(Yicai) Sept.1 -- Global New Material International Holdings' acquisition of Merck Group's Surface Solutions business was a meticulously planned move that took the company about a decade to complete, according to the chairman of the Chinese synthetic mica producer.

"Strictly speaking, our acquisition of Merck's surface solution business was a decade in the making," Su Ertian, who is also the chief executive officer of GNMI, told Yicai in an exclusive interview. It was not a spur-of-the-moment decision but a carefully orchestrated plan, he added.

On July 31, GNMI finalized its EUR665 million (USD759.7 million) acquisition of German science and technology giant Merck's surface solution business, currently known as Susonity, marking the largest cross-border deal in China's pearlescent materials sector. Su was then appointed CEO of Susonity.

Susonity is the market leader in premium effect pigments and active ingredients for automotive, cosmetic, and industrial applications. Pearlescent pigments, a type of effect pigments, are used to produce shimmering effects in cosmetics, paints, plastics, and textiles, and are in growing demand.

The acquisition gave GNMI three new production hubs -- in Gernsheim in Germany, Onahama in Japan, and Savannah in the United States -- complementing its existing operations in China and South Korea.

Susonity generated EUR402 million (USD468.9 million) in revenue last year. GNMI, headquartered in China's southern Guangxi Zhuang Autonomous Region, reported revenue of CNY1.6 billion (USD231.3 million) in the same period.

Moreover, GNMI committed to retaining Susonity's around 1,100 staffers worldwide, including over 600 in Germany, and continuing operations in Germany through 2032, addressing local concerns about foreign takeovers of German industrial assets.

Addressing Challenges to Win Trust

A decade ago, when GNMI solidified its position in the Chinese market, Su and his team identified Merck as an 'unreachable peak.' "Our goal was to become the industry leader, and when we looked at the industry leader, we saw Merck, which was far ahead of the others," Su explained.

The real challenge unfolded at the negotiation table. The sale attracted bids from dozens of global institutions, including private equity giants. Moreover, the sale happened during the Covid-19 pandemic, with geopolitical tensions adding layers of complexity to already intricate talks.

"At the time, not a single investment bank was willing to work with us," Su noted.

Faced with these hurdles, GNMI adopted a differentiated strategy. Through third-party intermediaries, it conveyed a key message that, unlike financial investors, GNMI was an industrial giant capable of addressing Merck's most pressing pain points.

One of the main pain points was the environmental, social, and governance pressure. Merck had faced public scrutiny over its reliance on natural mica from India, which was criticized for links to child labor. For this, GNMI held a unique advantage, as it owns the world's only core patent for synthetic mica, offering a sustainable alternative.

"Sell to us, and you'll be free of these concerns," Su told Merck. “We will treat your employees and technical staff as our most valuable assets and use our raw materials to enable sustainability.”

Moreover, GNMI had a solid financial situation. Last year, its revenue grew 55 percent to CNY1.6 billion from the previous year, with a gross margin of 53 percent.

GNMI's acquisition of a South Korean pearlescent materials company in 2023 generated KRW30.7 billion (USD22.1 million) in revenue and a net profit of KRW5.7 billion (USD4.1 million) in the first half of this year.

GNMI's first-half revenue rose 18 percent to CNY912 million (USD127.9 million), while its net profit shrank 42 percent to CNY62.2 million (USD8.7 million) due to financing costs. It maintained a robust cash reserve of CNY3.4 billion (USD476.9 million).

"Beyond our accumulated profits, we brought in strategic investors and issued convertible bonds, laying a solid foundation for our global expansion," Su said.

After 11 trips to Frankfurt in a year for grueling negotiations, GNMI and Merck came to agreement on the final price of EUR665 million, closing the deal last month, Su explained.

Retaining Susonity's Whole Staff

When asked about employee retention, Su said it was not a passive commitment. "During negotiations, we insisted that all employees stay with us -- not a single one could be left behind," he noted.

This seemingly "irrational" demand was rooted in deep business logic. "In the pearlescent pigment industry, training a junior operator takes five to 10 years," Su explained. “Losing the existing employees would be a significant loss for us.”

Susonity's most valuable assets are its brand, channels, employees, and highly-skilled technical, research and development, and management teams, according to Su.

Su also promoted key Merck executives to global roles at GNMI to show its commitment. "Susonity's former CEO is now GNMI's global supply chain head, and its ex-chief operating officer and product manager have become one of our global operations leaders," Su noted.

Synergistic Impact

GNMI sees immense potential in the integration of Susonity, and Su expressed confidence that the merger could "unlock tenfold or even hundredfold potential." He believes the opportunities are "virtually limitless," given Susonity's industry standing.

The strategic value of Susonity's acquisition lies in three levels of synergy -- technology, markets, and supply chains -- Su explained.

Technologically speaking, GNMI's synthetic mica patent complements Merck's global operational expertise and knowledge of active cosmetic ingredients. "With our synthetic mica, we'll gradually replace reliance on natural mica for both Merck and ourselves," Su said.

On the market front, the acquisition propels GNMI into the high-end segment. "Our pearlescent pigments primarily serve industrial applications, such as coatings, plastics, and inks, with sales focused in the Asia-Pacific region, especially China," he noted.

"We're expanding our patent portfolio significantly," Su pointed out, adding that Susonity brings over 30 years of global influence in the automotive and cosmetic pearlescent pigment markets.

Operationally, the acquisition optimizes GNMI's global footprint. "Europe will serve as our technical support hub, leveraging its advanced research, development, and manufacturing capabilities, while Asia-Pacific will act as our efficiency hub, capitalizing on cost-effectiveness and production scale," Su explained.

In terms of innovation, Susonity's smart coating technology enables self-healing, thermochromic, and reflective functions for automotive and construction materials, with potential applications in smart cities and low-carbon transportation.

Moreover, Susonity uses artificial intelligence technologies to analyze particle characteristics and synthetic mica's optical effects to shorten R&D cycles and leverages big data to predict market preferences for functional pigments, thus accelerating commercialization.

Merck's pearlescent pigment products hold a 22 percent global market share, primarily in automotive and cosmetic applications, according to Frost & Sullivan. In 2020, GNMI had an 11 percent share of the Chinese market and a 3 percent share of the global market.

GNMI will expand its share in the global surface treatment market to 12.7 percent by 2028 from 3.2 percent last year, according to a prediction by Yang Yongqiang, a partner at Toipo Capital. This would position GNMI as the world's third-largest supplier of surface treatment products after Merck at 18.5 percent and BASF at 15.2 percent.

Chinese Firms Enter 'Outbound 3.0' Era

Drawing on the experience from Susonity's acquisition, Su Ertain believes Chinese enterprises have entered what he calls the 'Outbound 3.0' phase. Reflecting on this milestone, Su offered unique insights into the evolution of Chinese companies' global expansion.

"The first version of going global was resource-driven," he said. "Think of Yiwu's small commodities, such as Christmas gifts and trinkets, that were exported worldwide for simple foreign exchange gains.

"The second phase focused on efficiency, with companies moving factories overseas to shorten supply chains," he added. "However, these operations often remained isolated from local ecosystems, as firms 'went out' without truly ‘going in.’

"The third phase, Outbound 3.0, goes beyond these earlier models," Su explained. “It emphasizes the restructuring and enhancement of organizational capabilities, a deep understanding of global rules, and the ability to tackle complex challenges.”

Acquisitions must align with clear strategic goals. "Mergers and acquisitions aren't about purposeless expansion or chasing scale," Su pointed out. “They're about accelerating brand-building and technological advancements in high-end markets.”

He highlighted the core value of GNMI's recent overseas acquisition. “By integrating world-leading technologies, markets, and talent, GNMI has fast-tracked its globalization and strengthened its competitiveness in the global new materials technology sector.”

Looking ahead, Su is confident that Susonity's acquisition will serve as a landmark case.

"When people look back on this deal, I believe GNMI will stand as a shining example of how Chinese enterprises can leverage global M&As to achieve transformation and take center stage on the world stage," he said.

“This will inspire more Chinese firms to boldly pursue overseas acquisitions and showcase China's strength in global markets.”

Editor: Futura Costaglione