Systems houses: What do the big boys think?

This is the first of a two-part series on systems houses. Dow Polyurethanes made an eye-catching announcement at UTECH Europe about its desire to buy into the sector again. How do other large companies see independent systems houses? Simon Robinson reports.

Maastricht, Netherlands – It is unusual for a senior executive at a polyurethane company to announce to the world that he is in the market for a particular class of companies in the industry.

It is a little like a soccer team manager announcing his interest in ‘attacking centre forwards with goal-scoring ability and an attractive style of play’. Suddenly, the agents start circling, and the price of centre forwards leaps.

Despite this, John Penrice, global marketing director at Dow Polyurethanes said: ‘We have gone through a strategic review. We are actively looking for M&A.’

He added that his company wants to pick up the pace again. ‘It’s a good strategy, we took a rain check on it,’ he explained. ‘We would like to grow our systems business at close to double digit; 8-10% is our projected rate.’ Penrice, like the other interviewees in this article, were speaking on the fringes of UTECH Europe 2018.

Buy into a new market

Other companies contacted on the subject after the show are more circumspect. BASF declined to respond to a question about the subject, and a source at Covestro said its systems house portfolio is not on the market, adding, ‘We take a pragmatic approach to business performance when deciding on the future of our individual systems houses.’

However, Steen Hansen, VP Europe, Africa, India and Middle East at Huntsman was more forthright. He claimed that Huntsman is interested in companies that are one step forward in the value chain. ‘[This includes companies] that have technology, bands, prospecting in automotive, machinery and construction,’ Hansen said. ‘We are looking at MDI users, but there is tremendous specialisation and fragmentation into what they do. That’s a big “middle class” of companies in Europe that offer opportunities to scale and globalise, but still retain their agility as an SME.’

His colleague, Huntsman’s president for polyurethanes Tony Hankins, added: ‘A real, particular interest for us is adhesives, coatings, elastomers, particularly elastomers, we’re very focused on that right now. That is one of highest-growing, most deeply downstream, innovative sectors we could operate in. We are looking at potential acquisitions in that area as we speak. Acquisitions give us channels to market as well as speed.’

It’s better to build

Hankins explained that Huntsman has four downstream investments. [We have] the Dubai systems house, and we’ve got one in Vietnam that is under construction in Ho Chi Minh City. [There is also one in] Tianjin in North China, and we’re going to significantly expand our systems house in Taiwan,’ he said. ‘It’s always better to build than to buy. There’s more value if you can build your way into the business. But we’ll do both. When we need to move quickly we will acquire.’

Dow’s Penrice said: ‘We are interested in acquiring technology positions in the CASE area and composites and in rigids. Acquisitions give us channels to market as well as speed. We are interested in acquiring technology positions in the CASE area and composites and in rigids.’

He cited several other targets. ‘Technical insulation for pipes… consumer areas too in the comfort sector,’ he said. ‘Within CASE, protective coatings for truck floors, and adhesives.’

Penrice sees systems as a way of moving up closer to adhesives customer in the supply chain. ‘Dow is a large company in the adhesive sector, but as a raw material supplier,’ he explained. ‘Dow is interested in industrial and construction adhesives, elastomers, small customers with high technology and higher than usual P/E margins.’

Another potential growth area is footwear. ‘That could be interesting as it moves back out of Asia to Turkey and north Africa, and it’s going a bit further up market,’ he said.

A range of sectors

Composites is the final area of interest for Dow. ‘It’s fairly small, compared to unsaturated polyester resins, but processability and performance are there,’ Penrice claimed. ‘Polyurethanes sit in the gap where it is more processable than epoxy and higher performance than polyester. We’re seeing much higher growth rates in composites in automotive and industrial applications.’

He added that there are small companies that lack scale but have global ambition. ‘We can give them global growth and expansion,’ he said. ‘These are areas where the large companies feel that they can give niche systems houses a boost: access to diisocyanates, which have been hard to source for many months and access to big company competences. These include marketing, distribution and, potentially, capital.

The company is also very flexible on the type of M&A, Penrice said. ‘They could turn into joint ventures or marketing alliances,’ he said. ‘We are not dogmatic. We want the entrepreneur to have skin in the game and to want to continue, but we can help scale, and they can grow much faster with us, or they can cash out.’

Huntsman’s Hansen explained that, to start with, there is always a relationship between Huntsman and the owner or general manager. ‘That means there is a continuum when they are acquired. The owner will typically stay with the business at least for a transition period of several years and many are still with us,’ he said. ‘We allow them to retain their entrepreneurial DNA. We don’t get in the way – we support with supply, capital and we open our technology and innovation, and keeping that balance.’

He said that, as the owners are driven entrepreneurs, he has not had a problem setting stretch goals. ‘It’s more about following and helping with globalisation because they don’t have a network outside, he said. ‘Take Tecnoelastomeri. We have taken the brand to Asia, to America. [When we bought] EMA  in 2012, they were number five in Turkey. Now they are one or two, and they have worked their way up. That is the model we are using in Dubai. Expanding is the managing team’s responsibility. They are extremely driven, very hungry for business. We give them the leverage.’