractive outsourcing, manufacturing and R&D location.
• Enabling regulatory framework. The Indian government allows 100% foreign direct investment (FDI) in the chemicals industry except for some hazardous chemicals. The agricultural sector is also expected to continue receiving policy thrusts (subsidies and incentive schemes), which will positively affect inputs such as fertilizers and agrochemicals.

• Supply side changes. The Indian chemical industry is highly fragmented (the top 10 companies in India contribute less than 15% of industry revenues and the top 100, less than 40%) and as smaller companies struggle to find economies of scale, consolidation in the market will continue, presenting international companies with an attractive entry point to the Indian market. Larger chemical companies are expected to continue pursuing their "go global" agenda and seek outbound acquisitions

Closing a Transaction in India Successfull
Foreign investors and companies evaluating deals in the Indian market should keep in mind the following considerations:

Decision Making
The shareholding and operations are often under the control of various family members and key associates. This may result in multiple decision makers or influencers. It is important to identify the key decision makers and influencers early in the transaction.

Cultural Factors
Indian sellers tend to be ambiguous and less upfront about their expectations from the transaction. Pride, peer pressure, family and other social factors also play on the minds of the vendors. In order to avoid protected negotiations, it is advisable to hold explicit discussions on scope, early on, to avoid ambiguities. Consider tailoring the transaction to manage softer issues such as succession planning, non-compete and vendor earn-out arrangements.

Price Expectations
India is a fast-growing market and recent transactions have taken place at rich multiples to reflect the strong growth potential. Indian sellers are all too aware of these multiples and will negotiate a hard bargain. Furthermore, business plans are often highly inflated and do not support market opportunities. This makes valuation a tricky exercise and doing diligence on the business plan is time well spent.

Availability and Quality of Information
The ability or willingness to deliver standard financial and operational data on the company may not be up to the expectations of an international buyer. The Indian chemical market is not well researched, and insights on a company's focus markets and competitive positioning are often difficult to find or not reliable. It is advisable to conduct detailed primary research and interviews with customers to get a sense of ground realities.

Knowing Your Counterparties
It is always advisable to conduct detailed background checks on creditors, customers, suppliers and other key business stakeholders to avoid nasty surprises post-deal.

Regulatory Issues
Certain investments are subject to Foreign Direct Investment/Foreign Investment Promotion Board/Competition Commission of India regulations, and listed targets are subject to takeover guidelines. Such approvals and processes may take three to 12 months. As a result it is important to appropriately evaluate transaction structuring options to comply with the Competition Act and tax jurisdiction matters.

Legal Recourse
In case of disputes arising from the transaction, Indian courts and other regulatory agencies may take several years before giving any verdict. Investors should consider escrow accounts, robust warranties and indemnities and well-defined arbitration mechanisms to speed up compensation. Perhaps even arbitration jurisdictions in other countries.

Governance Issues
There are a host of areas where governance standards fall well short of those a blue chip multinational acquirer would expect. As a result, the following aspects should be examined carefully during due diligence:

• Situations where the company participates in government tenders or public-private partnerships
• Extensive use of cash payments
• Real estate transactions and commission payments
• Labor intensive operations that may not meet minimum wage requirements

• Family-owned conglomerates with extensive related-party transactions

Outlook

Growth prospects for the chemical industry in India remain strong. The fragmental structure of the industry will provide investors with interesting opportunities. The challenge is to seize these opportunities at an affordable price. This is only possible by getting to know the vendor and the company in detail before doing the deal.