Lack Of Stability

The side effects of M&A and market consolidation

One thing that’s been on my mind since I started this newsletter back in 2020 is how the Mergers and Acquisitions climate in chemicals fundamentally shapes how employees view the industry. From small business units within chemical companies being spun out or sold to a competitor to whole companies being merged every few years means that working in the industry for your whole career at one site might mean you have shirts with five different names on them. If you are looking for stability and sanity then the chemical industry is not a good employer fit.

I picked the biggest chemical company in the world to see if I could glean any specific trends in the acquisitions and divestitures data over the last 13 years. Maybe you could argue that acquisitions are slowing down from 2017 to present and divestments are on the rise. BASF has also indicated a significant number of layoffs in Germany in an effort to cut costs.

In total, 45 divestitures have occurred at BASF compared to 37 acquisitions since 2010. That is 82 deals over the last 13 years. If you are an employee working within any of the parts of the business where those deals are taking place you’ve likely experienced a feeling of intense precarity and precariousness combined with personal insecurity means you have likely questioned, “should I get a new job?”

If you think about this too much you end up in a constant state of fear or anxiety and this gets even worse when you have a family or dependents that are reliant on your income.

The Only Constant Is Change

A lot of my previous coworkers have expressed a desire for a steady and stable job that pays well enough to afford a middleclass lifestyle. Many of my former coworkers have even expressed an interest in taking less pay in exchange for stability. Sadly, I don’t think this is viable for most careers in chemistry (industrials or pharma). In careers that span 40+ years as scientists, engineers, or associated professionals we tend to end up wanting longer term roles (stability) and we find ourselves specializing by staying somewhere for a long time.

Stability is important if we want to raise kids, have a family, and take on a 30-year mortgage to buy a house. Our professional lives tend to get easier when we know a very specialized amount of information and get regarded as experts. This narrow expertise can also make us quite fragile when technology moves on from our expertise. As companies start to consolidate and remove costs, I think it becomes more challenging to remain that expert without being willing to uproot your life.

The overall goal of any M&A activity (at least from what I can understand) is to figure out ways to remove cost in order to improve EBITDA, and maybe make a customer experience better. Cost reduction can be found in places like SG&A, R&D, and procurement. You might need less sales, marketing, regulatory compliance, engineering staff and less R&D due to consolidation. Instead of paying for 5 offices with labs maybe you can get away with 2 or 3 and less staff in those offices with labs. Your procurement teams might be able to negotiate better prices at higher volumes of purchase. These activities are often good for shareholders, but not necessarily good for employees.

These actions are especially difficult for middle managers who have climbed from the ranks of being an individual contributor to managing a small team. These people have often, “paid their dues,” or endured a lot of shit to get where they are and then merging with a competitor or being bought by a competitor typically means their jobs might be at risk. From Harvard Business Review on M&A back in 2001 which still feels and rings true:

Let’s start at the top, with the senior managers from both companies. Especially in a merger of equals, this piece is always messy, time-consuming, and political. Management teams focus their energies on the battle to maintain their positions, and the business suffers. This pattern is repeated all the way down the ranks. Problems exist even in acquisitions where one company is much larger. The best people from the new company are likely to leave. When mixed teams remain, employees must reconcile company cultures. Years after such mergers, it is common for managers from acquirer Alpha to describe an employee from the acquired company as a Beta company guy.

In the current world of chemicals, you might be merged with a company and trying to reconcile that culture or be spun off on your own trying to “make it” out in the cold alone without your parent company. You might only have a few years to demonstrate that things are working before some other action happens. These types of scenarios, especially when the actions are public, are detrimental to employees who often feel like they have less control over their professional careers than they had once thought.

My concern is that the more this occurs the more likely the very talented people will decide to leave the industry completely. Perhaps this means that very talented technical people decide to transition to completely different careers by learning new skills on their own. I think the best and brightest individual contributors in chemicals tend to come to a point where they decide, “fuck this, I’m out.”

As the more talented people decide to exit the harder the businesses become to run efficiently. Soon, and I think it’s happening as I write this and will continue, companies that were once seen as “industry leaders” will just become hallowed out shells of their former selves.

Maybe this is for the better.

Depreciation, Capacity, and Innovation

Large capital expenditures mean there are assets that can be depreciated to offset tax liability of chemical companies. Eventually, those assets reach a point of complete depreciation and as a society we end up having a lot of really old manufacturing capacity that is still being operated. The problem with old manufacturing capacity is that it becomes even more difficult to innovate when the market you want to disrupt has excess capacity that keeps costs down.

How much volumetric chemical reactor capacity do we have right now and how much of it is being utilized? How can that capacity be redeployed to those seeking it? A marketplace of understanding available manufacturing capacity, what the capabilities are, and who needs what right now could be a whole company that exists as a confidential contract manufacturer. Chemical innovation doesn’t have to be 100% exclusive to just making safer, more efficient chemicals and polymers and new drugs.

So where does all the chemical talent go if it’s not necessarily in the top 100 chemical companies or top 200? I suspect that some might transition to a product manager role and then exit to something more lucrative like software technology. I know of more than a few that “learned how to code.” I’m betting a bunch are flocking to start-ups seeking disruption of the industry.

The New Wave

Getting in early with a start-up seeking to disrupt the chemical industry might be a great way to play the lottery with your skills to try and get a little bit rich off of your potential equity. Getting in early with a deep understanding of your competition’s vulnerabilities while also applying a basic understanding of regulations, customer relationships, and the product development life cycle can help supercharge a start-up.

If start-ups feel risky they are at least somewhat insulated from the macroeconomic environment through investor funds. A former coworker of mine who recently retired once remarked before we parted ways that she wasn’t ever sure she had more a few years funding to keep her employed at legacy companies. Just because a company might look stable, talk about stability, and grow at a slow and stable pace doesn’t mean they are stable. If there is no daring plan for growth that is adequately staffed then it’s the same as buying a lottery ticket for the shareholders.

A small team with minimal oversight and a big carrot can achieve way more in a year or two than a large team with mostly a stick incentive. If large chemical companies want to stay relevant they need to change the way they innovate and change how they invest in their innovation. The current process of cost cutting to maintain profitability and taking the oldest manufacturing capacity offline to keep prices just holds us back.

In a world where the goal is to incrementally remove cost in order to return money to shareholders you get what you pay for—marginally worse stuff.

Tony