Advanced Materials M&A: Strong Demand for Better Mousetraps

Advancements in materials and manufacturing science continue to drive growth and investment opportunities across a wide variety of industry verticals. While exciting advances are often topics of media coverage, the real opportunity lies with those companies that are able to convert an often less than headline grabbing advancement into something that can be commercially produced and sold. In today’s economic environment, that generally means providing something that clearly works better, faster, cheaper than the existing alternative.

It also means these opportunities can be difficult to spot as they are often incremental improvements on current processes, not immediately obvious to casual observers. The appeal of these business models, and subsequently the opportunity to invest in them, is that they generally provide the end-user with increased efficiencies and/or higher cost-performance ratios without dramatic changes to their way of doing business. This enables end-users to lower their costs or offer superior products at the same price points. Only a small minority attempt to create new markets based on previously unavailable technologies.

Another common theme among successful materials-based businesses is a rapid valuation ramp as they gain market acceptance and prove commercial viability. This generally is preceded by a sometimes protracted proof of concept and validation period marked by lower valuations reflecting the increased risk of commercialization.

There are a number of common themes among those advanced materials companies that have successfully attracted investment dollars:

• Well-established product market – to be penetrated through reduced cost and/or improved performance;
• Proven reliability / ability to meet industry standards – penetrating established markets not only requires performance validation of the product itself but often regulatory and quality (ISO) accreditation as well;
• Direct path to high volume production – savvy investors are aware of the dangers of assuming bench-scale quantities can be quickly and easily scaled up to production volumes;
• Clear end market value proposition – for any potential buyer to assume switching costs and the associated risks there needs to be a simple, credible and quantifiable value to the end user; and
• Focused target market and commercialization plan – it is not unusual for multiple applications or markets to benefit from materials science advancements, but a focused initial approach lends credibility to an ability to penetrate wider markets later.

Understanding these issues and positioning an investment opportunity to potential buyers are critical for attracting interest and maximizing value.