In today’s competitive market, companies are seeking opportunities to provide new products and services in order to remain relevant and still make substantial profit margins. There are different alternatives available to a company through which it can provide these services and goods to the market.
The Eastman Chemical Company
The Eastman Chemical Company is a global company that specializes in the production of additives, speciality chemicals and fibres found in products that are used every day by everyone. In 2012, the company desired to extend its territorial reach and offer a more diversified and sustainable product portfolio. There were several options available to achieve both objectives such as opening up more outlets in the targeted areas or start production of the new products.
The company chose rather to acquire a global company that supplied a broader range of products and would help the management to expand into regions such as the Asia Pacific. The company acquisition will assist greatly in the Eastman Chemical Company growth strategy to extend its global presence especially in the emerging markets.
With the acquisition of the Solutia Company, there was restructuring in the company which resulted in five reporting segments. There will be the additives and functional products section which consists of the rubber materials from Solutia and Eastman Speciality Polymers and solvent product lines (Thomson Reuters (2012). The adhesives and plasticizers consists of Eastman’s adhesive product lines while the advanced materials section consists of Solutia’s performance films and advanced interlayers products and Eastman speciality products.
The Fibres segment will be in charge of the acetyl tow, yarn and other product lines. Finally the speciality fluids and intermediate section will be responsible for the speciality
fluids from Solutia and oxo and acetyl intermediates of Eastman Chemical Company. There have been changes in the management and several employees in the Solutia Company have been laid off though the number has been kept at a minimum.
The Eastman Chemical Company acquired the Solutia Company in May 2012. The Solutia stockholders entered into an agreement with the Eastman Chemical Company where they would receive USD 22 and 0.12 shares in the Eastman Company for every share the Solutia common stock. Analysing the closing prices of the stock in the Eastman Company, in January, 2012, each shareholder in the Solutia Company will receive USD 27.65 per share(Solutia, 2011). The transaction translates into a 42% premium and the total transaction will cost the acquirer USD 4.8Billion which is inclusive of the Solutia Company debt obligations.
The acquirer company therefore financed the acquisition through cash and equity. It paid 2.7Billion in cash and issued 14.7 million shares. The cash was obtained partly from its cash accounts and debt. The Barclays Capital and Citi, the company’s financial advisors are the ones who financed the purchase(Weiderman, 2012). There are certain key fundamental characteristics that the two companies share that made the Board of Directors in the acquirer company to support the decision. They both have similar technologies and business capabilities and a polymer science backbone. They have similar operating facilities and the staffs have a culture of high performance. They are also great opportunities for growth considering the overlap in the key-end markets.
The acquirer company has identified key cost annual synergies that will be accrued by the merger. There will be reduced corporate and raw material costs and increased efficiencies
in manufacturing and supply chain processes. There will also be significant tax benefits gained considering that the Solutia Company have a history of net operating losses(Gupta-verlag, 2011). In the first quarter of the year, 2012, the Solutia Company earned a profit of $54 Million. The net sales for the period were $498Million. In the first quarter of the year, the Eastman Chemical Company earned $158 Million on net sales of $1.82 Billion.
There are several advantages and disadvantages of acquisitions. In business, there are financial alternatives that a company considers in order to reduce the risks or cut costs. In business acquisition, there are usually costs savings due to the economies of scale and expansion into new markets without direct investments. In acquisitions, the acquirer gets to gain higher speed in providing diversified products into new markets. There is decreased competition as the acquirer gains more market share.
The acquirer gets technological and human resources that were not available in house. Higher sales margin are achievable due to the wider product range and wider customer base. However, there are certain risks in acquisition that need to be considered. One of the challenges may be integration of the two organization’s culture and values. There are employees who may resist the merger affecting their productivity. The employees are also concerned about their future career growth and how the merger affects their responsibilities and span of control. Will they be useful or critical in the new company structure or will they be redundant.
There needs to be integration of the processes and structures in the new company otherwise there will be bottlenecks in the processes and a lot of frustrations. There are
instances of job loss during acquisitions. The acquirer may have paid too high a price for the acquisition and the benefits are not realized as fully as was expected. This may come as a great disappointment to the stakeholders who were expecting the profits to be really high. Acquisition failure also occurs where the overall strategy and direction of the new company was not defined.
The cost synergies may be known but the implementation of the strategy requires the management to clearly clarify the strategy and the action plans to make it come to pass. The financial alternative for the Eastman Company was to open outlets in the targeted countries. The risks may be lower compared to acquisition however the costs would have been high. It would have meant recruiting staff and obtaining premises to conduct business. It would have to hire a team to get to know the legal and regulatory requirements in the country. The Solutia and other companies in the same industry would be competitors and the Eastman Chemical Company would be trying to get customers from the market.
There is also the cost of product development and research that would have been incurred by the company as they launched new products in the target area. There are the costs of advertising and promotion to let the customers know of their presence and why they should consider investing in the company’s products. There are also initial or preliminary costs for new organizations setting up in foreign countries such as licensing fees. These costs push companies to acquire or merge with companies that have already set up systems and structures in the target markets.
Gupta-verlag (2011).Eastman to acquire Solutia. Retrieved from:
http://www.gupta-verlag.com/general/news/industry/11117/eastman-to-acquire-solutia/pdf
Solutia (2011).Eastman to Acquire Solutia; Raises Outlook for 2013 EPS to Greater Than
$6.Relieved from:
http://investors.solutia.com/Cache/1001163381.PDF?D=&O=PDF&IID=4281075&Y=&T=&FID=1001163381
Thomson Reuters (2012). Eastman Completes Acquisition of Solutia
Retrieved from: http://finance.yahoo.com/news/eastman-completes-acquisition-solutia-143903963.html
Weiderman, G. (2012). Eastman closes $4.8 billion acquisition of Solutia. Retrieved from:
http://www.bizjournals.com/stlouis/news/2012/07/02/eastman-closes-48-billion.html?ana=yfcpc
