AZ in 'chip' shop window

It has taken decades for AZ to build up that level of skill and expertise, but it's not just high barriers to entry that make AZ special. With organic expansion increasingly difficult to come by, companies with bank accounts swollen by cost-cutting and disposals have little choice but to buy growth.

"European companies need to make acquisitions," says investment bank Societe Generale. "They face the fundamental challenge of trying to find additional growth over the next few years to counterbalance weak economic prospects in Europe, which remains core to their operations." And, says the French broker, AZ is the most likely bid target in Europe's chemicals sector "both for a western company or an emerging market player".

It's not hard to see why. Household budgets may be getting squeezed in Europe, but emerging markets are thriving. Asia accounts for 80 per cent of AZ's revenue - $315m (£203m) in the first six months of 2011. And it's where growth is strongest - up 27 per cent during the period.

Trading through the third quarter to September was reassuring. Group revenue rose 15 per cent to $202m, driven by the core integrated circuit, or micro-chip, division where sales jumped 20 per cent to $140m. Underlying profit margins matched the first half's 33 per cent and cash conversion was strong.

Still, there are potential stumbling blocks. AZ admits that demand for micro-chips is "softening" and it's "challenging" in flat panel displays. IT researcher Gartner has halved its forecasts for global semiconductor revenue growth in 2012 to just 2.2 per cent. A short order book is an issue, too - as little as one month for the flat panel displays business and two to three months for micro-chip ingredients.

Yes, AZ is clearly cyclical, but long-term prospects of electronic materials are attractive. What's more, AZ historically beats the market; no surprise given the amount it spends on research and development - an above average 6.4 per cent of revenue in the first half.

Much of the research - 59 per cent - is carried out in Asia, close to customers such as Samsung, Toshiba and LG. That makes relationships, built on quality and reliability over a number of years, easier to manage.

With demand for solid-state drives, smartphones and tablets buoyant, and Moore's law of continually shrinking computer chips, AZ will keep outperforming. Indeed, broker UBS believes business remained "robust" in the fourth quarter - expect sales of $199m - and it's possible that the semiconductor market will bottom out early this year.

Market share, too, is important to would-be buyers, and AZ is hard to beat. Products where it is either number one or two generate 82 per cent of revenue.

Pitch a bid at the right price and shareholders will come round. That AZ has willing private equity sellers goes in its favour - both Carlyle and Vestar sold 20m shares to institutional investors at 237p last December - they still own 5.8 per cent each. Carlyle paid $460m for AZ in 2004 and Vestar took its stake three years later, prior to flotation in November 2010 at 240p.

It's pointless speculating why a buyer didn't emerge then. More important, deals are being done now. CVC Capital Partners has just sold the Belgian chemicals business, Taminco, to Apollo Global Management for €1.1bn (£923m).

So who's the most likely predator? Air Liquide and Akzo Nobel could be on the prowl, says SocGen. Dow Chemical, meanwhile, likes throwing money at its electronic materials business and already has a distribution deal with AZ. And, says Mike Clements, director of PricewaterhouseCoopers, a return to valuations at longer-term norms could encourage more private-equity buyers, most waiting for more certainty in the global economy.