FEW: Takeovers concern producers

By Kris Bevill | June 02, 2008
Web exclusive posted June 18, 2008 at 6:32 p.m. CST

Not only do ethanol producers need to worry about $8 bushels of corn, now they need to be concerned about hostile takeovers. And the two worry lines are closely linked.

Kirk Martin, managing partner at Ascendant Partners Inc., said it's natural for a rapid buildup of an industry followed by a crashing of margins to lead to an increased number of mergers and acquisitions. He said that's exactly what is happening in the ethanol industry today. According to Martin, there were three reported mergers and acquisitions between 2004 and 2006 at a total cost of $220 million. There have been 12 mergers and acquisitions in the last year and half at a cost of over $2 billion - and Martin expects the trend to continue increasing.

Martin spoke about business considerations during a breakout session at the International Fuel and Ethanol Workshop & Expo in Nashville on June 18.

Companies interested in merging with or acquiring other companies are driven by four factors.

The first is the desire to increase the company's scale and diversity. For instance, an ethanol company looking to acquire a plant more closely located to the feedstock than their current facility would fall into this category.

The second reason to merge or acquire a company is a way for a business to enter the market. An increasing number of international companies are looking to enter the U.S. biofuels market, and acquiring an already built and operating company allows them a way to do so. The third reason is a strategic reason - vertical integration. And finally, the desire to gain more technology is a driving force for a company to merge or seek to acquire another company. Martin expects this factor to increase substantially as the race to produce cellulosic ethanol continues.

It's a proven fact that most mergers fail to achieve their anticipated value. In fact, up to 80 percent of mergers fail. However, Martin said that as margins continue to drop in the ethanol industry the "bottom feeders" will continue to move in and acquire the weaker companies, either in a friendly merger or in a hostile take-over. "The falling tide exposes the less efficient," Martin said. And, he added, there are plenty of businesses out there waiting to swoop in and take advantage of the situation.