Chemtura's Future

When Robert L. Wood became president and chief executive officer of struggling Crompton Corp. in January 2004, he wasn't expected to make a large acquisition for quite some time. Yet, just 14 months later he was on a conference call announcing a merger with a major competitor, Great Lakes Chemical, and the formation of a new company called Chemtura.

The acquisition was completed on July 1, and Wood is now running one of the largest specialty chemical companies in the U.S. His plan is to apply at Chemtura the same restructuring techniques he did at Crompton to create, as he unabashedly calls it, "the world's best specialty chemicals company."

Even Wood, who joined Crompton from Dow Chemical, is a little surprised that so much has happened so quickly. Early last summer, he was focused on getting his management team in place and his new company in the right direction. Crompton had been underperforming for several years, and Wood says it took a while to convince employees, customers, and Wall Street that "we would do what we said we would do."

While Wood was working on Crompton, however, turmoil was brewing at Great Lakes. Under CEO Mark P. Bulriss, the Indianapolis-based firm had been making an unorthodox foray into consumer products such as Greased Lightning multipurpose cleaner and The Works brand of glass, tub, and tile cleaner. By early 2004, the firm was having internal discussions about whether it should sell its industrial chemicals business and focus on consumer products. "They were struggling with what they wanted to be and what their strategy was," Wood says.

According to documents filed with the Securities & Exchange Commission, Wood and Bulriss met in June 2004 to discuss a specific manufacturing agreement aimed at achieving cost efficiencies. But soon after, Great Lakes entered discussions on selling its entire chemicals business, and by the fall, several firms, although not Crompton, were in talks with Great Lakes about buying all or part of the company.

Bulriss resigned unexpectedly in November, and later that month Wood contacted Nigel D. T. Andrews, a Great Lakes board member, to discuss a transaction that would be more significant than the one broached in June. By late December, those talks had expanded into negotiations over a full-blown takeover.

At first, Great Lakes turned down the terms of Wood's stock-for-stock offer. But, one by one, its possible transactions with other companies fell through. Meanwhile, Crompton's stock strengthened while Great Lakes's sagged, pushing the Crompton offer to "a sweet spot" that Wood says met Great Lakes's requirements. Following due diligence investigations and some last-minute wrangling, the acquisition was announced on March 9.

Wood and his top managers spent the subsequent four months pushing through regulatory and shareholder approvals and planning for the combination of Crompton and Great Lakes into a single organization. Thanks to these integration efforts, which included more than 20 cross-company integration teams, Wood says about two-thirds of Chemtura's structure was in place on July 1 when the deal closed. His team is now working on the final third.

Wood says he learned a lot from being a Dow Chemical executive during its 1999-2000 acquisition of Union Carbide. "I know the significance of doing a very aggressive integration--identifying things that need to be done and holding people accountable," he says. Some of Crompton's past operational difficulties, he adds, stem from a half-hearted integration process after the 1999 acquisition of Witco Corp.

Even with the work done to date, much of the responsibility for making the Great Lakes acquisition succeed will fall on Myles S. Odaniell, Chemtura's senior vice president for performance chemicals. That's because almost all of Great Lakes's industrial chemicals businesses--notably its plastics additives and flame-retardant operations--will become part of his performance chemicals organization.

Odaniell and other Chemtura executives have been working with management consultants from McKinsey & Co. on issues ranging from "day-one activities"--the nuts and bolts of getting the new company up and running--to designing a new organization and identifying opportunities for cost cutting.

These efforts have led Wood to boost his expectation of the merger's cost benefit to $150 million per year from the $90 million to $100 million range he anticipated when the purchase was announced. A good chunk of the savings will be achieved by reducing employment at Chemtura by 600 people worldwide, about 8% of its workforce of 7,300, over the next year.

ALTHOUGH CHEMICAL companies--Crompton included--don't have a great track record of highly successful mergers, Odaniell says he is encouraged by the initial signs. He points to a "culture survey" in which 1,400 employees from across the two firms were asked to describe their existing companies with 10 adjectives from a list of about 80. "We got very similar lists when we lined up what the Crompton people said with what the Great Lakes people said," Odaniell says. "But even more striking is that both sides picked the same exact 10 adjectives to describe what they would like to see in the new company."

He says the new Chemtura organization is being staffed via a hiring process in which managers from both former companies identify candidates for each job. In particular, Odaniell has organized performance chemicals into four divisions headed by executives from diverse chemical industry backgrounds.

Odaniell himself joined Crompton in 2002 from Cytec Industries, where he had spent more than 20 years. Anne Noonan, a former Great Lakes executive, heads the flame-retardants division. Rich Owins, who joined Crompton last year from Degussa, heads process chemicals and polymers. Janet Mann, who joined Crompton from Dow Chemical last year, heads performance specialties; and Sean O'Connor, a Crompton veteran, heads plastics additives.

At $1.1 billion in annual sales, plastics additives is the largest of the performance chemicals divisions and the one where most of the product-line integration will occur. Crompton was an important player in impact modifiers, heat stabilizers, and antioxidants, whereas Great Lakes focused on flame retardants, antioxidants, and light stabilizers. Great Lakes had particular success with its No Dust line of additive blends, Odaniell notes, and Chemtura is already working to replace additives that Great Lakes had to purchase with products that Crompton manufactured itself.

Interestingly, although Chemtura is now involved in some 10 plastics additives categories, Wood and Odaniell aren't particularly enamored with such product-line breadth. Odaniell says an early goal will be to bolster areas like organic peroxides, lubricants, specialty plasticizers, and antistatic agents in which Chemtura is now just a niche player. Wood goes even further, asserting that Chemtura would be better served by swapping niche businesses with another company so that each firm will have fewer, but stronger, plastics additives lines.

Wood readily acknowledges that profits in the plastics additives unit have been poor in recent years and that the Great Lakes purchase doesn't change that. "We have to figure out an answer and improve the quality of the business," he says. "Sean O'Connor and Myles Odaniell are in the process of doing that, and I expect them to come forward with a plan very shortly."

That kind of aggressive portfolio analysis is a hallmark of Wood's tenure with Crompton. Early this year, he identified four businesses--refined oil products, polymer-processing equipment, ethylene propylene rubber (EPDM), and rubber additives--that needed either to be fixed or sold off.

Last month, the company completed selling the $265 million-per-year refined-products business to the private investment firm Sun Capital Partners. And in April, it finished putting its Davis-Standard polymer-processing equipment business into a joint venture that Wood has said is a first step to exiting the field altogether.

Although the ink on the Great Lakes deal is barely dry, Wood is already scrutinizing the consumer products businesses that Bulriss acquired in 2003. Although Great Lakes was long successful in chemicals for pool and spa maintenance, Wood maintains that learning the ropes of other consumer markets distracted Great Lakes managers and contributed to a decline in the operating profit of the pool chemicals business from 20-25% historically to 6-7% last year. "We will be making a decision in the next 90 days," Wood says of Chemtura's strategy for the consumer products field.

IN CONTRAST, Wood has removed EPDM and rubber chemicals from the fix-or-sell list after a marked improvement in their performance. Wood attributes this partly to an improved supply-demand balance, partly to cost cutting, and partly to a controversial effort he launched to substantially raise prices across Crompton's, and now Chemtura's, specialty chemical portfolio.

"I have long believed that in the specialty chemical space, you shouldn't behave like a commodity player," Wood argues. But that, he adds, is just what Crompton and other firms have been guilty of. Now, with the help of people like James Mason, an expert on price analysis and market segmentation hired from Dow Chemical, Chemtura has been raising prices--dramatically in the case of products like Flexzone antiozonants, which have doubled in price in the past year.

"It made our salespeople nervous, and it made our customers mad, but at the end of the day a number of our customers who experienced significant price increases also announced significantly improved earnings on their end," Wood says. He is happy with the results of the program and is now looking forward to applying it to many of Great Lakes's products.

Odaniell uses EPDM as an example of how the strategy works. The rubber, used in automotive and roofing applications, has been under dramatic cost pressure because of rising prices for the raw materials ethylene and propylene. Yet Odaniell says the company is raising prices enough to make up for the run-up and then some, in the process restoring a portion of the rubber's former profitability.

"We had convinced ourselves that these were undifferentiated products, but in fact Chemtura's products work differently from our competitors', " he says. Despite the price hikes, customers are staying with Chemtura because they need what its products add to their products. As Wood says, "The more you understand the value of your products, the more you understand what you are able to do with those products."

Wood's pricing strategy has its critics. During a question-and-answer session at a recent Goldman Sachs conference, Charles Rose, a financial analyst with Ardsley Partners, compared Wood to Thomas Gossage, a former Hercules CEO who improved profits in the short term by significantly raising prices but paid for it in the longer term when the company was abandoned by some major customers.

Wood acknowledges that Crompton has lost some sales as a result of its new strategy. In the first quarter, for example, Crompton's sales volume was off 9% from a year earlier, and Wood figures that 2-3% of that was due to customers balking at higher prices. "The test continues," he says. "First-quarter volume was below a year ago, but we continued to improve prices. We will know about the second quarter shortly." Chemtura announces results later this week.

Although the jury is still out on Wood's pricing initiative--not to mention the merger with Great Lakes Chemical--investors have a lot more confidence in Chemtura today than they did when Wood joined Crompton a year and a half ago: Its stock price has risen from just above $5.00 per share back then to more than $15 per share in recent trading.

"I think the story works as long as the business cycle is expanding," says Jay Harris, a securities analyst with Goldsmith & Harris in New York City. However, Harris worries that Wood is "too evangelical" about price increases, and he is concerned that the strategy will prove too aggressive in a business downturn.

On the other hand, Harris credits Wood for improving Crompton's debt picture by merging with the underleveraged Great Lakes. He also thinks the combined plastics additives portfolio has the potential to earn more money for Chemtura. Harris expects Wood to sell off at least part of the consumer products business and invest the proceeds in more acquisitions.

Wood isn't bashful about wanting to make Chemtura the world's best specialty chemical company, and he isn't shy about laying out lofty financial goals. For example, he is targeting earnings before interest and taxes (EBIT) of more than 15%. Some businesses--like crop protection, petroleum additives, and urethane polymers--achieve this target, but Chemtura's overall EBIT was 11% in the first quarter.

Moreover, Wood is targeting annual revenue increases of 10% and says Chemtura can double its size in the next five years. No doubt some industry watchers are skeptical of this goal. But as Wood says, "A year and a half ago, lots of people thought we'd be dead by now. We have to not believe what people tell us can't be done."