Industry Week
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Industry Focus: Chemicals
The Race Is On
Chemical-industry giants continue to jockey portfolios and capital resources to take profitable, long-term advantage of global market opportunities.
by Tim Stevens
Last year was marked by a continuation of tremendous action in the worldwide chemical industry, as multibillion-dollar companies made blockbuster shifts in holdings and capital investments to improve returns, increase competitiveness, and dampen industry cyclicality.
Monsanto Co. announced a spinoff of its entire $3 billion chemical business to concentrate on life science. The UK's ICI PLC paid $8 billion for Unilever Group's specialty-chemicals business in May. Germany's Bayer AG committed $9 billion to capital expenditures and R&D through the year 2000 in the United States, and German Hoeschst AG has undergone a drastic reorganization to reemerge as nine separate companies, all with global organizations.
The chemical industry is no longer a predictable mix of products and companies," says Du Pont & Co. CEO John A. Krol. "Now it has become a powerful $1.5 trillion global economic system in the throes of evolutionary change. The dynamic is one of fierce competitiveness coupled with tremendous opportunity all around the world."
That's Life (Science)
Some might suggest that a number of changes-the recent emphasis on life science, for instance-are not so evolutionary. "Life science is seen as a pot of gold, but some chemical companies find it hard to mix that with traditional chemical businesses so they can exploit it," says Michael Ekstadt, vice president and chemical-industry analyst at the consulting firm A.T. Kearney, New York.
For Monsanto, chemicals and life science don't mix-at least they cannot flourish under the same roof. So the company will split this fall into two separate publicly traded companies. One will be a lean diversified, $3 billion chemical operation managed for some growth, but mainly for cash generation. The other will be a $6 billion agricultural, human-health, and food-ingredient operation managed for rapid growth in markets Monsanto predicts will converge as biotechnology allows creation of food products tailored to deliver favorable health benefits.
It became clear that the two different segments had very different needs, and appealed to different markets and to a completely different group of shareholders," says Monsanto chief economist Nick Flippello in St. Louis. "In the new organization, both companies can operate more optimally."
With perhaps less fanfare, but with equal decisiveness, other chemical companies have shifted emphasis to life science. The blockbuster Hoescht restructuring shows four of the nine new businesses competing in this arena.
"We are now concentrating our resources on the forward-looking markets of health and nutrition, which offer the greatest leverage for growth, employment, profit improvements, and thus shareholder value," says Hoechst Chairman Jüergen Dormann.
One of the companies, Hoechst Marion Roussel Inc., Kansas City-based maker of ethical and consumer pharmaceuticals, posted an operating margin of 14.3% in 1996, one of the highest ever achieved at Hoechst, which has been hovering around 5% as a company since 1993. The goal is for the pharmaceutical business to yield a margin of 20% by 1999, according to Dormann.
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