Merger and acquisitions activity in the ingredients space has set in motion several important new trends. But leaders will need to read the tea leaves quickly to take advantage of the shifting reality.
The flurry has its roots in a collection of large-scale acquisitions – some in the billions of dollars – that spiked in the years between 2017 and 2020. Across the industry, some of these combinations were successful, but others did not play out as planned. As the financial realities of those wins and losses become clear, companies in the ingredients segment are shifting strategies and creating new opportunities.
We detect the rumblings of change in several corners. Investment bankers have begun to shop some of the business pieces that were previously rolled up in mergers. Newly available opportunities in flavors, emulsifiers and cosmetics illustrate this trend. We’re also hearing that top talent, secured to run sections of those merged companies, are now leaving in search of new opportunities.
The turmoil in the space is not surprising. Public ingredient companies, in particular, are under intense pressure to improve profit margins. Revenue growth has stalled because customers of flavors and ingredients have not increased (and often decreased) the volumes they buy.
Not only does pressure on profitability lead to spin-offs of non-core assets, an increased focus on costs and pricing can often lead to a decreased focus on the customer. This can present an opportunity, especially for smaller, privately held companies with less short-term profit pressure, to swoop in, woo unhappy customers and expand their market share. We are already hearing of such opportunities from some commercial leaders in the industry.
We see a few key implications that we are monitoring:
- Attractive assets will continue to come on the market. This presents opportunities both for companies with a war chest and for private equity investors, either as new acquisitions or as part of an expansion/roll up strategy in their current portfolio. In these efforts, a crucial step will be identifying the right talent to retain - not the cost cutters, but the commercially minded operators who have contributed to the asset’s success thus far.
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Talent will become available. Operators at big companies who are focused on growth and customer success might be frustrated by cost cutting and divestment strategies. Companies looking to take advantage and grow their position in the market are seeing a unique opportunity to attract formerly unavailable talent. -
Leaders must be vigilant. Current employers of this top talent must ensure they don’t lose sight of the market and their customers - and that they identify and retain their operational and commercial leaders. The current employers of this top talent must ensure that they identify and retain their operational and commercial leaders to so as not fall behind their competition in the next business cycle.
Activity in a marketplace does not have to signal danger. Instead, it can be the opening of doors and the chance to create new opportunity. Smart industry players can capitalize on the current environment, or at the very least take precautions to ensure they are not negatively impacted.
Private equity funds, for example, should engage the right senior advisors, preferably former leaders at the multinational companies that are currently going through transitions to better understand M&A activity and its fall out and identify promising assets to acquire. In addition, they should jump on the opportunity to attract formerly unavailable commercial talent for their portfolio companies.
Meanwhile, company CEOs and commercial leaders must not lose sight of their customers. What’s more, they should commit extra effort to retaining their top talent. There may even be opportunity to bring on top talent from competitors. In times of transformation, companies will need to emphasize talent development – even amid cost-cutting – so that talent within the organization can evolve and adapt to meet new demands.
Lastly, the carving out or acquisition of a piece of a corporation from the parent can be complex and is prone to execution risk. This is true for the former parent company, the newly carved out entity and the acquirer. A strong focus on culture early on and throughout the process is key to manage the transition successfully.
No matter what part of the ingredients ecosystem you occupy, the changes underway will most certainly have impact on your business. The key is to remain aware of the shifting trends and the opportunities they present.
