Acquisitions, divestments and joint ventures in 1996.

1996 proved a fruitful year for corporate deals - chunky acquisitions interspersed with smaller, highly targeted purchases, pragmatic mergers and joint ventures, bold disposals and canny de-mergers, often followed by alternative re-mergers in the chemical field. Helma Jotischky comments on the

Transnational acquisitions predominated in 1996 with national transactions appearing parochial in comparison. Globalisation continued to exert its magic pull with Latin America moving into the limelight. Non-core disposals also continued, resulting in a lively trade of smaller specialists companies in narrowly focused market sectors. The markets most on the move this year were can coatings, powder coatings and secondary automotive sectors, together with adhesives which proceeded further towards large scale internationalisation.

The prize for corporate acquisitiveness must surely go to Sherwin-Williams of the USA, both in terms of number of transactions and size of payment. The US$830 million paid for the Thompson Minwax group has not been rivalled in the paint field in recent years. Above all, it was the year when the chemicals landscape underwent a fundamental change. Fierce competition in a glutted market for basic feedstock chemicals resulted in a collapse of prices and a subsequent restructuring of the corporate scene. Mergers and joint ventures between competitors alternated with disposals in an attempt to restore price discipline. Focusing on 'core competencies' led to further divestments, while the espousal of the shareholders value principle resulted in demergers and corporate splits.

Hanson, the archetypal conglomerate, even devised a four-way split with a separate flotation for its chemical arm, including SCM. The most fashionable idea, however, was the separation of speciality chemicals and pharmaceuticals, which in turn gave rise to new constellations in both fields - a la Novartis (Sandoz + Ciba) in pharmaceuticals and a la Clariant (ex Sandoz + Hoechst) in chemicals. At the same time, the accompanying sale of minor business interests - such as construction chemicals - offered opportunities for lesser contenders to build new mini-empires. As a result, new giants appeared, new corporate names took root and the chemical map was redrawn. In short, both the number and diversity of deals suggest the interplay of several threads and the existence of more than one scenario.

[TABULAR DATA FOR TABLE 1 OMITTED]

Coatings: Global Goals

Coatings proceeded on their global trail; this year it led to South America. Flirtation with the potentially vast but under-developed Latin American market is hardly new. Most multi-nationals - Akzo Nobel, BASF, Courtaulds and some US companies - have a toehold there.

This year was different: the encroachment into this market by the two leading outsiders - Sherwin-Williams and ICI - was determined and substantial. A confluence of circumstances came to their aid: the nascent Mercosur trading area (between Brazil, Argentina, Uruguay and Paraguay) and its boost to indigenous car manufacture on the one hand and the temporary setback suffered by the region in the wake of the Mexican financial crisis on the other. By helping to weaken the corporate fabric, among them the largest indigenous groups - Bunge of Brazil and Corimon of Venezuela - the latter opened the door to outsiders.

Sherwin-Williams and ICI walked in: Sherwin-Williams in several steps, ICI in a single concerted move. ICI's US$390 million purchase of the Bunge Group's paint empire brought in a quarter of the decorative paint business in the Mercosur bloc; additional sales of US$400 million (exceeding ICI's European decorative paint business); four companies (Tintas Coral in Brazil, Alba in Argentina and Inca in Uruguay plus a Paraguayan firm); five factories employing 2800 people and an additional paint output of 200 million litres. Indeed, it was this purchase which confirmed beyond doubt ICI's leadership in the global paint market, making it the first company to sell more than one billion litres of paint a year.

Sherwin-Williams, in contrast, made about half a dozen individual purchases in Latin America, mainly in automotive refinishes. These included its own eponymous licensee in Argentina (which it had once owned but sold in the 1960s), Elgin, Lazzuril and Globo in Brazil (the latter jointly with Bayer, Bayer retaining the pigment business), Productos Quimicos y Pinturas in Mexico and the Stierling Group in Chile.

It is tempting to view these purchases as a replay on the South American arena of the previous year's contest between Sherwin-Williams and ICI over the Grow Group, eventually won by ICI.

Indeed, the partial de-construction of Grow proceeded during the year, with ICI selling the household and consumer products business (aerosols, cleaning products) to none other than Sherwin-Williams, and the marine/offshore interests (known as Devoe) to Ameron International.

Not that Latin America totally eclipsed the global investor's favourite stalking ground - Asia Pacific. ICI has avowed its interest in looking for further Asian acquisitions to boost its 'under-used' balance sheet, proving it through the purchase of a 70% interest in Vina Paint in Vietnam. ICI also proceeded to strengthen its influence in North America - it already controls 15% of the US paint market - by buying the St Clair Group in Canada, consisting of a wholesale operation, 400 paint stores and numerous factories.

Eastern European companies managed to elicit plenty of interest but few buyers. Akzo Nobel finally plunged into Poland, judged to be the region's star performer, with the outright purchase of Nobiles, a Polish manufacturer mainly of decorative but also of industrial and automotive coatings. It is not known what has [TABULAR DATA FOR TABLE 2 OMITTED] become of an earlier joint venture between Nobiles and Herberts for the marketing of automotive OEM paints. Akzo Nobel, which already owns a leading paint company in Hungary, had announced some years ago a joint venture with the Russian paint producer Pobeda Rabochikh but has since withdrawn from the deal. The main transnational transactions are shown in Table 1.

Market Niche Accretions

Global acquisitions mainly follow a two-pronged attack: targeting a particular global region and/or a specific market niche. The sectors most on the move this year were can coatings, powder coatings and secondary automotive markets, with the emphasis as much on technologies as on markets. Europe was the scene for most of these market niche accretions.

Valspar's purchase of the Coates Can coatings business from the Total Group had all the hallmarks of a canny deal: a wide geographical spread, a complementary market segment and access to a particular technology which Valspar lacked, namely the metal decorating (inks) aspect of can coatings. It also gave Valspar immediate entry into the European market (the UK, France, Germany, Norway and Spain) as well as into Australia, strengthened its North American profile and, as part of a two-stage deal, promised to extend its presence to Asia Pacific and Africa - in total encompassing a US$125 million business, 40 sites and a workforce of 500.

This substantial purchase tended to obscure more modest transactions in the same market. Valspar's acquisition of the can coatings business of Gordon Bartels in the USA is a case in point. Dexter's purchase of Jallut Iberica, a Spanish specialist in food can coatings, and Rhenania's acquisition of Grebe's can coating business are further examples. The continued globalisation of the metal packaging industry itself - typified by the merger between Carnaud Metal Box of France and Crown Cork & Seal of the USA in 1995 and between Pechiney and Viag in 1996 - will act as a further spur to the emergence of global suppliers of can coatings.

Powder coatings, too, experienced a further concentration, though mainly on the US market. Evtech, Eastman's powder coating interests, went to PPG and TCI's business to RPM, while Herberts profited both from the powder coating sale by Dexter and by O'Brien. As a result, Herberts can now claim world leadership in powder coatings.

With much of the main automotive OEM coatings market highly concentrated already, it was the secondary markets national, component and refinishing sectors - which aroused interest.

DuPont's surprise purchase of the automotive OEM business of its UK licensee, Carrs Paint, reduced the number of European national players to virtually two: Bollig & Kemper in Germany and Blancomme in France. The purchase, which comprised OEM finishes, refinishes, paints for plastic components as well as distribution services, represented the best part of Carr's [pounds]40 million turnover.

Less noticed was the further inroad made by PPG of the USA into the German commercial vehicle market with the purchase of W L Schwaab Lackfabrik, a medium-sized supplier of bus and truck coatings. To this should be added the acquisition by Herberts of Becolin, a German manufacturer of automotive component coatings, and purchases by both Akzo Nobel and ICI of distributors of refinishes. While ICI bought Sigma's Benelux distributor, Akzo Nobel acquired its own Irish distributor Reftech, and its Hong Kong agent Sung Ling Apac, complete with four regional offices on the Chinese mainland.

Sherwin-Williams' accretions in the automotive refinishing field in South America have already been noted. The automotive joint venture between Renner Herman and DuPont was restructured with DuPont doubling its share from 23% to 46%. In the USA itself, Valspar strengthened its refinishing arm with the purchase of the private producer House of Kolor.

Local interests

Purely national transactions between companies in the same country proved less significant this year, with the possible exception of the US market. In the UK, for instance, pigment manufacturer European Colour took over specialist paint producer Tor Coatings, best known for its toll manufacture facilities. Specialised technology rather than physical facilities was the object of several other European acquisitions. Herberts made two such purchases during the year, in each case integrating the technology of the acquired companies with its existing facilities. They are Elf Atochem's German paint business, focusing on coatings for plastics, and Becolin, specialising in heat-resistant paints as well as coatings for automotive parts.

It was, however, the US market which [TABULAR DATA FOR TABLE 4 OMITTED] provided the greatest activity and Sherwin-Williams the highest number of purchases. Their sheer number managed to dwarf Lilly's purchase of Guardman Products, which doubled its size and possibly thwarted Lilly's own takeover.

Throughout the year Sherwin-Williams made a number of smaller acquisitions on the US home market, mainly local producers of architectural coatings complete with stores, shown in Table 2.

The trump card came late in the year with the US$830 million purchase of Thompson Minwax Holdings from Forstman Little & Co, an investment house which itself had acquired the business for US$700 million from Eastman Kodak only two years before. Three separate companies came with the acquired group, two from the USA and one British: Minwax Inc, producer of interior woodstains and varnishes; Thompson & Formby, producer of Thompson exterior water sealers, Formby enamels and Red Devil paints; and Roncraft, a market leader in the woodstain and varnish field. It was Sherwin Williams' seventeenth acquisition over the last two years and the one which, almost inadvertently, gave it entry into the UK market.

Focus on Inks and Adhesives

Printing inks made fewer headlines this year; adhesives proved more newsworthy. Both are becoming increasingly more global. Manders became a more international company with the purchase of Croda's American inks as did Sericol with its new interests in the Australian and Indian markets. Several companies opted for a strategic exit from the inks market altogether, among them Zeneca (in favour of Sun Chemical) and BASF in North America (in favour of Flint Ink). Table 3 documents the key transactions.

[TABULAR DATA FOR TABLE 5 OMITTED]

Adhesives, with their ubiquitous use in so many applications, attracted greater interest. The year's champion buyers were Elf Atochem of France and Henkel of Germany. Henkel, already world leader in adhesives, fought for and won control of American producer Loctite, paying US$1.3 billion for the 65% stake in the company it did not already own. Its other purchases included Canadian Adhesives in Montreal, the Thiem Automotive Division of adhesives and sealants and United Resin Products, both in the USA.

Elf Atochem, already the owner of CECA adhesives, moved from No.10 in adhesives worldwide to among the top five. This it achieved through the purchase for some US$200 million of Findley Adhesives of the USA - itself reckoned No.11 worldwide - and later of Laporte's European adhesives business with Evode at its core. Table 4 gives further details.

Chemical swings

The instability in basic chemical markets created ripple effects in the polymer field further downstream. Polyester resins glutted the market, their manufacturers changed hands or became the subject of joint ventures. There was much pruning as companies preened themselves for that leaner 'perfect fit' look. Here more than one scenario prevailed as some companies defined and redefined themselves, shedding one product line or buying another.

Among the well-known names that changed hands during the year were Daniel Products, bought by Harcros and Mearl, acquired by Engelhard. Those bidding goodbye to old businesses included Zeneca (to textile dyes), Cookson (to organic pigments) and Hoechst (to fluorochemicals). Table 5 gives leading transactions.

Forging Joint Ventures

In a mature market, joint ventures, and ultimately mergers, were often the alternative to outright disposals. There is a distinct difference here between the joint ventures forged in Europe, in an attempt to rationalise the market, and those designed to gain market entry in the Asia Pacific region.

In Europe the most notable joint ventures were in the chemical field, some stopping short of actual mergers. Old rivals would band together to restructure glutted markets. Examples include alliances between BASF and Hoechst in polypropylene and BASF and Shell in polyethylene; DSM and BASF in unsaturated polyesters; Huls and Bayer in emulsion polymers.

Scandinavian companies, which had pioneered the joint venture idea in Europe, engaged in several interesting alliances during the year. Tikkurila of Finland formed a 67:33 joint venture in colorants with McWhorter Technologies of the USA. With Soab (Sweden), McWhorter (USA), and its UK subsidiary Kemira Coatings, Tikkurila formed another joint venture for resin production in Sweden, much of it destined for Eastern Europe.

Tikkurila and Becker were already partners in the Baltic states through Baltic Color, the umbrella organisation through which the two companies manufacture and market paint in Estonia, Latvia and Lithuania. The sale during the year of the 22% stake in the company by the Latvian state made the two Scandinavian companies equal co-owners of the enterprise.

Two examples from the Americas illustrate the versatility of joint ventures in breaking into new markets or managing existing ones. The partnership between paintmakers Sico in Canada and Berel in Mexico - forming a new Mexican company Sicorel - is an example of the former approach. The alliance between Morton Automotive Coatings in the USA and Nippon Paint, for supplying plastics coatings for Japanese carmakers in North America, illustrates how existing markets can be managed and shared.

It was, however, in Asia Pacific where joint ventures really came into their own. China continued its attraction as the favourite venue. Some companies had as many as a dozen joint ventures there; Nippon Paint entered into its fifth agreement during the year (for automotive paint in Hebei), Hoechst into its seventeenth (for azo pigment production at Tianjin). Sachtleben signed an agreement for lithopone production, but Tioxide's letter of intent for Ti[O.sub.2] production was later cancelled.

The emergence of India as a joint venture venue should also be noted. Following its economic liberalisation and good growth record, Indian companies are now deemed attractive partners. W R Grace anti Ciba are only two companies which have chosen this route. Table 6 gives further examples.

Mergers and Demergers

Mergers and demergers gathered momentum during the year, taking on a curious twist. Demerged companies often remerged with different partners, forming new super-companies narrowly specialising in a few core businesses but operating on a global basis. Demergers thus often resulted in new mega-mergers with global marketing clout.

Novartis anti Clariant are examples. Novartis represents the 1996 merger between the rump of (the demerged) Ciba and Sandoz; Clariant is the speciality chemicals business spun-off by Sandoz in 1995. The twist came late in 1996, with Hoechst now offering to merge its own struggling speciality chemicals business into Clariant in return for a 45% equity stake.

The new Clariant Hoechst constellation will create the world's largest chemicals speciality group, ahead of Ciba's. Many of the speciality chemicals produced by the enlarged company are under severe pressure. The textile chemical sector is facing particularly harsh competition from China and India. In 1995, Bayer and Hoechst had merged their textile dyes businesses into a new company, Dystar. Dystar is now No. 1 in the field worldwide. In 1996, Zeneca sold its textile dyes business to the other leading contender, BASE With the emergence of Hoechst-Clariant, further market rationalisation can be expected. Mega-mergers offer an expedient means of effecting such change.

Demergers also gathered pace. Hiving off high value added pharmaceuticals, healthcare products and agrochemicals from commodity chemicals, a la Zeneca, became particularly popular. Ciba and Sandoz went ahead with it, Monsanto is considering it, while Bayer and Rhone-Poulenc have reportedly ruled it out. With so many changes afoot the chemical industry has emerged with a new face and operates in a redrawn landscape.

Enhancing shareholders' value is the new banner for change. Old fashioned conglomerates, comprising dissimilar holdings, are decidedly out of favour. The Hanson Group, that archetypal conglomerate, accordingly decided to split itself into four: Millennium Chemicals, with SCM and Quantum Chemicals at its core, was one of the four successor companies floated on the New York Stock Exchange. The Williams Group, another currently under performing conglomerate, opted for a more conventional solution by selling off its Home Improvement Division 15 diverse businesses in all. Other disposals may follow, as well as acquisitions in the fire protection and security products area.

Among the year's more conventional mergers was the pooling of Klintens and Acroma, Alfort & Cronholm's and Becker's respective industrial wood finishes businesses.

Below the Parapet

Acquisitions, mergers, divestments and [TABULAR DATA FOR TABLE 6 OMITTED] joint ventures represent the public face of an industry in the throes of restructuring. The stirrings below the parapet were even more indicative of the industry's state of health. Administrative reorganisations, rationalisations, cost reviews, outsourcing decisions, closures of physical facilities - including some recently acquired ones - have all become routine events.

Acquisitions and mergers - both focused on specific technologies or markets - are part of the same arsenal of corporate strategies, along with downsizing and disposals. Emphasis on developing corporate 'core competencies' emerged as the essential driving force behind acquisitions and disposals, proving more potent this year than the speculative impulse.