That opinion was shared by Fuchs Petrolub AGs Apu Gosalia during an October keynote address at the annual congress of the Independent Union of the European Lubricants Industry in Vienna. Gosalia, who is head of global strategic marketing for Mannheim, Germany-based Fuchs, also said that future M&A activity will probably involve more small firms than in the past.

I think the likelihood that there may be a revival of M&A activity is strong, he said.

M&A Makes a Comeback

Gosalia said there is every indication that the pace of lube mergers and acquisitions fell off after the recession began in 2008. Fuchs counted 18 in 2007, including the purchase of Italys FL Selenia – then one of the biggest lube marketers in Europe – by Malaysian oil company Petronas. Also that year, AEA Investors bought industrial lube supplier Houghton International; Croda sold its refrigeration lubricant business to Lubrizol; and Fuchs itself picked up two operations – the grease business of Brazilian blender Tribotecnia and the forging lubes of another Brazilian firm, Igucima.

By Fuchs count, the number of deals fell to 13 in 2008, led by Houghtons acquisition of D.A. Stuart and the purchase of Crescent Oil by Miller Industrial Fluids, to 10 deals in 2009, including Gazproms purchase of a Chevron blending plant in Bari, Italy. In 2010, the number rose again to 13.

Gosalia explained that the list of lubes industry deals compiled by his Market Research Department stems from whatever it sees reported. Nevertheless, he expressed confidence in the numbers at least reflect actual trends. The pattern closely mirrors M&A activity both for all industry and for the industrial and chemicals sector, of which the lubricants industry is part.

The slowdown in mergers and acquisitions also follows trends observed in past recessions. Although downturns certainly weaken some companies and thereby ripen them as acquisition targets, economic analysts say recessions also tighten credit, making it harder to put together deals. In addition, fewer companies are willing to take the risk of increased debt at such times.

The real question, Gosalia said, is whether M&A activity in the lubes industry will rise again now that the recession seems to have passed. There are arguments on both sides, he said.

Some say a new wave of M&A activity in the lubes industry is on the way and that if it hits, it will include much larger deals than seen in the past because companies recovering from the recession have a greater availability of investment capital, he said. Moreover, many of the deals put on hold by the recession will move forward as the economy improves.

Others, he noted, contend that the number of companies in the industry has shrunk and that there simply are not enough potential targets to fuel a rush of acquisitions.

Targeting Smaller Companies

Gosalia believes the number of deals will rise again, but he suggested a significant difference from heavy activity a few years ago. Many of those deals involved large companies, but Gosalia thinks small companies could be a focal point this time around.

The recession has been particularly harsh for small niche suppliers of metalworking fluids and specialty products, all looking for a white knight, he said. They may therefore be attractive takeover targets for better-positioned rivals. Besides, the market for special lubricants in a way seems to be penalized because monetary resources are allocated to financing M&A rather than to the area of research and development, which is necessary to keep alive the niche [supplier].

New chemical regulations such as REACH and the Global Harmonized System of Classifying and Labeling of Chemicals (GHS) put further pressure on small companies because they have less resources to bear the costs of such mandates.

There may also be a geographical shift in a rebound of mergers and acquisitions. In the past, the focal point for such activity was in Western developed countries. As Gosalia noted, financial advisor KPMG predicts an increase of such activity in Asia, Russia and other members of the Commonwealth of Independent States.

The lubricants industry has undergone a large degree of consolidation in recent years, according to Fuchs data. The Mannheim, Germany-based manufacturer estimates that there were 1,700 lube manufacturers in the mid-1990s, including 1,500 independents. The number decreased to less than 1,400 (1,200 independents) by 2000 and then plummeted to slightly more than 700 (approximately 600 independents) by 2005.

Recovery Begins

The recession had a painful but uneven impact on the lubricant industry, Gosalia said. Based on Fuchs estimates, worldwide demand was 32.2 million metric tons in 2009, down from 36 million tons the previous year. The Asia-Pacific region had the smallest setback, as its demand fell just 4 percent during 2009, Gosalia said. Europe suffered the most, experiencing a drop of 19 percent. North American demand decreased 15 percent.

As a result, Asia-Pacific accounted for approximately 40 percent of global demand in 2009, compared to 27 percent for the Americas, 21 percent for Europe and 6 percent each for the Middle East and Africa, Gosalia said.

The industry began rebounding from the recession in 2010, although the pace of recovery varied from country to country. Gosalia estimated that worldwide lubricant consumption would rise to around 35 million tons in 2010. That would represent an increase of 7 percent from 2009 but would still leave the industry around 4 percent below its 2008 level.

Germany, France, Italy, Spain, the United States and Japan all suffered roughly similar setbacks from the recession, as Fuchs estimates showed lube demand in each country dropping between 12 percent and 21 percent. In the first three quarters of 2010, though, U.S. demand rose 12 percent from the same period of 2009, suggesting the country would finish 2010 down just 5 percent from 2008. Japan looked slightly worse off, as an 11 percent improvement over the first nine months of 2010 had the country headed toward finishing the year 7 percent off 2008 levels.

Recovery has gone slower in Western Europe. A similar analysis suggested Germany would end 2010 with lube demand 7 percent below pre-recession levels. France, Italy and Spain looked to be off by 10 percent, 12 percent and 15 percent, respectively.