DSM And Firmenich To Merge
A box without hinges, key, or lid, yet golden treasure inside is hid
I’ll be taking a vacation the first two weeks of July. I’ve got most of my writing for next week wrapped up (mostly) and this post is a bit shorter than I normally write. I don’t know much about the subject matter, but the more I read the more I realized (yes, even I can be surprised) at how extensive chemical sales are into food and personal care products. Below is an example of DSM’s egg pigmentation guide which you can read in full here. Whenever my wife asks me to get the $6 dollar per dozen pasture raised eggs because they have beautiful yolks I’m going to question if they were really pasture raised or if it’s something in their food.
The biggest story in the M&A space right now is the merger of DSM and Firmenich. The combined company would be worth roughly $43 billion dollars. There are some great pieces on this already including Angela Mehta at ChemistryWorld and Alex Scott and Alexander Tullo at C&EN.
DSM was a Dutch chemical giant that has been slowly dismantling its petrochemical business over the last few years through divestment. DSM sold their coatings business and they recently sold their engineering polymers and protective materials businesses. DSM had announced they were going to focus on health, nutrition, and personal care chemicals. I think these moves speak to a desire to run a “clean” business that has the potential to be synonymous with sustainability or green chemistry.
Firmenich has always been a specialty fragrance and flavor producer. The combined forces of the two companies means even more consolidation in the personal care and nutrition space especially since IFF and DuPont’s Nutrition and Biosciences merged last year. These types of consolidations give a few companies significant global power when it comes to setting prices and offering secondary sourcing.
If you have no idea what flavors, fragrance, and nutrition chemicals even mean then let me try to paint the picture. Whenever you bite into an Impossible or a Beyond burger and the taste and feel is just like a regular beef burger there is a good chance that IFF or Firmenich has an ingredient in there. Whenever you crack open an egg and marvel at how yellow the yolk is there is a chance that DSM is selling an additive for the chicken feed to the farmer to produce a specific color yolk. DSM calls their additive Carophyll.
If you have ever used a hand soap, a lotion, or a shampoo that smells wonderful it’s likely that there is technology and fragrance delivery mechanisms at play that chemists and engineers at IFF and Firmenich figured out. Most of us just tend to take for granted that some people somewhere figured out how to make liquid hand soap smell really good and we will gladly pay a boatload of money for it. Even more if it looks like a fancy brand (see below).
While companies on the whole seem to be organizing themselves into purer plays, this DSM-Firmenich deal also seems to foreshadow that some will become larger. If you are a formulator or a procurement professional I suspect you are finding it more difficult to to find suppliers for some key raw materials. Synthetic rubber and antioxidants come to mind, but I think the same may start to be true in the flavor, fragrance, and personal care spaces.
One benefit of consolidation is that prices should decrease (at least in theory they should) based on increased efficiency (less overall people), but as more consolidation occurs the more fragile our supply chains start to become due to lack of manufacturing capacity. Often, companies want to fill up their manufacturing operations as much as possible because the company is often more profitable when capacity is near 100%.
A smart play in this world of consolidation by Chief Operating Officers should be to ensure that your manufacturing grid stays broad, global, and redundant. You want a bit more open capacity than normal. This leaves room for growth (and inefficiency), but being able to land a new customer quickly due to manufacturing agility can be the moves that lead to more business and growth.
A cautionary tale around this would be Abbot and their contaminated baby formula. Having one plant shut down should not create a national shortage of a product. I just hope we take the lessons I think we are learning now and try to have some redundancy built into our economy, even if it means paying a bit more, because having stuff to buy at a slightly higher price is better than having no stuff at all.
I’m not trying to be depressing, but this is where my mind goes when I see this stuff. I hope you have a good weekend.