business
CLAMANT ENTERS GROWTH PHASE Swiss firm targets intermediates for life sciences, electronic chemicals as strategic areas to build market share Rudy M. Baum C&EN Washington
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lariant, a Swiss specialty chemicals manufacturer, perfectly captures the ferment that is the modern, fiercely competitive global chemical industry. In its formation and fiveyear history, Clariant has been shaped by the swirl of mergers, acquisitions, and spin-offs that characterizes the chemical industry today. "Clariant has now clearly entered the third phase of its short life," says Reinhard Handte, the company's chief operating officer, who is also responsible for corporate development. After a somewhat turbulent beginning, and a few years that Handte admits were a "struggle," the company has positioned itself to grow strongly in the coming years, he says. The company got off to a slow start in 1999, following a "reasonably good" year in 1998, Handte says. As this year has progressed, performance has improved. Clariant had first-half 1999 sales of $2.85 billion, off 5%fromthe same period in 1998. Earnings through the first half were $165 million, essentially unchanged from first-half 1998 earnings. Through the first nine months of 1999, the company posted sales of $4.3 billion, down just 3% from the year-earlier period. (Clariant does not break out quarterly earnings.) "We expect 1999 sales to equal 1998 sales, and 1999 net earnings to be above those of the previous year," Handte says. "Overall, that is not bad," he comments, given the economic climate. That said, he adds, 'We're not happy, of course—we still have a long way to go." Clariant, which is based in Muttenz, a suburb of Basel, came into existence in 1995 as the spin-off of Sandoz' specialty chemicals operations in preparation for Sandoz' merger with Ciba-Geigy to form Novartis. Novartis subsequently spun off Ciba-Geigy's specialty chemicals opera12
IANTTARY3 2000 C.&FN
Handte: targeting strategic areas
tions in 1997 as Ciba Specialty Chemicals, a company whose fate would briefly intersect Claimant's in late 1998. In one of the more dramatic developments in the restructuring of the global chemical industry, venerable German giant Hoechst decided to transform itself into a life sciences company and developed a plan to divest itself of its vast chemical operations. That process has continued throughout the second half of the 1990s. One element of the strategy was the sale of its specialty chemicals operations to Clariant in 1997. The purchase of the Hoechst units, made on July 1, 1997, effective retroactively to Jan. 1,1997, essentially quadrupled the size of Clariant. Clariant's 1996 sales were $1.45 billion; 1997 pro forma sales were $6.45 billion, making Clariant the world's largest specialty chemicals company. Nevertheless, the integration of the two entities was "rapid and smooth," Handte says. "Both components had been part of much larger conglomerates. When the separation [from Hoechst] came, it was quite a
shock, but most of those involved realized that this was a chance to focus on our own future. The process didn't take too long. Of course, there are still some who talk about the 'old days/ But for most, this is now Clariant." The tumult of mergers and acquisitions in the chemical industry buffeted Clariant once again in late 1998 with the surprise announcement that Clariant and Ciba Specialty Chemicals would merge to form a $13.8 billion specialty chemicals behemoth (C&EN, Nov. 16, 1998, page 8). But the proposed merger never sat well with the two companies' stockholders, and both stocks began drifting downward shortly after the announcement. By mid-December, after due diligence assessments had turned up risks that, according to press releases from both companies, were "so significant as to undermine the future benefits and synergies" of the merger, it was called off. Clariant today consists of six divisions—process and performance products; functional chemicals (formerly surfactants); pigments and additives; fine chemicals; cellulose ethers, polyvinyl alcohol, and polyvinyl butyral; and masterbatches—each of which contains a number of business units. For instance, the fine chemicals division is home to business units that produce electronic materials, life sciences intermediates, and specialty intermediates. In the company's strategic plan for 1999-2003, however, Clariant has divided its business units into three categories that cut across the company's divisions
Clariant at a glance Headquarters: Muttenz, Switzerland Sales: $5.9 billion in 1998, $4.3 billion in first nine months 1999 R&D spending: $210 million in 1998 Employees: 29,300 Products: Dyes and chemicals for the textile, leather, and paper industries; pigments for use in printing inks, paints, plastics, and special areas such as cosmetics; masterbatches (plastic compounds that include a high concentration of one or more additives); surfactants; fine chemicals, including electronic chemicals, intermediates for life sciences, and C2 building blocks; cellulose ethers, polyvinyl alcohol, and polyvinyl butyral
based on growth and earnings potential, Handte says. Semispecialties, such as textile dyes and leather and ink pig ments, are characterized by pressure on prices, sufficient capacity, and nearly no chance to distinguish itself as a supplier through R&D. Currently contributing 30 to 35% of Clariant sales, the cash flow from semispecialties will exceed the funds needed for the targeted growth of this business. According to Claimant's plan, by 2003 semispecialties will contrib ute less than 30% of total sales. Specialties such as masterbatches, pigments and additives, cellulose ethers, and textile chemicals make up the bulk of Clariant's current sales, 50 to 60%. Cash flow from specialties will be fully reinvested to finance growth, par ticularly in new segments. Specialties will continue to contribute about 50% of total sales in 2003. Handte says fine chemicals has been targeted as a "strategic growth area," where Clariant plans to achieve rapid growth and expansion. Materials such as photoresists, electronic chemicals, and intermediates for life sciences currently contribute about 10% of total sales, but are targeted to contribute 20% by 2003, and to contribute 30% of earnings. According to the strategic plan, the excess cash flow from semispecialties, plus any other funds available, will be used tofinancethe expansion of strate gic growth areas, he says. Handte emphasizes that Clariant's strategic plan isfirmlyrooted in a set of financial targets collectively referred to as "2-15-20-20." The first of those num bers represents Clariant's goal of an an nual growth rate that is 2 percentage points above the average growth in those markets in which it operates, Handte explains. Additionally, Clariant has set targets of 15% for long-term op erating margin, 20% for operating in come before depreciation and amortiza tion, and 20% for return on net assets. "Everyone is aware of what it means to be in a particular business," Handte says. "If s not that we don't like the semispe cialties—we like them very much. These business units may spend a reasonable amount of money to invest in good ideas." That said, Clariant has clearly hitched its future to the strategic growth areas. Handte says growth in these areas will be about equally split between internal projects already in the pipeline and acquisitions. In terms of in ternal growth, he says, "we know how to run and grow such businesses."
"In agrochemicals, Clariant is an accepted, reliable, well-estab lished corporate partner for lead ers in the industry," Handte ex plains. "Pharmaceuticals are harder. We have not yet reached a comparable level of coopera tion. But we actually have more projects in the pharmaceutical area than in agrochemicals." Suc cess in building Clariant's posi tion as a supplier of intermediates to the pharmaceutical industry is critical, he says. Margins in the pharmaceutical market are high er than those in the agrochemical area, where price competition is alreadyfierceand growing. The other half of growth will come from acquisitions, but, Handte says, "we are not pre ClarianVs ketene/dlketene plant was upgraded pared to pay any price. We will and expanded In 1998. follow four criteria to impose dis cipline on our choice of acquisi For example, in electronic materials, tions." Those are that the acquisition be he says, Clariant is the only supplier in line with Claimant's strategic plan and with a presence in all three major geo priorities, that it be in line with the graphical markets—Asia, Europe, and firm'sfinancialobjectives, that smooth the U.S. The company has production and rapid integration of the unit is possi facilities in Korea and Japan and a re ble, and that there be no dilution of search and development facility in Ja earnings past one to two years after the pan; it also has production and R&D fa acquisition. cilities in Europe and the U.S. Clariant Claimant's long-term financial objec just completed a 70,000-sq-ft production tives also cover research and develop facility for advanced photoresists, strip ment and capital spending. In 1998, per solvents, and antireflective coatings Clariant's R&D expenditures of in Somerville, Ν J. $210 million represented about 3.5% of "We would welcome a pickup in elec the company's $5.9 billion in sales. "We tronics," Handte says. Although the flat- want to increase that to about 4% of panel display market "is booming" in sales," Handte says. "Expenditures will Asia, he notes, semiconductors are still range from less than 1% of sales to as lagging; however, some improvement much as 15%, or more," generally trend seems likely. But growth in electronic ing with the three categories Clariant's materials will come not just from what businesses have been divided into. The are traditionally seen as electronic prod company has targeted capital expendi ucts, such as computers, he emphasiz tures at 4 to 5% of sales. es. "Within five years," Handte says, Although biotechnology will "cer "most consumer products will have tainly have an impact on the specialty semiconductor and flat-panel display chemicals business," Handte says, what technology incorporated into them." form that impact will take "isn't yet In the area of life sciences intermedi clear." And while Clariant does not yet ates, Clariant remains a "pure organic have a presence in biotechnology, chemistry" player, not yet having Handte makes clear that, if the need tapped into biotechnology. "We are very arises, "we willfillit." successful as a supplier to agrochemiClariant already is the world's largest cals producers," Handte says. He points specialty chemicals company, but it to four recent agreements with leading clearly isn't content with that status. In agrochemical suppliers in which Clari the turbulence that is the modern global ant will be the exclusive supplier of in chemical industry, Clariant has, in the termediates. "One agreement is based space of a few years, established a solid on a project begun eight years ago," he foundation and put in place a strategic says. "Clariant is investing $19 million plan that it hopes will sustain its growth in the project for the customer. in the coming years.^ JANUARY 3,2000 C&EN
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