BUSINESS
INSIGHTS BY MICHAEL MCCOY
FIXING WHAT YOU HAVE Rather than trying to sell laggard businesses, companies are attempting to improve them
I
F YOUR CAR HAS TURNED INTO A CLUNK-
er, you have two choices: trade up or fix up. Trading up is fun. Yni get to go shopping, kick a few tires, and buy something shiny and new. Fixing up, on the other hand, is a lot ofwork and you rarely end up with what you really wanted in the first place. Chemical companies looking to spruce up their portfolios face a similar decision, and in recent years the tendency has been to trade up. But the opportunities to do so are thinning, and companies may have to start looking at fixing what they have. DSM's recent success at tradingup makes it sound simple. InJune, the company sold its commodity polyolefins business to Saudi Basic Industries for just under $2 billion; only three months later, it signed an agreement to acquire Roche's vitamins business for just over $2 billion. The deals take DSM out of a cyclical business and a long way toward its goal of having 80% of its sales in specialty chemicals by 2005. ICI, another trader-upper, didn't have it so easy with its transformation in the late 1990s. The company made the mistake of doing the buying first, acquiring Unilever's specialty chemicals business for $8 billion in 1997, before it tried to unload its commodity chemical assets. It turned out that the market wasn't very interested in old-line businesses such as titanium dioxide, polyurethanes, and chloralkali. ICI struggled with a mountain of debt for two years before it was able to strike a deal with Huntsman Corp. for the bulk of the unwanted assets and with companies like Ineos for other odds and ends. Today, ICI is still debt-heavy and trying to sell assets—it announced the sale of its Synetix catalyst operation just two weeks ago. Huntsman ran into debt problems of its own, while Ineos is now suing ICI, claiming it misrepresented the condition of a chlorine plant in Runcorn, England. Other companies have had trouble making a go of the cast-off assets of upwardly mobile firms. Vantico, created in June 2000 through a management buyout of Ciba Specialty Chemical's performance HTTP://PUBS.ACS.ORG/CEN
polymers division, has struggled almost since its start. Perm Specialty Chemicals, formed in 1999 to buy Great Lakes Chemical's furfural derivatives business, declared bankruptcy earlier this year. COMBINE UNFORTUNATE tales like these with the poor economic climate today, and it's not surprising that companies seeking to shed unwanted assets are having trouble. Lonza tried twice to sell its polymer intermediates businesses to private investment firms, only to see both deals fall apart. International Paper took its Arizona Chemical subsidiary off the selling block in June after an unsuccessful effort to sell it. Crompton Corp. had its industrial sur-
FIXER-UPPER Lonza will try to improve this polymer additives operation in Italy rather than sell it. factants business on the market for more than two years before finally selling it in June to Akzo Nobel. Its refined oils business has been for sale even longer with no takers. And Hercules has had its FiberVisions unit and parts of its pine chemicals business on the block for years. The difficulties companies have experienced selling businesses is showing up in the form of reduced merger and acquisition activity According to the investment banking firm Yning & Partners, only 29 deals worth $25 million or more were completed in thefirsthalf of 2002, compared with 48 in the first half of 2001. Calvin B. Cobb, head of the U.S. chem-
icals practice at management consultants Cap Gemini Ernst & Young (CGE&Y), says the poor chemical merger and acquisition climate is dovetailing with a growing corporate emphasis on expanding existing businesses. "When I talk to chief executives in the chemical business today," he says, "there's a lot more consideration of internal growth." The chemical industry's glory years after World War II were fueled by internal growth, Cobb notes, and it wasn't until growth began to slow in the 1980s that companies turned to mergers and acquisitions to expand. Increased globalization entered the mix during the 1990s, but in the current decade, innovation and organic growth are getting attention again. Mixed results from the acquisition era play a role in the return of the old thinking. Cobb says research conducted by CGE&Ys Center for Business Innovation shows that 50% of mergers and acquisitions fail outright, while 70% fail to meet financial objectives. As such experiences accumulate, Cobb says, executives are starting to realize that "maybe I can't buy everything I want. Maybe I can't sell everything I don't want." He says chemical companies are calling on CGE&Y to apply its "analysis design" methodology to their existing businesses. CGE&Y helps the chemical industry in three broad arenas: managing the innovation process, transforming businesses with an eye to cost reduction and sales growth, and accelerating the benefits of enterprise resource planning systems. Cobb joined Monsanto in 1967 and has worked in the chemical business ever since. He's seen chemical industry growth fall from two or three times gross domestic product to less than GDP in many sectors today. Price-to-earnings ratios for chemical stocks, meanwhile, have fallen from 15 to 7.5 or 8. Faced with such dismal numbers, a renewed focus on innovation doesn't seem like such a bad idea. "Among executives," Cobb says, "there is a school of thought that maybe the industry needs to return to what made it great." It may be too much to expect that the chemical industry's heyday will ever return in full. But companies can recapture part of it by increasing their focus on the businesses they have. In the process, executives may find that while tradingup is fun, fixingup can be more rewarding—and more profitable. C&EN
/
OCTOBER
7,2002
17
