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44-49_Feature.qxd 4/6/09 5:44 PM Page 47ProfileSpecifically, Bacon and other sponsors are onlylooking for a conversation and a sign that creditors arewilling to look at each situation on an individual basis.This kind of approach may stem from the firm’sbeginnings. New York Life launched Madison CapitalFunding in March of 2001, with a mandate to financemid-market LBOs sized between $15 million and $200million. The environment for leveraged loans at thistime was marked by consolidation, such as GeneralElectric’s industry-changing deal for Heller Financial,and defection, as the bigger banks were largely fleeing.This created an opening for non-bank lenders such asMadison, Dymas Capital, an affiliate of Cerberus CapitalManagement, and CapitalSource, among others.While many deal pros contendthe current crisis is as bad as they’veever seen, the upheaval caused bythe tech implosion, followed shortlyby the September 11, 2001 terroristattacks, created nearly asmuch uncertainty in the deal marketin the 2002 frame. M&A volumeplummeted by more than44% that year, with all-cash dealsrepresenting nearly 39% of the domesticactivity. It was a bad yearfor lenders and sponsors, but likethe current crisis, 2002 was essentiallya show-me year that allowedeach side to prove themselves tothe other.Five of the six founding partners,all veterans of Bank of America,remain at Madison Capital.Only Terry Capsay, who retired,has since departed. This kind of continuity helps provideperspective, which has kept Madison level-headedas cycles change.Early on, Williams says, Madison was able to benefitfrom the initial dislocation in the leveraged loan arena.“When the credit crisis first hit, our pipeline reallyexploded in terms of opportunities,” Williamsdescribes, noting that in mid-2008, sellers were eagerto accept lower valuations, and buyers, in turn, weren’tseeking such high leverage multiples.However, when the market took its knockout blowin September, sparked by the bankruptcy of LehmanBrothers, things changed quickly, as sellers, buyers andlenders all took a step back to reconnoiter.“There are so few deals being done right now; anythinggetting closed in today’s market is of extremelyLinsalata’s Bacon says relationships aretougher to maintain in hard times.high credit quality,” Williams says.His definition of quality is characterized by companieswith stable earnings that reside in recession-resistantindustries. Sound end-markets and a diversecustomer base are also required today.For companies that might be border-line situations,Williams notes that relationships do count. If asponsor has a track record with Madison and has provento be a supportive owner, it can make a difference inwhether or not a deal gets funded.Bacon too notes that relationships go both ways. Intimes of stress, he describes, that it’s up to the sponsorto be vigilant owners and keep the lenders apprised ofwhat’s going on. “It’s our obligation to not chew throughtheir collateral,” he describes.Williams does acknowledgethat Madison will pursue fewerdeals in 2009 than last year. In2008, according to its website,Madison Capital notched 77tombstones, although since September,new deals have been fewand far between.At the same time, MadisonCapital has not yet followed a pathcleared by many of its peers todownsize. GE Antares, for instance,has been rumored to beplanning staff cuts, according tosister publication Investment Dealers’Digest, while familiar namessuch as American Capital Strategiesand Allied Capital have had to trimtheir respective workforces in lightof the market conditions.Williams credits New York Life’srelative health for providing Madison Capital with a cushion.It may seem like a small difference, but job securitycan ease the tension between the lender and sponsor.Even as deal flow remains slow, Williams anticipatesactivity will perk up in select sectors. “We dohave a specialized healthcare group,” he cites, notingthat activity there “has been fairly strong” compared toother areas.And when the market as a whole begins its recovery,Madison Capital should be well positioned. Sponsors,it is well known, have very long memories whenit comes to relationships.Bacon notes, “For us it’s never about price... It’sabout understanding what’s going on and keeping yourears open. If it’s the policy of a [lender] group to notunderstand specific issues then we won’t go back.”“When the creditcrisis first hit, ourpipeline reallyexploded in termsof opportunities.”February 2009 MERGERS & ACQUISITIONS 47
44-49_Feature.qxd 4/6/09 5:44 PM Page 48FeatureThe VaporsM&A in the chemicals space is at an inflection pointBy Avram DavisEveryone knows chemicals are a cyclical industry; it’s justfew could have predicted any cycle could be this volatile.In the second week of January, for instance, Lyondell-Basell went from teetering to toppled as the companyfiled for bankruptcy protection. Lyondell’s fall, roughlya year after its merger, is a microcosm of the forces at play wreakinghavoc in the chemicals space.Record energy prices, petroleum feedstock in particular, initiallydrove the $12.7 billion merger between Lyondell Chemicals and BasellAF, a deal — completed in 2007 — that was predicated on the needto build scale. Shortly thereafter, the economy started to sink, with energyprices falling soon after, leaving a $26 billion debt load, and a bloatedcompany with pricing power that no longer much mattered.The woes are shared by many in the sector. Ineos, the No. 3chemicals producer in the world and another product of rapid consolidation,was forced to negotiate covenant waivers from its banks,while industry giant BASF has suffered as well, idling 80 plants to goalong with other production cuts.M&A, while at the root of some of these issues, has also been avictim, as deals that have been in the works for months crumble amidthe volatility. Huntsman’s purchase of Hexion took a much publicizeddetour, while Dow Chemical was spurned at the eleventh hour whenthe state-owned Kuwait Petroleum Corp. pulled out of a joint venturethat would have created the world’s largest petrochemicals producer.As of press time, marketwatchers were fearful that Dow’splanned $15 billion Rohm & Haas acquisition would face a similarfate without the $9 billion in pre-tax proceeds the Kuwaiti joint venturewas supposed to provide.At the crux of the chemical industry’s struggles is the volatility inenergy prices. Of course, the economy is playing a major role as well,but it’s the rapid rise and fall of energy and commodity prices that’screating fits for companies trying to keep pace. And while energyprices were at a peak, key end markets such as housing and autoswere showing severe stress. Many companies sought to achieve purchasingpower through consolidation, which meant buying into theteeth of an M&A bubble. “They were getting crushed [by energyprices]. It’s not even arbitrage, it’s a life survival game,” Kenneth R.Yager, II, a principal at MorrisAnderson Associates says.When Hexion, a commodity chemicals company, first bid forHuntsman in 2007, the premise behind the deal was to diversify byadding more specialty chemical assets. Huntsman, it seemed, was aperfect candidate to mute its cyclical risk. And with Basell fightingfor Huntsman at the same time, the list of targets that could providesuch relief were quickly disappearing. While the deal fell apart for multiplereasons, the effort to win Huntsman’s hand reflects the urgencyat the time, while the dissolution of the deal showcases how quicklythings changed.Even as commodity and energy prices have plummeted, there isstill a motivation for M&A; namely an effort to diversify. That wasthe goal for the Ashland/Hercules deal, the $2.6 billion merger completedin November, and was also the thrust behind Dow’s proposedacquisition of Rohm and Haas, which, if completed, would bolsterthe buyer’s global specialty chemicals and advanced materials reach.What is making M&A so difficult, however, is that buyers can’t adjustto the volatility. Accordingly, deal pros have differing views as towhat the future will bring as it relates to dealmaking in the sector.Andrew Marino, a principal at The Carlyle Group, alludes to thisanxiety, saying he has “no view” of whether energy prices will rise or fall.Yager, though, speculates that if energy prices stay low, it will“cool off chemical consolidation” in the short term.There is no consensus, however, that that will be the case. RobertHenske, vice president and chemicals practice leader at consultancyCRA International, dismisses the notion that the run up in energyprices was the main driver behind the industry’s consolidation. Hesurmises, “If there were capital available, I think we would be seeinga fairly robust M&A market in the sector.”Others take the view that companies in the sector should simplyplan on the volatility. Tiff Armstrong, managing director and coheadof the energy and power group at Harris Williams & Co. cites,“Oil prices have risen so high and dropped so quickly, so commonsense tells you that those same drivers for acquisitions will be therewhen oil prices rise again.”Indeed, it would seem as if there is no right answer. Henske’s earlier pointis an important one, though, because for many chemical providers,the balance sheets will dictate activity. Dan Rogers, a partner in King& Spalding’s energy practice, notes that for those in the petrochemicalssub-sector, the easing of energy prices “hasn’t been much of a help.”But he adds, that “only companies with significant cash reserves and along-term market demand view will be in acquisition mode in 2009.”To be sure, a company’s capital position will also play a role in whichpotential targets go on the block. And many of the mergers completedVAPORS continued on page 8648 MERGERS & ACQUISITIONS February 2009
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