ILMA Compoundings September 2017 - 16

INDUSTRY RUNDOWN

Market Report
What's Driving Mergers and Acquisitions
in Lubricants?
By Ben Scharff
Like many specialty chemicals industries, lubricants
manufacturing and distribution is characterized by a
handful of large, global companies that account for
the lion's share of the market, followed by a substantial
number of smaller niche players that serve specialized
markets or geographies. Our experience as investment
bankers working almost exclusively in the chemical
markets is that such industry structures represent fertile
ground for mergers and acquisitions (M&A). It's not
just larger companies buying up smaller ones - smaller
companies are joining together in order to remain competitive in today's market.
In the past few years, we have seen a fair number of acquisitions in lubricants, and the pace of M&A in the industry
seems to have picked up over the last two years. By our informal count, for 2017, 13 deals have been announced yearto-date through May, which is on pace to equal or exceed the
28 transactions in 2016. By contrast, we counted 16 deals in
2015. The reasons for the increased activity, we believe, have
to do with economies of scale and pressures to maintain growing sales and profits. Increased scale gives lubricant formulators more leverage throughout the value chain - dealing with
base oil suppliers, additive manufacturers and their channels
to market. Simply put, in an increasingly challenging market
environment, larger companies are able to achieve sourcing,
operating and sales efficiencies that give them significant
advantages over smaller rivals.
Lubricant manufacturers and distributors face pressures
from both the supply and the demand sides. From the supply
side, it's hardly a secret that volatility in the prices of crude
oil and feedstocks is a reality that might be here to stay. On
the demand side, continuing weakness in manufacturing and
capital spending, not just in the U.S. but also globally, means
that suppliers of lubricants and process fluids face an uphill
struggle if they want to grow their business.
Having the advantages of large scale can help mitigate the
uncertainties on both sides of the supply/demand equation.

SEPTEMBER 2017

| COMPOUNDINGS | ILMA.ORG

Larger firms can more easily absorb the shocks of changes in
the price of crude oil. When prices rise, a large company has
a greater ability to pass the increased cost of production to
customers, and if it is a leader in the market, it often is the
first to raise prices, in effect setting a price level that smaller
competitors follow. Scale also has the advantage of spreading
fixed costs over a larger base. For example, an argument can
be made that the cost of complying with increasingly burdensome safety and environmental regulations falls disproportionately on smaller companies. Larger firms can more
easily absorb these costs and might even have dedicated
compliance departments to handle regulatory matters. Rarely will a small or midsize manufacturer have these resources,
and the costs of compliance might make an outsized dent in
its bottom line.
Even though the technology for lubricants keeps evolving,
manufacturers and distributors operate in mature markets,
most of which are growing slowly and face uncertain futures.
But this doesn't mean they escape the same pressure to grow
that affects all companies in a market economy. Because of this,
producers and distributors are increasing acquisitions as an
instant way to achieve growth and realize economies of scale.
Quaker Chemical, a market leader in supplying specialty lubricants and process fluids to the steel, metalworking
and coatings industries, is a notable example. Quaker has
a history of successful acquisitions, and management and
the board consider acquisitions to be an integral part of
the company's growth strategy. Most recently, Quaker
announced that it will acquire Houghton International for
about $1.4 billion, with the deal expected to close in the
fourth quarter of 2017. The acquisition will double Quaker's
sales and earnings, with the combined companies generating
about $1.5 billion in revenue and $227 million in adjusted
earnings before interest, taxes, depreciation and amortization (EBITDA), based on 2016 data.
The companies are similar in many respects, with complementary products and services, overlapping geographies
and compatible corporate cultures. Because of this strong
strategic fit and Quaker's strong balance sheet, Quaker

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ILMA Compoundings September 2017

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