Business
Acquisition activity at Grace quiets down Diversified firm is achieving balance of consumer and chemical profits that it had targeted; still, more firms will be added, some let go
William J. Storck C&EN, New York
The vigorous acquisition and divestment program at W. R. Grace makes that company the most active operations shuffler in the U.S. chemical industry. Announcements of deals come out of the company's New York City headquarters with amazing regularity. In the past three years, Grace has acquired 15 new companies and has made 17 divestments—five of these divestments were parts of the old Hatco polyester division. And there were announcements of pending deals that never reached fruition, such as a bid for Felton International, a maker of flavors and fragrances, and for King's department stores. However, after all this activity at Grace, the company now has achieved much of the balance that it wants, Robert M. Coquillette, executive vice president at Grace, tells C&EN. Coquillette is closely involved with acquisitions and divestments through his role in the company's corporate executive office and as the person in charge of chemical development. In a speech to security analysts in New Orleans in late 1977, Coquillette mapped out a company goal to derive about 20% of its operating income after taxes from its consumer activities, and about 50% from specialty chemicals. In 1978, 19.4% of the company's after-tax operating profits came from consumer activities and 56.8% from specialty chemicals. The remainder came from agricultural chemicals and natural resources. (After-tax operating profit excludes disposal of businesses, foreign currency translations, general corporate overhead, and general corporate interest.) Because Grace is now achieving the balance it wants, the acquisition and 10
C&EN Nov. 5, 1979
Coquillette: three main categories
divestment program is slowing down, according to Coquillette. However, some acquisitions and some divestments will continue. The 61-year-old Coquillette himself came to Grace as a result of an acquisition. After receiving a B.S. degree in chemistry from Harvard College and working for Procter & Gamble, he joined Dewey & Almy Chemical in 1946, where he held various positions until Grace acquired Dewey & Almy in 1954. He has been with Grace since then, except for three years when he was president of the Ohio Rubber Co. division of Eagle-Picher. Grace's acquisitions will continue to be in three main categories. These are natural resources, product lines, and new business. According to Coquillette, most acquisitions in natural resources are for replacement of inventories or reserves. As reserves of oil, natural gas, or coal dwindle, they must be replenished. Grace does this by finding additional properties. This usually means purchasing corporate entities that own these reserves. Since these are corporate entities, their purchase must be reported to the Securities & Exchange Commission, giving the impression that Grace is much more acquisitive of net resources than actually is true. Coquillette says, "If this were being carried out in a regular chemical
company and somebody went out and got a new contract for a supply of soda ash or something like that, you wouldn't think twice about it. But since these have to be reported to SEC, people look at it and say, 'Grace is doing a lot of acquisition activity.' This just is not the case." The second type of acquisition involves developing product lines or filling in product lines within existing businesses. These are mainly small acquisitions, such as Evans Chemetics, which Grace acquired in 1978. Evans had a particular type of sulfur chemistry that Grace wanted to fit into its specialty organics area. In cases such as this, Grace is really acquiring the research and development for a product and then backing it with its larger financial and personnel resources. The third type of acquisition is, according to Coquillette, the one that has attracted the most attention. This one takes the company into new areas of business. A good example is doit-yourself home centers. Grace studied the market and decided to seek a major position in it. Then, Grace acquired a group of formerly independent companies. The buildup has made Grace the largest company in the U.S. in direct-to-customer home centers, according to Coquillette. Grace does not hesitate to buy units it does not need in order to obtain ones that it wants. For example, to acquire book wholesalers Baker & Taylor in 1970, Grace also had to take F. A. 0 . Schwartz, the toy retailer. F. A. 0 . Schwartz was later sold, in 1974. The same situation may recur in Grace's acquisition of Daylin earlier this year. According to Coquillette, Daylin was acquired mainly because of its ownership of Handy Dan home centers. Probably, some of the Daylin units, such as pharmacies or stores selling women's apparel, will be divested if Grace finds that they don't fit its plans. Coquillette says that there are no sales or earnings minimums for the companies acquired, but the organization of the target company must be large enough and professional enough to convince Grace that it will be a good business. What Grace looks at
Grace's divestments have exceeded its acquisitions over the past three years Acquisitions
Type of business
1977 Channel Companies
Home centers
Glasscock Drilling
Type of business
Divestment
Toys, hobbies & housewares division Golding Brothers division
Retailing
American Carry-Products division
Automotive accessories
Polyester, vinyls, synthetic lubricants & plasticizers Office accessories Shoes
Mattress ticking
AAA Fishing & Rental Tool Co.
Oil and gas well drilling contractor Oil field services
1978 Rent-It Inc.
Oil field services
Hatco Group (four units)
Gilbert/Robinson Inc.
Specialty chemicals Printing industry drying equipment Restaurants
Office products division Lawrence Maid Footwear division Educational products division
A-1 Bit & Tool Co. Drillograph Co.
Oil field services Oil field services
Evans Chemetics
Specialty chemicals
Pix of America Medical Diagnostic Services, division of Chemed Corp. Figi's, subsidiary of Chemed Corp. Voyager Petroleums Ltd. (23% interest)
Emerson & Cuming Inc. TEC Systems
1979a Orchard Supply Building Co. Robert B. Peters Co.
Home centers Specialty fertilizers
Daylin Inc.
Home centers, women's apparel stores, hospital pharmacies Leather goods retailer Jewelry stores
Berman Buckskin Co. J. B. Robinson Jewelers
Pearce, Mayer & Greer Inc. Southbridge Plastics, unit of Hatco Barrilla G. eR. F. Hi S.p.A.
Audiovisuals, other educational products distributor Shoe stores Medical diagnostics Specialty foods Oil and gas exploration
Realty Vinyls Pasta products
TOTAL DIVESTMENTS: 17
TOTAL ACQUISITIONS: 15
).
a As of Oct. 29. Source: W. R. Grace & Cc
more than anything else is quality of management. Grace also tends to avoid tender offers, preferring to acquire private or closely held companies. (Daylin was an exception.) The reason is that tender offers often serve to identify good target companies for other acquirers. Thus, Grace could do all of the investigative work on a target company, only to see another acquirer come away with the prize. It takes a large staff at Grace to find and execute all the acquisitions. One or two people in each division identify product line possibilities; and three kinds of staff members at corporate headquarters work on new business. These include a business economics group of 12 to 15 people to identify economic trends so that Grace can enter markets early; a business development group of about eight people who financially analyze markets that Grace may want to enter; and a few specialists who develop contacts and negotiate with target companies. The same groups identify possible divestments. In most of Grace's acquisitions, the existing management of the acquired
company is retained. In fact, this practice leads to one of the more intriguing aspects of these acquisitions—the incentive to the seller or "kicker." In many acquisitions, the selling management will be promised additional stock (most of Grace's acquisitions are stock transactions) if they meet specified goals in such areas as sales or profitability within a certain time. This amounts to playing on the seller's pride, according to Coquillette. Managers in an acquired firm want to prove they are better than Grace has stated they are and they work extra hard to exceed Grace's goals. In many cases, he says, the seller puts in more hours and works harder after Grace buys the company than before the acquisition. Besides a hard-working management, Grace obtains a couple of other benefits from its acquisitions. In product line acquisitions, for instance, Grace buys research. This has held Grace's R&D expenditure as a percentage of sales to one of the lowest figures in the chemical industry. It was 0.9% in 1978. Even if all this R&D went into specialty chemicals,
its percentage of specialty chemicals sales of $1.66 billion would be 2.4%. The U.S. chemical industry's median for R&D compared to sales, for companies with sales of more than $500 million in 1978, was 2.5%. Also, in these days of rapidly escalating construction costs, Grace is buying cheap capital expenditures in its acquisitions—plants built with preinflation money. Again, this shows up in Grace's capital spending ratios. Capital expenditures as a percentage of sales stood at 6.4% in 1978, compared to an industrywide median of nearly 10%. Capital spending as a percentage of net plant was 20.9%, closer to the median of 21.3%. Thus, Grace has found it very attractive to build the company upon someone else's initiative. But coupled with the acquisitions must be a nononsense attitude toward divestitures. As a division begins to lose ground, someone must be able to give the order to sell it. Coquillette says that there are very few sacred areas at Grace, not even its big fertilizer operations. "If someone were to come along with the money, we would talk," he says. • Nov. 5, 1979C&EN
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