Synthesis and Analysis
An abridged version of this appeared in the lamented Chemistry in Britain in September 1997. Interesting how out of date it is, with Courtaulds now gone, Hoechst mutating into Clariant, the rump of ICI moving into specialities and selling Polyurethanes.
In October last year the German chemical giant Henkel announced its (ultimately successful) intention of acquiring my current employers, Loctite. As I write, the precise
structure of the new merged adhesives business is still being finalised, but the future looks promising. At the time of the announcement, however, it was impossible to keep feelings of uncertainty from sweeping across the target company. Nevertheless, I allowed myself a wry smile. In my career, which has included periods with Courtaulds and ICI, all my employers have been subjected to take-over bids or gone through demergers or both.
The chemical industry is going through an astonishingly turbulent phase. It's difficult to keep track of who owns whom. There are several big mergers and demergers currently underway. It all set me thinking about the dynamics of organisational growth and fission. Is there an optimum size for a chemicals operation? What drives the decision making process? Is the industry a chaotic system or merely a very complex one?
The histories of growth and fission at Courtaulds and ICI begin to point to some answers, and there are fascinating parallels and interactions with the German chemical industry and DuPont.
The textile industry, with its demand for dyestuffs and alkali as well as synthetic fibres, has been a crucial influence, but two other demands played critical roles: that for drugs to keep people alive, and that for explosives to kill them. A tale of Life, Death and the Sunday Best.
Looking first at the story of Courtaulds, we find that a long established silk company had done very well out of the late Victorian fashion for black crape. However, early in the new century their far-sighted managing director Henry Tetley was on the look-out for new products, and in 1904 he acquired the British rights to the newly discovered viscose process. Courtaulds efforts to commercialise the process were handsomely rewarded before and immediately after the First World War. Although the competition grew rapidly, Courtaulds in the thirties were still a major world player in the rayon industry, with large interests in the USA, and agreements with the second largest German producer. In 1940 they also set up, jointly with ICI, British Nylon Spinners to exploit a licence granted by an up-and -coming name in the fibre industry, DuPont.
Until 1918 DuPont had been predominantly an explosives company. After the war they diversified rapidly - into viscose and "Cellophane" (viscose made into a sheet rather than a fibre) for instance. In 1929 one of their chemists, Carothers, started experimenting with polyamides. By 1938 DuPont were ready to launch nylon, but were looking for European partners.
However, the war then intervened. Courtaulds were forcibly demerged in 1941, when they were forced to sell their US operations, the American Viscose Corporation, at a knockdown price to help pay for lend-lease. Nevertheless, organic growth soon continued again after the war, alongside diversification driven by internal development. Courtaulds became particularly important in acrylic fibres, even though they were late in the field. DuPont had launched "Orion" in 1950, and it took some time to get around the DuPont patents -"Courtelle" was not launched until 1958. However, one year earlier had come the opportunity for a major acquisition.
In parallel with the Courtaulds experience with viscose, two brothers, Henry and Camille Dreyfus, had done similar pioneering work between the wars with cellulose acetate, setting up British Celanese and American Celanese. The companies had been rivals to Courtaulds and there had been patent disputes. However, by the fifties smaller fibre producers in Britain were beginning to struggle, and British Celanese were looking for a partner. Their product range complemented that of Courtaulds beautifully, and in 1957 the two companies, agreed to a merger. Courtaulds had thus become by 1961 a world scale operator in several of the major fibre technologies and important on a national scale in the others. The fibre industry was booming and Courtaulds attracted the interest of ICI, who were strong in the melt-spun fibres - polyester ("Terylene") and nylon - but weak in the dry- and wet-spun fibres (acrylic, acetate and viscose).
In December of that year they made a formal bid for the company. The Courtaulds board was divided on the merits of the bid, but finally voted for rejection. Opposition was organised by one of the board's youngest members, C.F. (later Lord) Kearton. An able chemical engineer, he had been head-hunted from (ironically) ICI in 1946, made an immediate impression, and by his early forties he was a director. The take-over battle acquired national interest and the board members of the two companies became public figures. Kearton staged a masterly campaign. In March ICI were forced to withdraw their bid, but it was obvious that Courtaulds needed to reorganise. Financial institutions felt that the yield on assets that the company had generated between the Celanese acquisition and the ICI bid had been poor. Younger board members, feeling that internal squabbles over succession had been more important than profitability, likewise had little faith in the chairman and chairman-designate. Both stepped down, and Kearton became chairman in 1965.
Although the bid failed, it is hard not to speculate on "what if?". Almost certainly the joint company would have made huge profits in the late sixties and seventies. On the other hand, both firms were in difficulties in the early eighties, and the merged organisation, with an enormous European fibres exposure, could easily have gone under.
On gaining control, Kearton went shopping with a vengeance, aiming to make sure that Courtaulds would never again be at risk of being swallowed up by the likes of ICI. His main thrust was a down-stream integration, acquiring a rash of spinners, knitters, weavers and garment manufacturers. This was imaginative. Buying up struggling textile operations would not at first glance seem to be a great way to improve yield on assets. But the idea worked, and Courtaulds saw some of its best ever years. Another important diversification in this period was into paints. Under Courtaulds, International Paints became one of the most important marine coatings businesses in the world.
As the integrated fibres-to-garments conglomerate grew through the seventies it became clear that it was difficult to tell which parts of the business were subsidising others. When I joined the company at the end of 1979 a start had been made at unravelling the various profit centres. But my arrival (coincidentally, I hope) heralded a disastrous couple of years. Oil price rises, plus the Conservative government's abandonment of price and wage controls led to a surge in inflation, and to counter this interest rates went through the roof, followed rapidly by the pound. Home-produced textiles couldn't compete with imports. Closures and redundancies were unavoidable. Largely as a result of this restructuring, Courtaulds posted a £114M loss, at the time the largest loss made in the UK outside the nationalised industries. The share price plummeted. At one stage you could have bought the entire company for less than a realistic valuation of International Paints, who were doing very nicely with their new self-polishing anti-fouling coatings, and who were keeping Courtaulds alive. Not surprisingly the vultures started to hover.
I don't suppose the truth of what then happened will ever emerge, but gossip proliferated. The only sure fact is that someone began buying shares. One rumour was that this was Hoechst. Many laughed at this. Why on Earth would Hoechst want to expand their European fibres operation? Another rumour was that the government, desperate to avoid massive redundancies in the Midlands textile industry (lots of marginal seats), made dire threats to the potential buyer about what they would do to any asset stripper. Who knows, and is prepared to tell? All I know is that everything went quiet. The share price continued to rebound, but at a sensible rate. The panic subsided. There are, however, two intriguing postscripts to this incident - in 1987 Hoechst acquired American Celanese (the other half of the Dreyfus empire) and in 1994 they merged their viscose and acrylic fibre interests with those of Courtaulds.
However, in the interim Courtaulds had re-engineered itself. The new chairman, Christopher Hogg, continued to disentangle the various businesses. Non-core fibres, including nylon and polyester, were dropped, as were several bizarre seventies-style diversifications. On the other hand, paints and acrylic fibres expanded, and a successful new fibre related to viscose was developed. The company seemed healthy enough when I moved on in 1986.1 was therefore as surprised as anyone when, in 1989, Hogg announced that he was splitting the company in two. Courtaulds would retain the fibres, paints, packaging and chemicals operations, but the spinning, weaving and garment manufacture would be put into a separately listed Courtaulds Textiles. Kearton's integration, successful as it had been in the sixties, had played its course. There was little or no synergy between the two branches, so why keep them together? Apart, they could focus more intently on their own markets.
Considering how common demergers now are in the chemical industry, it is easy to forget that the first ever was only eight years ago.
Prophets of doom suggested that the new Courtaulds, shorn of its textile side, would be a tasty bite-size piece for a larger concern. (The same was considered true of Courtaulds Textiles.) But the newly focused companies indeed performed better than before, their price/earnings ratios rose, putting off potential predators, and both are still healthy, independent operations.
We have seen that the early growth was nucleated by a technological breakthrough (the viscose process), allowing a rapid expansion, and the creation of a whole new market. But after this inflationary phase the main force at work was the need to maximise return on assets, with an eye on the stock market, so as to maintain independence. (Although different individuals held widely differing views on how best to do this.) A second influence which affected Courtaulds was American suspicions of cartels, particularly those involving both American and non-American firms. We shall see the same forces operating in the histories of ICI and the German chemical industry. However, the directions of development of these companies, and therefore their current phenotypes, were driven by a third factor - economic nationalism.
The German chemical industry has its roots in England in the 1850's, when Perkin discovered the first aniline dye. It is not uncommon for chemical breakthroughs to be exploited outside their country of origin. The viscose process was invented in France, and we shall see how ICI owed its existence to pioneering work by Solvay (Belgium) and Nobel (Sweden). However, there can have few "missed boats" more important than British industry's failure to capitalise on this early lead in synthetic dyestuffs. Several German industrialists realised the significance of Perkin's work, and rapidly established a dominant position world-wide. The three biggest, all of whom betray their aniline dyestuff origins in their full names, were (Farbenfabriken vorm. Friedrich) Bayer, (Farbwerke vorm. Meister Lucius undBruning of) Hoechst (Farbe is the German word for "colour" or "dye") and BASF (Badische Anilin und Soda-Fabrik). But although Germany as a whole controlled the industry, competition between the three was ferocious. In 1903 Carl Duisberg, general manager of Bayer, suggested some form of dyestuffs cartel, so as to increase profitability for all three. Moves were beginning to, be made in this direction before the war. Non-dye interests were excluded however, and these were becoming increasingly important. Bayer introduced aspirin in 1899 and Hoechst went still further into pharmaceuticals early in the new century, with Paul Ehrlich's Salvarsan (a treatment for syphilis) and Novocain. But the biggest diversification was BASF's development, between 1909 and 1913, of the Haber-Bosch high pressure process for producing ammonia from nitrogen and hydrogen. Ammonia could then be converted to nitrate for fertilisers and, crucially, explosives. The timing was critical - Chile until then had a monopoly on nitrate, and a key part of the British blockade strategy early in World War One was to prevent Chilean nitrate from reaching Germany. Haber and Bosch became national heroes, leading figures in BASF and eventually Nobel Laureates.
British readers are accustomed to think of the Battle of the Somme as simply a gross act of stupidity, doomed to failure. The Germans, however, saw it as a heroic defence under desperate conditions. Their general staff and industrialists were appalled by the sheer weight of men, and particularly explosives that the British could continue to throw at them. It began to dawn that the war could well be lost, even though Bosch was beginning to produce significant quantities of synthetic nitrate. There were two consequent effects on the German chemical industry.
The first was a massive increase in the amount of war material demanded, much of it requiring the development of new technology - poison gas (mostly chlorine at this stage), synthetic rubber, sulphuric acid (BASF developed the Contact Process in 1915) and an attempt to produce synthetic petroleum from coal. The second was that Bosch and others, seeing that if Germany lost the war, their country's dominance in dyestuffs could also be lost, responded more favourably to Duisberg's overtures. A loose Interessen Gemeinschaft or IG ("community of interests") was formed in 1916, between Bayer, BASF, Hoechst and others, paving the way for a full merger as I. G. Farben in 1925.
The new conglomerate was comfortably the largest chemical company in the world. IG however was to increase its strength still more, by forming a strategic alliance with John D Rockefeller's Standard Oil, who had interests in synthetic rubber and coal liquefaction. They also took over Koln-Rottweiler, a large explosives manufacturer, who incidentally had a large slice of the German viscose industry. As with most international operations, IG made enormous profits in the twenties, but began to struggle during the depression. A few branches of the German chemical industry profited from protectionism. Viscose did well and a native cellulose acetate fibre industry mushroomed. Following Du Font's pioneering work with synthetic polymer chemistry, IG made some important contributions to the field, such as polyurethanes and acrylic fibres.
Early in the Nazi period IG was stigmatised as "non-Aryan" - Haber was Jewish, Bosch was an outspoken critic of anti-Semitism. This situation could not be allowed to continue. IG had German monopolies in synthetic fuel, rubber and nitrates, and needed to be Nazified. Haber was expelled from Germany in 1933, Bosch was pushed into a non-executive role in 1937.
From then until the end of the second war, IG operated essentially as the chemicals branch of the state. As well as supplying the key raw materials to keep the Wermacht operational, IG also set up a slave labour camp at Auschwitz. It supplied the prussic acid to the extermination camps, and began producing the nerve gases, Tubun and Sarin. An interesting irony in the history of the period is that IG's monopoly position eventually contributed to Germany's defeat. When the synthetic petroleum plant at Leuna was repeatedly, heavily bombed in May to July 1944, Germany's oil production was crippled. Speer himself saw this as the moment when the war was lost.
At Nuremberg individual directors of IG were convicted of war crimes and imprisoned. There was certainly justification for this. Indeed, it could be argued, as the prosecution did, that the sentences were extremely lenient. Far less justified was the breaking up of IG, on American insistence, into its component companies. Already, in 1941, IG and Standard Oil had been prosecuted under American anti-trust legislation. It is hard not to feel that the break-up of IG was driven more by US commercial policy than anything else. Until well into the war IG had behaved no worse than many other large businesses. What went on at Auschwitz was not a result of the size or monopoly position of the organisation. But whatever the rights and wrongs of the case, the most remarkable chemical company ever had ceased to exist.
Let us go back now to the formation of IG in 1925, and its ramifications in the UK. British chemical companies viewed the creation of this giant with alarm, and the four largest agreed to merge: Nobel Industries, Brunner-Mond, the British Dyestuffs Corporation, and the United Alkali Company. The new company, Imperial Chemical Industries Ltd. had a dominant UK position in four sectors: explosives, alkali, dyestuffs and the Haber process (the technology for which had been "acquired" dubiously by Brunner-Mond in 1920). A Dynamite business had been started in Scotland by Alfred Nobel himself, and the company later formed part of an
Anglo-German Nobel Dynamite Trust. Attempts were being made before the First World War to bring in Du Pont. The relationship thus fostered between Nobels and Du Pont were to prove important in the twenties and thirties, but the trust had to be broken up, for obvious reasons, in 1915. The UK company prospered, not surprisingly, during World War One. They had even become involved in making ammunition itself, and had therefore developed metallurgical expertise. This led them on, after the war, into the automobile industry (the same thing happened to Du Pont) and then into automotive paints.
(The British alkali industry had a remarkably cosmopolitan background. The Solvay process for making caustic soda involves the use of ammonia (a further spur to Haber, and why Brunner-Mond had been so keen to acquire his process) and salt. The most important alkali industry in the world, supplying the British soap, glass, paper and textile industries had been long established around the Cheshire salt mines, but still employed a forerunner technology. Accordingly Solvay tried to interest British manufacturers in licensing his method. His only takers however were two immigrants, Brunner (Swiss) and Mond (a German Jew). Later on, Solvay himself saw that the future lay in a new electrolytic technology developed by Castner (American) and Kellner (Austrian), and after some hesitation this was also adopted by Brunner Mond.)
The new ICI immediately started trying to form international alliances. No formal agreement was made with IG at that stage, but informally IG kept out of the Commonwealth, while Germany was closed to ICI. A more formal alliance with Du Pont was established in 1929.
ICI expanded its metals interest in 1928, but otherwise the development of the company in the twenties and thirties mirrored what was going on at these two large rivals. The government invested heavily in an oil-from-coal project, although IG-Standard were far ahead.
As with Du Pont polymer research began to produce some benefits. "Perspex", a polymethylmethacrylate resin, initially used for aircraft cockpits, appeared in 1935. Polyethylene was discovered by accident in 1933, and was first employed as a dielectric material for radar. A polyester fibre "Terylene" was developed as a response to nylon. Chlorine chemistry found application in pesticides similar to DDT in a 1937 joint venture with Plant Protection Ltd (acquired by ICI after the war) and later on in poison gases (chlorine itself, phosgene and mustards). These last were never used in action, but reflect how ICI operated during the war as a branch of the state. Obviously the explosives and metals operations were of key importance - in fact ICI even developed the PIAT anti-tank weapon. A pharmaceuticals interest began when ICI needed to replace drugs previously imported from Germany, and also started making penicillin. Before the Manhattan Project they were even involved in the independent UK atom bomb project, using fluorine chemistry for uranium extraction and 235U enrichment.
After the war the US government broke up the ICI-Du Pont alliance. Following the forced sale of AVC, and the IG-Standard break-up, large-scale foreign involvement in the US chemical industry had been eliminated, while the Americans could operate freely in Europe.
The structure of the company established in these early years proved remarkably resilient. Any deficiencies in this structure were masked by the rapid growth which prevailed in the fifties and sixties. Even though large profits were being made, the company was not in fact significantly out-performing the UK economy. The mismanagement of the Courtaulds bid failed to ring the warning bells loudly enough. It was not that nobody in the company could see what the problems were. Chambers, the chairman at the time of the Courtaulds bid, himself saw that the company needed to address three issues. Most critically, ICI had too great a reliance on the Commonwealth, and too small a presence in Europe, the Pacific and the US. Secondly, the manpower productivity was low. But the third factor, that of too bureaucratic and top-heavy a management structure, was both self-perpetuating and a brake on action in the other two areas. The headquarters at Millbank were known by many as "Millstone". Indeed, twenty years later the same three problems were still facing John Harvey-Jones.
There had been some reform in the seventies - the acquisition of Atlas Chemicals in the US in 1972 made a difference to the international balance of the company. The metals business, profitable but difficult to expand, was divested in 1977. But the same economic problems that came close to destroying Courtaulds in 1979-82 hit ICI almost as hard. It was now clear that continuing to follow the same path at the same speed would bust the company. Consequently, Harvey-Jones and his successor Dennis Henderson were able to push through changes much faster than before.
A start was made towards breaking down the old divisional structure, by splitting off certain separate businesses, such as Speciality Chemicals and Polyurethanes. Polyurethanes even had its headquarters outside the UK (it was to this Belgian site that I moved from Courtaulds in 1986). The internationalisation continued with US acquisitions in paints (Glidden), speciality chemicals (Beatrice) and urethanes (Rubicon). The creation of a separate seeds business, and European acquisitions in this area illustrate both trends.
Things were going in roughly the right direction, and the company was generally seen as healthy. But the return on assets was still nothing special, and in 1991 this attracted the attention of Lord Hanson. It was far from certain that he intended to asset-strip ICI, but a few back-of-an-envelope calculations showed how his mind might have been working. The sale of just two businesses, Pharmaceuticals and Paints, at realistic prices, would have covered what he would have paid for the whole organisation. The bid was beaten off with a minimum of panic, but it was nevertheless necessary to remedy the weaknesses that Hanson had highlighted.
With the successful recent Courtaulds demerger providing encouragement, Henderson split the company in two. Pharmaceuticals, Plant Protection and Seeds - businesses where possible synergies could at least be imagined - were grouped together into a new entity, Zeneca. The rump ICI could now make decisions that would probably have been too small tp have been of interest to the larger organisation. Core businesses could be expanded, non-strategic interests divested. Asset swapping became very popular - exchanging the nylon operation for acrylics with DuPont in 1993, selling the polypropylene business to BASF the next year, and almost getting more acrylics in return. What was left was given a thorough downsizing (hence my own departure). As with Courtaulds, the two more focused fragments are doing very well (although there are occasional rumours that Zeneca is about to be swallowed up).
Since then the Swiss pharmaceutical-chemical conglomerates have copied ICI, and Hoechst has announced that all its businesses are to be run independently. Unilever have sold their speciality chemicals operations to ICI. Interestingly, when Unilever announced that these businesses were for sale one of the first shoppers was Henkel, who are bucking the trend. Otherwise it appears that across the industry the giant organisations are getting smaller.
So we come back to the issues that started this discussion. What spurs growth in the industry? Largely the exploitation of technological breakthroughs, and/or forced reactions to others' leads. Is there a limit to organisational growth? Can we predict when a company will be worth less than the sum of its parts? There is certainly no answer that is independent of economic history or geography. DuPont, Hoechst, Bayer and BASF are all larger than ICI before it split, and each of the German majors are now also larger than I.G.Farben before it was broken up. Of these four only Hoechst has shown any indication of fragmentation.
I suggest that there is no precise optimum size. Yes, there is an imperative towards growth, to keep the price/earnings ratio high and ward off potential take-overs. Often diversification is the only means to achieve this. And yes, above a certain size, the organisation will become unwieldy, and demergers become sensible options. But this size will be very sensitive to the initial conditions - the particular niches and markets in which a company operates, and any synergies between the various diverse businesses.
Even if these factors could be included in the equations, I don't believe that the process is deterministic. The characters and caprices of individuals in the organisation can have enormous effects. The presence of a strong CEO with a clear vision of where he sees the company going, a Kearton or a Hogg, a Duisberg or a Henderson, is more important than a particular number in the balance sheet.
It's an exciting, complex industry. Long may it remain so.
Suggestions for Further Reading
1. Coleman, D.C., "Courtaulds: an Economic and Social History. Volume II: Rayon." Oxford, Clarendon Press, 1969.
2. Coleman, D.C., "Courtaulds: an Economic and Social History. Volume III: Crisis and Change 1940-1965." Oxford, Clarendon Press, 1980.
3. Borkin, J., "The Crime and Punishment of I.G.Farben." London, Andre Dentsch, 1979.
4. Reader, W.J., "Imperial Chemical Industries, A History. Volume 1 The Forerunners 1870-1926." Oxford University Press, 1970.
5. Reader, W.J., "Imperial Chemical Industries, A History. Volume II The First Quarter-Century 1926-1952." Oxford University Press, 1970.
6. Pettigrew, A.M., "The Awakening Giant: Continuity and Change in Imperial Chemical Industries." Oxford, Basil Blackwell, 1985.
