The Clariant-Huntsman Merger: Is Size the Only Thing That Matters?

On May 22, Switzerland-based Clariant and U.S.-based Huntsman announced that the two firms would merge and create a new combined company, the unimaginatively-named HuntsmanClariant. With little business overlap and few technical synergies between the two firms, the prime motivation of the merger is simply to create a larger firm. The combined firm would have had $13.2 billion in revenue in 2016 (excluding Huntsman’s Pigments and Additives business, which is to be spun out as Venator Materials this summer), making it the second largest specialty chemical company in the world behind Evonik at $15.2 billion and just ahead of Covestro also at $13.2 billion. Clariant and Huntsman believe that within the next 10 years, the specialty chemical industry will be dominated by six to eight global companies, each with sales in the $14 billion to $17 billion range. The two firms believe this merger will put them in a strong position to be one of the survivors.

As shown in Figure 1, HuntsmanClariant will consist of eight specialty chemical businesses, four from each company. Over time, the firm may off-load its two lowest-margin businesses, Clariant’s Plastics and Coatings and Huntsman’s Textile Effects. Huntsman had previously attempted to sell Textile Effects as part of its Venator spin-out, and Clariant has floated the idea of selling Plastics and Coating in 2015, and continues to do so.

Along with gaining size, HuntsmanClariant also expects to increase margin by achieving $400 million in cost savings, with $150 million coming from increased procurement leverage and $250 million coming from combining corporate functions. An additional $25 million in annual tax savings is expected from having the combined company headquartered in Switzerland.

With all the recent M&A activity among large chemicals companies, HuntsmanClariant’s belief that scale is needed to survive is reasonable. And, although uninspiring, improving margin by squeezing out scale-related savings is also reasonable. But both of these justifications completely ignore technical innovation, something that can be existentially important to specialty chemical and materials firms.

HuntsmanClariant may have some difficulty keeping up with its peers in technical innovation. Its eight businesses have reasonable scale and some technology differentiation, but also have large technically proficient competitors including the likes of Akzo Nobel, Arkema, BASF, and Covestro. As shown in Figure 2, Huntsman, Clariant, and the combined HuntsmanClariant all significantly trail similarly sized specialty chemical peers in patent production. If HuntsmanClariant wants to be one of the specialty chemical firms that survives into the 2030s, it will need to be technically innovative and not just rely on scale. A good start would be to develop a robust patent portfolio that encompasses both incremental and disruptive innovation.

By: Matthew Wagner