The cover of Great Lakes Chemical's 2003 annual report features a picture of a small boy peering into a jar in which Monarch butterflies are emerging from cocoons as a caterpillar crawls up a stick. The theme is transformation--the emergence of grandeur following a period of dormancy.
This image becomes a fair representation of the specialty chemical sector, if you tone down "grandeur" a little and replace "period of dormancy" with "grueling five-year economic downturn."
Transformation has been the predominant trend as companies, large and small, made big moves to build platforms for growth in a sector that has lost its luster over the years.
For some, the process has involved a series of acquisitions; for others, a string of divestitures following a megamerger. Noncore businesses were dropped here, as new product platforms were gained there through acquisition. In nearly every case, however, the idea has been to stanch the steady encroachment of "commoditization" in performance chemical markets through the development of niche expertise, collaborative research mechanisms, and new product lines that serve emerging growth markets.
For butterflies, transformation seems effortless: one minute a chrysalis, the next a shimmering bit of gossamer. But for chemical companies, the process is a whole lot harder. In fact, many specialty chemical companies have experienced a remarkably similar pattern of difficulties in financing and in integrating often sizable new businesses.
They also tend to share similar skills in working with customers, developing systems for ease of chemical product use, and anticipating problems. Those tactics still feature strongly in the new generation of specialty producers. But they are now channeled to support innovation as companies build fundamentally new technology platforms and orient portfolios for growth.
It's an ongoing process. Eric P. Vogelsberg, senior vice president at consultants Kline & Co., says that though many specialty chemical companies have streamlined operations in recent years, many others need to closely examine their product portfolios to ensure that they are focused on their strengths.
"If you look across the landscape, there are companies that still have specialty operations that you wonder about, given the mind-set of the owner," Vogelsberg says. "These businesses are not fully consistent with the direction that management is taking."
He says Cambrex' sale of its Rutherford Chemicals specialty business last year illustrates the benefit of exiting specialties when a company's focus has shifted elsewhere--in Cambrex' case, to pharmaceuticals and biopharmaceuticals (C&EN, Feb. 2, page 17). The purchase of Rutherford by Arsenal Capital illustrates that there are ready financial investors. There are also other specialty firms shopping for bolt-on acquisitions, Vogelsberg says.
Sometimes the decision to sell a particular unit is a tough one to make. When it's a question of heritage--ICI leaving polyethylene, which it invented in the 1930s, for example, or Ciba exiting the epoxy resins business--it's that much more difficult, and other considerations come into play.
Sometimes a business just doesn't fit. For example, Vincent A. Calarco, chairman of Crompton Corp., says it was more than just debt concerns that prompted Crompton's divestiture of its OSi organosilicones business. The business was capital intensive and lacked integration with the rest of the company's operations, he says. "While it was a difficult decision to come to, we felt the business would have been in far better hands with someone that had that backward-integrated capability than as a stand-alone business within our own portfolio," he says.
THE CURRENT ROUND of restructuring in specialties follows on some tough decisions made nearly 10 years ago by diversified chemical companies in Europe. Specialty chemicals operations were often an afterthought.
Achim Riemann, a vice president at Arthur D. Little International, believes that "there are not that many examples of successful large specialty chemical companies. When you look at the history--especially of companies in Europe--you see they tend to be unwanted assets from mergers of companies focusing on life sciences, particularly on pharmaceuticals."
For example, prior to their merger to form Novartis, both Sandoz and Ciba-Geigy spun off their chemical businesses, as Clariant and Ciba Specialty Chemicals, respectively. Similarly, Hoechst was eager to shed its chemical operations prior to merging with Rhône-Poulenc to form Aventis: The specialties were added to Clariant, while commodities were spun off into Celanese. Rhône-Poulenc, for its part, launched its chemical business as Rhodia.
"When you look at role models," says Riemann, the two that stand out are Ciba and DSM. "DSM has made a nice transition from a broader portfolio player into a specialty chemical player, with a focus on the market sector of life sciences. Materials are still there, but I wonder if that will remain long term in their portfolio."
To Riemann, the large specialties companies are so diverse, in so many segments, that "they must create some logic, and create a story that makes sense, to create value. In the medium term, there is still a lot of portfolio restructuring left to be done," he adds. "There are only a few companies right now with a good position in the sector, and with a logic to their portfolio."
For European companies, ICI was the trailblazer when it split itself into a chemical company and a pharmaceutical company, called Zeneca, in 1991.
ICI's management subsequently decided its future was in specialty chemicals, not commodities. Rather than build up a specialties business bit by bit, ICI acquired, in one grand purchase in 1997, the chemical division of Unilever, itself a $4.5 billion business. ICI already had a coatings division; the new purchase added consumer-oriented products such as flavors and fragrances, oleochemicals, adhesives, and starch derivatives.
However, the concept--praised by many industry analysts--was dependent on selling off commodity operations to pay for the Unilever buy. The problem, which has beset ICI until only recently, is that selling those commodity businesses was not all that easy. The market conditions were wrong because the industry was in the wrong part of the business cycle.
But the reshaping is now virtually complete, according to CEO John McAdam. His attention, he adds, is now on performance transformation.
For those companies where transformation was forced upon them, however, the process has been somewhat rockier.
The largest specialties company worldwide is Degussa, which last year had sales of roughly $13 billion. Its formation was nobody's idea of a perfect plan. Rather, it was the afterthought of mergers of various corporate parents: The 1999 merger of Degussa and Hüls was followed quickly, in 2000, by the additional merger with SKW Trostberg. The result was an unwieldy conglomerate with total sales of $19 billion. A concerted effort to divest many of those businesses has slimmed down the company, even as the "new" Degussa has made selective acquisitions in its core areas.
And although some industry observers may question the breadth of its core sectors, that breadth is a strength, Chairman Utz-Hellmuth Felcht insists. "Degussa's strength lies in its broad business portfolio," he says. "Not only are we the global leader in about 85% of our activities, but our balanced structure gives us stability in a difficult macroeconomic environment."
The company will be shaped by how the different businesses can stand up to competition, especially from China and India.
Success depends on thoroughly knowing customers and providing solutions for them--"not a solution to problems, but before any problems ever arise," says Clemens Grambow, head of corporate development. "Innovation is a major element in this effort. In the old days, R&D created new molecules, then marketing looked for somebody to buy them. Now R&D and marketing go together to the customers to see what problems they will be facing."
The throes of transformation are still not ended at some companies. Case in point: Clariant, formed from Sandoz in 1995, was a medium-sized specialties company with sales of slightly less than $2 billion per year when it was lumped together with the specialty chemical business of Hoechst in 1996. The combination formed a specialties firm with annual sales of roughly $6.4 billion.
There was some product overlap in Clariant's and Hoechst's businesses of specialties for textiles and leather, paper, coatings and printing inks, plastics, and fine chemicals. The immediate problems were of digesting and integrating such a big acquisition.
CLARIANT'S ACQUISITION of the fine chemicals producer BTP in early 2000, however, proved a stumbling block because it was, in hindsight, too pricey and occurred just before overcapacity became a problem in that sector. That purchase, and the downturn in the economy that wreaked havoc in other specialties sectors, left Clariant with sizable net losses in 2001 and 2002.
For now, the company--which reported a net profit last year--is working to cut its debt. Earlier this month, its shareholders approved a new issue of shares to raise capital, plus a resumption of dividends. In the past two years, Clariant has sold cellulose ethers, latex emulsions, and hydrosulfite assets. And last August, it announced that its electronic materials operations were for sale. But the company is still not comfortable talking about its operations. Clariant executives declined to be interviewed for this article.
At Rhodia, a return to financial health has become the compelling consideration. The company reported a sharp deterioration of results last year and doesn't expect to return to profit until 2006. However, selling off more operations is only part of the recovery plan; also involved are a streamlining program to save nearly $350 million in costs and a massive refinancing plan that was just approved by shareholders.
"We've built a business plan for the next three years with assumptions that are basically conservative," said CEO Jean-Pierre Clamadieu when the company's 2003 results were reported. Continued portfolio restructuring is expected to bring in more than $900 million this year from the sale of businesses that were bought in misguided acquisitions over the past decade.
To move forward, explains Paul-Joël Derian, vice president for R&D, Rhodia is intensifying its work with customers to bring innovative new technology into use. "More and more of our research is into functionalities, to meet customer needs," he says. Whether in areas such as reinforcement or surface treatment, he adds, "the chemistry is always hidden, but it must always be able to deliver a benefit, so the customer can claim something."
Products introduced in the past five years, Derian says, now account for about 18% of Rhodia's sales, up from 12% in 2000. Its target is 25% within the next five years, reflecting the company's emphasis on moving promising technologies into the marketplace.
Ciba Specialty Chemicals also is aiming to boost its proportion of sales from new products, says Chairman and CEO Armin Meyer. "Currently, new products that are less than five years old account for around 26% of Ciba sales," he says. "Over the medium term, we aim to increase this figure to 33%. To do this, we will continue to keep a strong focus on innovation." Moreover, in addition to the company's regular R&D spending, it has a research fund of slightly more than $10 million for what he terms "strategic high-risk/high-reward projects."
Following the acquisition of Allied Colloids in 2000, Ciba was structured into its current five segments. That reorganization, says Meyer, "was a deliberate marketing strategy to reflect the structure of our key customer industries and their markets.
"We already leverage our core competencies--for example, UV absorption, light stabilization, antioxidant chemistry, and polymer chemistry--across our whole product portfolio and maximize our existing expertise and technologies to meet customer needs in new markets," he adds.
View a timeline of Degussa divestment from 2001-2004
MOREOVER, he says, Ciba has a strong pipeline and strong cash flow to support partnerships and acquisitions to strengthen its market position or meet new market needs.
"Ciba has clear acquisition criteria," he explains. "An acquisition must provide a meaningful extension of our current business either by strengthening our market position or by providing complementary technologies to those that we have. It also has to contribute to the company profits by the second year. We are not interested in moving into completely new business areas."
Similar themes--innovation to support growth, a move toward more consumer-oriented products, and integration and financing problems--pop up in conversations with U.S.-based specialty chemical companies.
For example, International Specialty Products (ISP) has moved beyond its butanediol chemistry base, adding entirely new platforms through acquisitions. There have been some bolt-on acquisitions in recent years, as well as alliances, but for the most part, growth now stems from product innovation and service, says Sunil Kumar, ISP's CEO.
The company has also spent the past five years moving away from economy-sensitive "bulk" specialty markets in the soap and cosmetics fields, into niche areas such as pharmaceuticals, biocides, and food ingredients. "Our molecules are quite complex," says Kumar. "We are building our own micro markets that I think will remain specialties for a long time."
The company entered food ingredients by buying the Kelco hydrocolloids unit from Monsanto in 1999 and biocides with the purchase of Degussa's business in 2002. It bolstered those operations with further acquisitions. Just last month, ISP acquired Hallcrest, a supplier of microencapsulation and liquid-crystal technologies for personal care, oral care, and food ingredient applications.
Larry Grenner, senior vice president of R&D and Latin America--a hotbed of ISP-customer formulation collaboration--has taken a strong applications development approach. ISP labs even include paper coaters, plastic extruders, and beauty salons with which its scientists test-drive new formulations--if possible, in collaboration with customers, says Grenner.
The company's fastest growth is in specialty chemicals for pharmaceuticals, Kumar says. The company is completing construction on a $30 million excipients plant in Texas City, Texas, scheduled to go on-line in the third quarter of 2005. The company formed an alliance this year with Taiwan's Mingtai to sell cellulose materials for pharmaceutical and food applications, and last year with U.S.-based Capricorn Pharma for encapsulation technology.
Rohm and Haas CEO Raj L. Gupta is optimistic about business developments this year, partly based on economic recovery late last year carrying into 2004. This comes after a few tough years for everyone in the industry, over which time Rohm and Haas has worked on efficiency improvements, Gupta says.
The company has focused its services on supporting its customers' more tightly managed supply chains. The need to provide local service, Gupta says, is being challenged by a concurrent shift of manufacturing in Rohm and Haas's end markets to China, India, and elsewhere. This has required Rohm and Haas to expand its technical service infrastructure around the world, he says. The company has tripled the number of its service centers to 36 since 1990.
Currently, 65% of Rohm and Haas's R&D spending goes into its two growth markets: electronic chemicals and coatings. The electronic chemicals market accounts for 40% of the total R&D spending of $238 million, Gupta says. "Electronics companies are asking for innovation, and they are willing to pay," he says.
Rohm and Haas has been active in acquisitions in recent years, completing 44 transactions between 1999 and 2003. Almost 60% of Rohm and Haas's 2003 sales of $6 billion come from products acquired over the past five years, Gupta says. The company's portfolio and geographic footprint, he says, are now sufficient to drive 4 to 6% growth annually, and the firm will not be aggressive on the acquisitions trail. "We'll be very selective," he says. "We don't need to do a major transaction to grow Rohm and Haas."
At Great Lakes Chemical, historically a more commodity-oriented specialties firm with water treatment and flame-retardant products back-integrated into its bromine production, the approach is to increase efficiency and add value, according to CEO Mark P. Bulriss. Over the past five years, the company has shut 50% of its manufacturing plants but has increased output through efficiency improvements and debottlenecking, he says.
It has also advanced its product portfolio by adding chemistries or developing custom-blended products, Bulriss says. The amount of revenue generated from new products has risen from 5% in 1998 to 18% last year, and Bulriss hopes to bring that up to 21% this year. Some of the new-product revenues will come through acquisitions.
For example, the firm has added UV stabilizers and other light stabilizers; hindered-amine-based products and extrusion-blended stabilizers; and in recreational water treatment, the company has added a line of nonoxidizing treatments. The net result, according to Bulriss, is an enhanced, more specialized product line.
ONE GAUGE of the company's product-line evolution is its increasing sales to consumer products markets, Bulriss says. This year, 45% of sales will be in those sectors, as opposed to 30%--mostly for recreational water treatment--in 2000.
"We've changed our model fairly significantly," Bulriss says. "We want to establish a specialty chemical company capable of generating cash in almost any economic environment. We'll keep commodity chemical production for those who need it. Right now, 90% of our resources go into new, high-end products."
Crompton fattened itself up on good financial results and bolt-on acquisitions through the late 1990s, when it bit off more than it could chew. Calarco joined the company as CEO in the mid-1980s, when the then Crompton & Knowles had only about $230 million in annual sales from its dyes, equipment, and flavors and fragrance businesses.
The company embarked on a strategy of internal growth and acquisitions. "We bought businesses that were complementary and reinforcing to the businesses we already had in the portfolio," Calarco recalls. Over the next 10 years, the company swelled to $700 million in annual revenues, achieving half of this growth organically and the other half through some 15 acquisitions.
"We decided at that time that, from a strategic point of view, we really needed to broaden the portfolio if we were to continue to grow," Calarco says. Accordingly, the firm bought Uniroyal Chemical in 1996, giving it a huge new business in polymers and additives for polyolefins and rubber and total sales of $1.8 billion.
However, the acquisition also gave it about $1.1 billion in debt, and the company's once pristine books were strapped with enough debt to give its bonds "junk" ratings. Still, given the vibrant market for specialties at the time and the cost savings of the merger over the following three years, Crompton & Knowles was able to pay down $400 million of the debt it took on.
The company also wanted a bigger hand in some of its core markets, so it merged with Witco, a dominant supplier of additives for polyvinyl chloride, to form Crompton Corp. That deal closed on Sept. 1, 1999, just as the stock market tumbled and the chemical and plastics industry slipped into its roughest period in decades. The company couldn't pay down its debt as quickly as it had after the Uniroyal acquisition. The company had already shed its dyes and food ingredients business after the Uniroyal purchase, but it needed to dig deeper, so it sold the surfactants and industrial specialties business it got from Witco.
LAST YEAR, Crompton sold its OSi specialty organosilicones business to General Electric in exchange for $633 million in cash, GE's plastics additives business, and quarterly payments that may total more than $200 million through 2006.
Cytec Industries has avoided some of the expensive acquisitions that have been typical of the specialty chemical industry. Instead, it is focused on modest additions to existing businesses, according to Shane D. Fleming, Cytec's president of specialty chemicals. "In our sector, there have been a number of questionable acquisitions over the last five years," he says. "We looked at some of those opportunities and chose not to participate because we thought they were overvalued."
In one bolt-on acquisition, Cytec last year bought out Japan's Mitsui Chemicals' half of a water treatment and coatings resins joint venture. The business had $21 million in sales in 2002. "Japan was the missing link for us globally, and through that acquisition, we now have a global market in coatings," Fleming says.
In addition to acquisitions, R&D will continue to be a key part of Cytec's strategy. Fleming says 14% of Cytec's specialty chemical sales come from products developed in the past five years. It wants to reach 25% in another five years by introducing next-generation flocculants, innovative cross-linkers for coatings resins, and new extractants for rare-earth metals and copper for its mining chemicals business. The effort in copper got a big boost, he says, from Cytec's acquisition last year of Avecia's metal-extractant products and intermediates and stabilizers businesses.
The company is also looking at longer term projects like UV stabilizers for nanocomposites and ionic liquids to be used as volatile-organic-compound-free solvents for industrial and pharmaceutical reactions. However, Fleming says Cytec's research will be a careful mix of long-term and short-term projects.
Air Products & Chemicals' specialty chemical business--which makes up roughly 20% of its sales, focusing on polymer emulsions, specialty amines, and surfactants for the coatings and adhesives industry--is taking a multifaceted approach to growth that makes use of acquisitions, organic development of markets, partnerships, and even venture-capital investment.
On the acquisition front, Air Products recently purchased Japanese specialty polyamide resin and epoxy curing agent producer Sanwa Chemical, which gave the company about $30 million in new sales in product areas already in its portfolio, according to Wayne M. Mitchell, vice president and general manager of Air Products' performance materials division. "We already were a reasonably strong player in Asia," he says, "and by acquiring Sanwa, we were able to strengthen our position and our brand in the region."
Also in the performance materials business, Air Products is bridging the gap between industrial gases and chemicals in its advanced materials development program, which leverages Air Products' core surface chemistry capabilities into its specialty chemical business in such next-generation technologies as nanomaterials. "The advanced materials platform sits in the performance materials business because a lot of the skills and application know-how lend themselves to what we already do," Mitchell says.
At Air Products and most other specialty chemical firms, new growth platforms will have to find their place among more commodity-oriented businesses--sometimes among actual commodity businesses. The idea, sources agree, is to position these operations so that there are no real distinctions regarding contribution to growth.
"At the end of the day, you can make money in commodities or specialties; it really boils down to execution," says Rohm and Haas's Gupta. "We are all participating in the same market from different starting points. We all see the world pretty much similarly. It's all a matter of picking the areas where your strengths are and executing well."