Thoughts on the Potential PPG & Akzo Nobel Merger
The news has been reporting that a second offer by PPG to purchase Akzo Nobel was declined on March 20th. There are a variety of concerns that Akzo mentioned, including whether the deal would be approved due to the potential merged company’s size, whether the deal would offer value above what Akzo can offer by retaining control of their company, and other issues. The full statement by Akzo Nobel is available on their website here. The following are thoughts on the potential merger.
Strategic reasons that PPG may want to acquire Akzo Nobel
In 2011 the Harvard Business Review published an article called “The Big Idea: The New M&A Playbook”. In this work the author mentioned the idea of potentially lowering costs as a reason for acquisition. While lowering costs are almost always mentioned, it is often not the reality. However, as the author points out, costs reduction may be possible if the acquiring company is able to gain new customers through the acquisition but simultaneously reduce costs necessary to serve the newly gained customers.
This would potentially be the case for PPG if they are able to succeed in acquiring Akzo Nobel. As noted in their investor presentation, PPG is considered to be number 2 in architectural and general industrial segments while they are number 3 in protective and marine coatings. Akzo is shown to be number 1 in general industrial and protective and marine markets. If PPG were to acquire Akzo, it’s easy to see they would gain a significant new share of market segments that they are presently involved in, but not necessarily the leader.
A key for the potential merger to succeed would be for PPG to be able to integrate Akzo’s products well and reduce the overall costs associated with the potential newly merged company. There are some challenges that would have to be successfully addressed. With Akzo having a lot of their business based in Europe and PPG based out of Pittsburgh, significant evaluation resources would need to be done to see about opportunities to consolidate resources. Additionally, PPG would have to evaluate if potential manufacturing sites could be reduced and products be transferred to other plants that may have excess capacity. If these kind of opportunities exist and the acquisition can be made at a price that is appropriate, PPG could benefit from gaining new customers and reducing redundant costs between the two businesses, resulting in improvements in the newly merged business’s performance compared to the original independent companies. Additionally, PPG may be able to integrate Akzo’s products into their distribution network which includes a continual expansion of store locations as well as other channels; this idea may or may not prove as profitable as research is inconclusive about mergers that are done for the intent of obtaining new products to sell to existing customers. Finally, PPG may be able to benefit from having access to chemicals internally that it previously would purchase from other companies.
Potential Concerns about the merger of Akzo Nobel and PPG
While the merger could bring benefits, the concerns from Akzo’s standpoint make sense as well. No doubt there is a lot to consider. Akzo may be able to unlock better value by selling off its specialty chemical division and working on valuation improvements in the remaining business units. This would potentially leave Akzo Nobel more strategically focused on the coatings market and allow for advantages competitively in the market. The concerns over anti trust are also valid, as a merger of the two companies would place the newly merged company as significantly larger and would make the relative number of competitors significantly smaller. Additionally, Akzo is strongly based in Europe and the potential loss to Europe’s job market as well as economy is certainly an important consideration. A final area of valid concern is the financial strength of a merged PPG and Akzo Nobel, as it is mentioned that if the merger were to succeed, it could result in a high amount of leverage for PPG which could make it challenging to have the financial resources needed to implement restructuring and merging of the two companies’ operations and cultures.
Ultimately, it will be interesting to see what progresses between PPG and Akzo Nobel. Akzo Nobel does have a variety of defensive options to help hold out against takeovers, including the right to make binding nominations to the management board and/or amend the companies article of association. Both companies have interesting reasons for wanting or not wanting the merger and it will be interesting to see where things go from here.