Business
Chemical industry mergers on the upswing Low price-to-earnings ratios and good profitability have combined to make chemical companies very attractive takeover targets Merger activity in the U.S. chemical in dustry is going strong. For example, the past few weeks have seen bids for Calbiochem by American Hoechst, for Ma rine Colloids by FMC, and Kewanee In dustries by Gulf Oil. While overall U.S. industrial merger activity is dropping off, in the chemical industry it is increasing. The first half of 1977 saw a 16% decline in all industrial merger announcements, compared to the first half of last year, according to merger specialists W. T. Grimm & Co., Chicago (C&EN, July 18, page 7). However, in chemicals, paints, and coatings, merger announcements in the first half of 1977 increased more than 2.8% over the first half of 1976. An improving economy eventually may curb this merger boom by increasing companies' equity prices. But at the mo ment, Wall Street analysts say that chemical stocks are tremendously un dervalued and hence attractive as take over targets. Stock price-to-earnings ra tios have dropped significantly since the late 1960's and early 1970's. At that time
the average price-to-earnings ratio was more than 15; it now has fallen closer to 10, with many quality chemical com panies below that figure. This drop has taken place while chemical profits have, in many cases, increased faster than sales. Falling stock prices can make a com pany look especially tempting for take over in relation to another key figure. This is book value per share. Book value is the theoretical breakup value of a company —assets minus current liabilities and long-term debt, or, in other words, total stockholders' equity. Lately the stock price of many companies has been falling below the book value per share. This means that a company that acquires a firm in this position gets value even if the acquired company is broken up and its assets sold. A good recent example of a company falling into this position is the second largest U.S. chemical company— Union Carbide. A few weeks ago its stock price fell to $49 per share—below book value per share of about $50, after the Amchem merger. More recently, Car bide's stock rose slightly above book value. Inflation has caused much of the de cline in stock market evaluations. Inves tors have been able to find better returns on their money in a number of other areas. These have ranged from high-yield bonds to real estate to paintings. The result has been to reduce the number of stock mar ket investors and their total activity in stocks, thereby lowering stock prices.
With inflation abating, hope is wide spread that the individual investor soon may be coming back into the market. Inflation also has driven chemical production costs up. This rise has had an adverse effect on earnings and has low ered price-to-earnings ratios still more. Still another performance measure which slipped earlier has now turned around in many cases—operating profit margins of chemical companies. Operat ing profit margin is figured by dividing pretax earnings, excluding extraordinary items, by sales. Long used as an indication of the management proficiency of a com pany, this figure fell for many companies at the end of the 1960's. Lately operating profit margins have been increasing. But price-to-earnings ratios still remain low. For example, in 1971 the operating profit margin at Airco was 6.7% and the priceto-earnings ratio stood at 13.1. By 1976, Airco's profit margin had almost doubled to 12.7%, but its price-to-earnings ratio was only starting to recover, reaching 5.5 from a low of 4.3 in 1974. Finally, there is an often overlooked factor that can make a company attractive for takeover—the age of the company's management. If the man who founded the company or who is the dominant force is nearing retirement or has died, often the firm can be picked up at a bargain price. Boards of directors and shareholders get nervous about the chances for success of a new in-house management team. The stockholders believe that they cannot af ford to give the new team a chance to
Medium-sized chemical companies tempt takeover with good earnings, low Wall Street rating Company
Airco 3
Beker Industries*
Cabot Crompton & Knowles
Sales 1976 ($ millions)
Net change since 1971
Earnings 1976 ($ millions)
$837.4 131.2
90.1% 271.7 73.7
$54.0
461.0 154.4 289.7
DeSoto Eagle-Picher Industries
400.3
94.7 35.4 56.4
Ferro First Mississippi
376.5 148.2
124.8 901.4
Freeport Minerals Inmont
118.7
Pennwalt Reichhold Chemicals
308.8 534.3 777.3 585.1
201.3
Stepan Chemical Sun Chemical
97.8 291.6
125.3 139.4
Virginia Chemicals Witco Chemical
99.1 566.0
172.3 118.4
62.8 91.7
(11-6) 29.4
Price/earnings ratio
Book value/ share
Stock price 3
6 —
$32.39 8.57
$29 1 / 8
6 7
49.61 26.11
7 9
11.68 31.71
8 10 9 9
28.79 9.61 22.39 20.51
419.4
10 9
29.11 21.57
155.0 161.2
8 6
25.88 7.28
300.2
6 8
14.19 29.87
Net change since 1971
182.7%
—
4.7 9.1
66.1 104.3 102.2
22.1
87.3
20.0 12.9 48.5
153.2 367.2
20.1 34.9 16.1
246.6 166.4
5.1 12.8 3.97 23.1
270.2
113.9
6% 46 151/8
16% 21 32% 13% 24% 24%
