||SPECIALTIES FOCUS With major markets poised
for an upswing, an enhanced chemistry repertoire is pulling
lack-luster chemical products onto the growth track of value-added
ROHM AND HAAS PHOTO
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
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
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,
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,
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
"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
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
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
"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
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.
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
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,
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,
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.
||THEN AND NOW "Big chemicals" gave way to
consumer-oriented specialties at ICI.
"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
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."