insead busienss case

Acquisition Wave in the Fine Chemicals Industry: CLARIANT-BTP Acquisition (A)

04/2007-5268

This case was written by Laurence Capron, Associate Professor of Strategy at INSEAD, and Andrew Horncastle, Project Manager at Roland Berger Strategy Consultants. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright 2006 INSEAD

N.B. PLEASE NOTE THAT DETAILS OF ORDERING INSEAD CASES ARE FOUND ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION.

Copyright 2006 INSEAD 04/2007-5268 1

On January 21, 2000, the board of Clariant, in consultation with the BTP board, was about to make a cash offer for the entire ordinary shares of BTP that amounted to 1.7 billion. Headquartered in Muttenz, Switzerland, Clariant AG was one of the largest global specialty chemicals companies, with 1998 sales of approximately 3.6 billion (5.9 billion) and 30,000 employees worldwide. Clariant was very aggressive toward the fine chemicals business and wanted to develop its strategic growth area of life science intermediates. Clariant estimated that the merger of its life science activities with those of BTP would create a global supplier of intermediates and active ingredients in pharmaceuticals and agrochemicals, with total sales of around 340 million (564 million). The global market for fine chemicals was worth an estimated US$45 billion (41 billion) per year, and BTP was the third-largest company. The acquisition is fully in line with Clariants strategy to double the proportion of its business in strategic growth areas, such as life science intermediates, within a few years, said Rolf Schweizer, Clariants Chairman and President.1

Clariant was considered a stellar specialty chemicals company. In 1998, after a substantial refocus of its portfolio and its successful acquisition of Hoechst Specialty Chemicals, Clariant was rated the best-performing chemicals stock. In March 1998, a spokesperson for Salomon Smith Barney commented on Clariant subsequent to the acquisition: The acquisition of Hoechst Specialty Chemicals was a pivotal event for Clariant, tripling the size of the company and creating the largest specialty chemicals business in the world. The price paid was 70% of sales and 5.5 times earnings before interest, taxes, depreciation and amortization (EBITDA). As Hoechst felt this was a fair price, the question must be asked why the market is now valuing Clariant at 150% of sales and over 10 times EBITDA, when two-thirds of the business came from Hoechst.

Some chemicals analysts stressed that acquiring BTP would provide Clariant with critical mass in fine chemicals with a broader customer base, a broader range of technologies, a lot of cGMP (current Good Manufacturing Practices)2 facilities, and sufficient size to withstand the inevitable fluctuations in custom synthesis when new products fail to reach the market. It was also expected that Clariants bid for BTP would trigger one or more counterbids from rival chemical producers, such as DSM, Bayer, Rhodia and Degussa, which were also looking to expand their fine chemicals operations.

Study Questions:

Does the Clariant-BTP acquisition make strategic sense? How does the price for BTP compare with previous deals? What would you advise Rolf Schweizer? Should he purse that deal?

1 Quoted in Clariant appears to gain control of BTP Chems in Chemical Market Reporter, January 31,

2000. 2 cGMP (current Good Manufacturing Practices) refers to the body of regulations that describe the methods,

equipment, facilities and controls required for producing human and veterinary products, medical devices and processed food. Manufacturers of active pharmaceutical ingredients (APIs) must comply with these regulations. In drug development, samples for clinical trials must be produced under cGMP conditions.


The Chemicals Industry: Historical Background

Transformation of Chemicals Conglomerates

During the 1960s, the chemicals industry was made up of major national conglomerates that grew by diversifying into new products, markets and regions. In the 1990s, pressures from shareholders and poor financial performance forced these conglomerates to split their activities into three parts: 1) petrochemicals and plastics, which are often referred to as commodities, 2) specialty and fine chemicals and 3) pharmaceuticals. Many of the leading specialty chemicals companies originate from this break-up process and subsequent mergers. Companies such as Ciba-Geigy, Hoechst, Rhne-Poulenc and Sandoz abandoned chemicals and focused on life sciences, i.e., pharmaceuticals and agrochemicals. In doing so, they formed Novartis (Ciba/Sandoz), and Aventis (Rhne-Poulenc/Hoechst), simultaneously creating commodity producers such as Celanese and specialty chemicals companies such as Clariant, Rhodia and Ciba Specialty Chemicals.

What Are Specialty Chemicals All About?

There is no clear, broadly shared definition of what specialty chemicals are. The specialty chemicals industry encompasses a broad range of product lines and categories. Industry groups and independent research firms covering the industry have, in some cases, identified more than 30 unique sectors in the industry, many of which are segmented further. Yet, the four largest segments fine chemicals (consisting of active pharmaceutical ingredients and pesticides), advanced ceramics materials, specialty polymers and electronics chemicals have a share of about 45% of total specialty chemicals. Although some industry sectors are dominated by a handful of large, diversified global players, there remain a large number of moderately sized companies. Securities firm Piper Jaffray has identified more than 200 US-based middle-market companies, with estimated revenues of between US$50 million and US$500 million, that compete in the broader specialty chemicals industry. In general, specialty chemicals products commonly share a number of characteristics that make them more profitable than their basic chemicals counterparts:

Specialty chemicals products, unlike commodities, are normally sold on the basis of performance in the customer end product rather than specification.

Specialty chemicals products are manufactured and used on a much smaller scale than commodity products, and their selling prices are higher.

Although specialty chemicals products constitute a small part of the cost of finished and semifinished manufactured goods, they often have an important impact on the quality and usefulness of many products.

They have a high technology component; product development and custom formulations are key, and they are supplied with a high degree of technical service and specialized marketing. Both factors create high entry barriers.

New product development is critical to avoid being commoditized. Specialty chemicals products have lower capital intensity than commodity chemicals.

Price swings are much lower than for commodity chemicals, being driven more strongly by customer industries than by raw material prices.


Fundamental changes since the mid-1990s have reduced growth rates and margins in specialty chemicals compared to the early 1990s: average sales growth in the early 1990s was 5% to 7%, falling to 3% to 4% in the late 1990s. Average earnings were 12% to 14% at the beginning of the 1990s, falling to 8% to 10% at the end of the decade. The main reasons for these changes are commoditization of products and less differentiation, increased competition from Asia, and consolidation and globalization of customers, increasing their market power. In 1998, in particular, specialty chemicals had a terrible year, underperforming the sector, although specialties were generally considered less cyclical, with higher growth and stronger margins. The total chemicals sector, worldwide, underperformed local markets by about 30% in 1998. The worst performance was in specialty chemicals, with stocks down relative to local markets by an average of 35% to 40%. Slowing growth, economic collapse in Asia and substantial pressures in product prices were all important drivers of profit weakness. Commodity chemicals prices fell by an average of 28%, with greater pricing pressure at the specialty end of the industry than had been expected.

In order to address pressures from shareholders and improve performance, a number of leading specialty chemicals players restructured their portfolios and significantly strengthened, or planned to strengthen, their fine chemicals activities.

Entry into the Fine Chemicals Industry

Fine chemicals is the largest single segment in specialty chemicals (approximately 23% of total specialty chemicals market) and offers the highest growth, with conservative estimates of 7% to 9% for 20002005, as shown in Figure 1.

543

Foodadd.

21

6

Printing inks

Plastic add.

Flameretardants

Spec. coatings

Oilfield

Synth. lubricants

Separationmembrans

Imaging chem. + mat.

Speciality polymers

Electronic

Advanced ceramic mat.

Spec. surfactants

Ind. + Inst. cleaners/

surfactants

Rubber-processing

Textile Synth. dyes

Mining

Lubric. oil add.

Fine Chemicals

0

10

20

30

40

50

60

70

0 1 2 3 4 5 6 7 8

Market value[bn]

Estimated AnnualGrowth Rate 2000-2005 [%]

Market value Adhesives + sealants

Corrosion inhibitors

Biocides

Antioxidants

1 Water mgmt. chem.

2 Cosmetic chem.

3 Water-soluble polymers

4 Flavors + fragrances

5 Catalysts

Figure 1: Specialty Chemicals Segments

Source: Deutsche Bank-Roland Berger

Historically, the fine chemicals supplier base had been fragmented, with more than 500 firms participating in the US and Europe. Traditionally, most of these firms had been medium-size organizations, with sales between US$20 million and US$50 million. In the mid-1990s, prospects of increased outsourcing from the pharmaceutical and agrochemical sectors, which together accounted for nearly 75% of global fine chemicals consumption, aroused immense interest in the sector. The major drug companies were growing rapidly, their new product


lines were full, and they were outsourcing production of active ingredients and intermediates to the contract manufacturing sector. Furthermore, fine chemicals was perceived as enjoying high margins and low cyclicality, thanks to the stable main customer industry, pharmaceuticals. Industry growth was being pegged in double digits, and large fund houses were giving a buy rating to the sector. Industry participants also anticipated significant growth prospects. For instance, Steve Hannam, CEO of BTP, said, The current growth in fine chemicals is the largest opportunity I have seen in specialty chemicals in my 30 years in the industry.3

Although fine chemicals players are often a division of larger companies (Dow, Eastman, Bayer, BASF), some pure players, such as Lonza and Siegfried, co-exist with the more diversified groups. Lonza was the largest player in contract manufacturing until the late 1990s, when it was eclipsed by acquisition-born giants such as DSM and Degussa, and many observers still consider it the bellwether of the industry.

Value Chain of Fine Chemicals and Key Success Factors

Fine chemicals is almost entirely an outsourcing business in which so-called active ingredients that are key to the effectiveness of drugs and pesticides are produced for the client industries. Fine chemicals companies, therefore, offer their services along the value chain of the life science industry, from laboratory-scale custom R&D to larger-scale custom manufacturing during the commercial life cycle (see Figure 1). By outsourcing these activities to fine chemicals companies, the life science industry can focus on its key competencies, such as the proprietary part of drug discovery and marketing, without having to cover the whole value chain. Therefore, it is key to fine chemicals outsourcing to be able to solve customers technical or supply chain challenges at equivalent quality and with better economics and timing than the internal pharmaceuticals R&D or manufacturing organizations can. Consequently, the strength of the fine chemicals market is directly tied to the performance and outsourcing patterns of the life science industry.

In recent years, large pharmaceutical companies have moved from tactical outsourcing, whereby outsourcing was used to fill temporary needs, to strategic outsourcing, whereby outsourcing is key to reducing the internal fixed cost base and securing leading-edge technology and resources. Emerging drug companies have different needs, and they outsource many activities the majors do internally. Out of necessity, they outsource small volumes of many promising compounds. Smaller companies also seek more guidance from a contract manufacturer than does a big drugmaker, including regulatory expertise; quality assurance; and assembly of the chemistry, manufacturing and controls sections for investigational new drug (IND) and new drug application (NDA) submission to the Food and Drug Administration.

Outsourcing of the early phase requires a high level of service and customization and a flat organization in which lots of people have direct contact with the customer, while the late-phase and commercial manufacturing that major drug firms outsource requires process efficiency, rapid scale-up of manufacturing and a top-down model, often with a single point of contact. In the late phase, pricing, planning, scheduling and long campaigns are important. Today, large contractors, such as Degussa, believe that customers want a one-stop shop where 3 November 1999, Bear Stearns Fine Chemicals Seminar.


they can buy both types of production. They want to be present throughout the entire outsourcing value chain (see Figure 2).

Drug Discovery

Pre-clini-cal deve-lopment

Chemical process develop-ment

General inter-mediates

Advanced inter-mediates

Active pharmaceutical in-gredients

Dosage form products

Marketing and distri-bution

Outsourcing opportunities In principle 6 of 8 steps can be outsourced to fine chemicals Pharma industry can use own capacities alternatively

Pharmaceutical R&D Primary manufacturing Secondary manufacturing

Figure 2: Pharmaceutical Value Chain and Outsourcing Opportunities

Risk Associated with Outsourcing Business

Collaborating with major pharmaceutical firms raises some risks. As with any outsourcing activities with big clients, there are two main types of risk to assess. The first risk is associated with demand fluctuations. The demand varies with clients outsourcing needs, which can fluctuate according to their sales, their internal competencies and their degree of capacity utilization. The outsourcing trend did not deter drug companies from adding in-house capacities, increasing already commonly recognized overcapacities in the market. The second risk is associated with overdependence on one or two customers. For example, in 1998, 67% of ChiRexs business was with Glaxo Wellcome. In December 1999, Glaxo Wellcome canceled US$28 million of orders for two drugs, which represented about 20% of ChiRexs turnover. As a result, ChiRex saw its stock price plummet 64%, from US$34/share to US$12/share.

Collaborating with new emerging companies is not risk-free, either. Small clients outsource small volumes of many promising compounds. Yet, only a select few of these compounds move on to clinical trials, and even fewer survive to become successful. Many companies fail along the way.

Consolidation of Fine Chemicals

In addition to its growth prospects, the fine chemicals industry was experiencing a wave of consolidation. Experts and participants stressed that acquisitions in this industry were driven by sound reasons such as 1) finding new sources of growth, 2) catching up with the client pharmaceutical industry consolidation trend, 3) achieving critical mass and 4) providing a one-stop shop service.

Finding New Sources of Growth

Firms were eager to jump on the acquisition bandwagon, as they anticipated that fine chemicals would continue to strongly outperform the average specialty chemicals markets. During the past decade, growth of the fine chemicals market has, on average, been 5% to 7%


per year, and margins have been high and stable compared to specialties and even more cyclical commodities markets. In 1999, analysts such as Deutsche Banks Chris Whitmore reinforced this view, foreseeing that the global fine chemicals market will grow 15% a year during the next five years, compared to an average growth in the specialty chemicals sector of just 4%. More cautious experts still saw high growth: Eight percent a year for the fine chemicals industry is more realistic. The major reason for these optimistic forecasts lay in the belief that pharmaceutical companies, in particular, would need to continue strong outsourcing to be able to focus their resources on core competencies such as drug development and marketing. Furthermore, rising development costs through more stringent regulatory requirements and more complex R&D procedures on the one hand, and the necessity to minimize time to market on the other, has made it increasingly less efficient for life science companies (pharmaceuticals and agrochemicals) to maintain a complete toolbox of technologies and processes. Optimistic forecasts are reflected in the evolution of firms value (see Appendix 3).

Catching Up with the Consolidation of the Client Pharmaceuticals Industry

Some fine chemicals companies shared the view that the consolidation sweeping through the key customer life science industries was going to spread to the fine chemicals sector. The market share of the top 10 pharmaceuticals companies had increased from 35% in 1996 to 47% in 2000, and in agrochemicals, the top five players covered around 80% of the market. The top 10 fine chemicals players have a combined market share of only around 20%. Executives of the leading specialty and fine chemicals companies, such as Manfred Spindler of Degussa, believed that in a few years, there will be between five and seven top-tier fine chemicals producers with sales of more than US$500 million a year. Smaller companies will either be acquired or become second-tier producers, specializing in niche technologies. They will end up supplying the first-tier contract manufacturers. A comment made by pharmaceutical giant Roche supported this trend: What has changed is that instead of dealing with 20 different companies, we now deal with maybe five. The contracts awarded to those companies are therefore much larger, and the cooperation is more intense. Needless to say, the top fine chemicals companies, like Lonza, BTP and DSM, wanted to remain in the first-tier league, but in addition, specialty chemicals players with, at that time, had smaller fine chemicals activities, such as Degussa, Clariant and Rhodia, had ambitions to move up to the first tier and not be stuck in the middle.

Achieving Critical Mass

Increasing demand for custom manufacturing from the pharmaceuticals sector called for increased investment geared to high-value pharmaceutical ingredients. Escalating R&D, equipment and regulatory costs require large investments. Large players thus began eyeing mergers and acquisitions to attain critical size and enter profitable segments that would allow amortization of such investments on a bigger volume. Beyond pure size effects, it was largely recognized that acquisitions in fine chemicals could help realize scope benefits In terms of exposure to the global market, a limited sales force, a narrow technological or product focus and localized production would not favor small players. Larger fine chemicals players have a higher ability to spread risks across projects, countries and customers. Acquisitions could facilitate access to complementary technologies that would take much longer to build organically, thus missing market opportunities in this highly innovative market. Acquisitions also add regional reach, especially when considering that the largest end-use market is in the


US, whereas for historical reasons, most production is in Europe. While greater scope and amortization of R&D, facility and regulatory expenses were benefits that would be associated with greater size, there was an ongoing discussion among industry experts about whether or not there were substantial synergies to be realized when acquiring fine chemicals companies, and whether scale mattered.

The optimal size, or critical mass, for a custom manufacturer has been the subject of considerable debate for years.4 According to a management consultant at Roland Berger Strategy Consultants companies in specialty and fine chemicals need a minimum critical size of 6 billion (US$5 billion) in annual sales. A company would want to be in at least five of the 50 market segments in specialty and fine chemicals in order to actively manage its portfolio, said Wolfgang Falter, a partner at Roland Berger.5 It would normally want to be number one or number two in each of these segments, with sales of around 1 billion to 2 billion each. In addition, it would have to spend a minimum of 300 million annually or 5% of sales on R&D to be in a position to enter new market areas. Other participants in the industry came up with more conservative estimates. Giorgio Oberrauch, fine chemicals business manager of the Zambon Group, estimated the optimal size at between US$100 million and US$150 million in revenues. Fairmount Chemical Co.s Luke Verdet, reluctant to put figures on critical mass, pointed to the complexity of the notion. Is it the size needed to lure investors? Is it the amount of business which will allow a company to survive during a downturn of the economy? Is it the number of production required to keep the operation profitable, while, in the meantime, being able to invest in new equipment and develop new products for the market ahead? It is certainly all of that. For us, one way to achieve critical mass is to partner with other players, either to complement our technology or to give us access to a particular market.6 In a more critical tone, Pressure Chemicals Robert Dollinger said: Critical mass is a much-overused expression to justify the large expenditures multinationals have made in their efforts to enter the custom business. They seem to believe that bigger is better in the custom world. What they fail to realize is that the custom business cannot be run like a commodity operation using the same economic models. He noted that DuPont and Union Carbide both tried to make a strong presence in the custom business 25 years ago, and they both exited after a few years.

Even large companies concede that being both nimble and large presents a tricky balancing act. Other than in large-scale commodity chemicals, where capacity is measured in kilotons, fine chemicals is, by definition, a small-scale industry, with, typically, a maximum of a few hundred tons of capacity per year in custom manufacturing, down to kilo level in custom R&D. Furthermore, the plants serve many purposes, and products are manufactured in discrete campaigns that determine the utilization of the plant, and therefore the economies of scale. The typically hazardous products are not easily shippable between sites, which prevents synergies through integration of sites. The largest, albeit limited, synergy potential stems from the integration of sales and marketing. However, since customer relationships are key, this has to be done with prudence.

4 Is bigger really better in custom manufacturing?, by Clay Boswell, in Chemical Market Reporter, August

13, 2001. 5 Communication at ECMRA Strategy and Marketing Conference, London, October 11, 2000. 6 Cited by Clay Boswell (see footnote 4).


Generally, the fine chemicals industry is a service industry that provides complex outsourcing of custom R&D and manufacturing to the pharmaceutical and life science industries. Therefore, a close and trustful customer relationship, meaning physical proximity as well as close interaction with the customers R&D department, is a key success factor. Furthermore, it was commonly said that large, diversified fine chemicals firms were slow to respond to market changes and client needs. Fairmount Chemical Co.s Verdet noted that Generally, large chemicals companies do not deal well with small multipurpose plants, where continual manufacturing changes are needed for product optimization.7 There is also a strong argument that larger size leads to diseconomies of scale by increasing bureaucracy, implying inflexibility in this fast-moving, innovative business.

It is worth noting that many focused players have remained independent and have taken no part in the M&A frenzy (FIS, Hovione, Lonza, Omnichem, Orgamol, Siegfried, Sumika). In fact, they all probably see M&A as a strength-diluting exercise, as it debilitates one of their strongest assets, namely, their company culture. Their growth, which has consistently been in double digits for the past 10 years, remains purely organic. Hoviones President of US operations, Dave Hoffman, noted: We want to build from internal growth, taking the quality systems and our internal culture, that we have developed and which have been very successful for us, and using them on a global basis. All sites operate on the same quality platform. We believe that will set us apart from the others that grow by acquisition and inherit a patchwork of quality systems that is everything but seamless.8

Providing a One-Stop Shop Service

New and enlarged laboratories and plants are being set up as a part of the strategy to offer fine chemicals customers a complete package of services. These services include contract research, preparation of samples for testing, process optimization and production scale-ups. Yet, firms embarking on a one-stop shopping strategy must maintain the service-oriented culture that made their units successful suppliers of early-phase chemistry in the first place. This is not an easy task, however, because the early-phase services are fundamentally different from the late-phase and commercial manufacturing that major drug firms outsource.

Early-phase development is characterized by a high failure rate of products and winner take all logic. Failure is the norm in drug development. Of 5,000 compounds in preclinical testing, only five will make it to Phase 1 clinical trials, and only one will be approved. When its winner take all for the one successful product, having a piece of early-phase pies makes sense. If firms can participate very early in a project and implement their specific technology, then the customer is locked in.

The 19971998 acquisition activity is summarized in Table 1 below.9

7 Cited by Clay Boswell (see footnote 4). 8 Cited by Clay Boswell (see footnote 4). 9 We did not include in this table the acquisition of the Switzerland-based Pharmaceutical Fine Chemicals

(PFC) company by Allied Signal as there was no available financial data. PFC had sales of US$110 million in 1997.


Table 1: Major Deals in the Fine Chemicals Industry > 150m (19971998)

Target Acquirer Announcement Date

Details

Haltermann (Germany) Fine chemicals

Ascot (UK) December 8, 1998

Combined entity sales: US$365 m Acquisition price: 0.15 b

Inspec (UK) Fine chemicals

Laporte (UK) Highly diversified chemicals firms New focus on specialty chemicals

August 5, 1998 Combined entity sales: 1.25 b Acquisition price: 1.1 b

Archimica (Italy) BTP (UK) July 6, 1998 Combined entity sales: US$700 m Acquisition price: 0.2 b

Gist Brocades (Netherlands) Fine chemicals

DSM (Netherlands) Petrochemicals commodity New focus on fine chemicals

February 23, 1998

Gist was merged with the fine chemicals division of DSM. Acquisition price: 1.6 b

Holliday (UK) Fine chemicals

Yule Catto (UK) Specialty chemicals firm

December 8, 1997

Combined entity sales: 550 m Few overlaps in product portfolio Acquisition price: 0.4 b

This acquisition activity continued in 1999 with smaller deals. For example, Cambrex made a series of small to medium acquisitions, including Conti, Irotech Laboratories, FMC, Bioproducts and Poietic Technologies. Catalytica bought Wyckoff for US$60 million. ChiRex bought Caudron (paying US$6.5 million for a US$3.9 million business). In May 1999, AstraZeneca, the newly merged Anglo-Swedish life science company, agreed to sell for 1.3 billion (US$2.1 billion) the Zeneca specialty chemicals business to a management buyout financed jointly by private equity companies Investcorp and Cinven. The deal represented the largest buyout ever in the chemicals sector. The new entity was named Avecia. With sales of US$1.1 billion last year and an operating profit of US$150 million, it was to become one of the top European specialty chemicals manufacturers.

The acquisition activity was expected to continue in 2000. As indicated in Appendix 1, acquirers paid substantial prices, reflected in both the premium and the average transaction multiple. While valuations of deals completed in the chemicals industry during 1996 and 1997 stood at roughly 6 times EBITDA and 0.7 time sales, acquirers could pay as much as twice the multiple that was used in the chemicals industry.

In spite of relatively high prices paid, companies participating in these deals have been rewarded fairly well. Stock prices have generally moved higher in the wake of the deals (see Appendix 2), and equity analysts have lauded them. For instance, Paul Nailor, head of European chemicals at CS First Boston, said: Laporte CEO Jim Leng has done a fabulous job in restructuring the group, and by buying Inspec, has finally made the move everyone has been asking him to make. It is a great fit.10

Note that most major deals were undertaken by stock-listed companies. For stock-listed companies, acquisitive growth remains attractive to maintain earnings momentum. Generating 10 Quoted in M&A activity peaks: Will values hold? in Chemical Week, September 9, 1998.


organic growth is difficult and time-consuming. To continue earnings momentum, firms have sought to cut internal costs, which can go only so far before harming the company, or they have looked outside for acquisitions to maintain growth. And they know how critical earnings growth is to price-to-equity multiples and stock evaluation, said Peter Vermylen, Managing Director and head of the chemicals division at Salomon Smith Barney.11

Clariant-BTP Deal

On January 21, 2000, the board of Clariant, in consultation with the BTP board, was about to make a cash offer for the entire ordinary shares of BTP. BTP, through its recent acquisition of Archimica, had moved up to third place in the fine chemicals industry and employed approximately 2,800 people worldwide. In the financial year ended March 31, 1999, BTPs audited consolidated turnover was 374 million, and operating profit was 58 million (before amortization of goodwill), with an operating margin of 15.34%. Clariant also expected that the combined life science intermediates business would have a strong pipeline of new products, which could contribute to additional sales within three years of more than 190 million (CHF 500 million). In late 1999, BTP, which makes part of the molecule in Pfizers Viagra, predicted that three major custom manufacturing projects would contribute an additional 100 million to its annual sales by 2002. While some analysts stressed that BTP would offer strong growth prospects in an attractive market, some industry participants, such as Hans Pommerening, business manager for fine chemicals at Wacker Chemie in Munich, raised a red flag: The whole sector is becoming much more competitive. A lot of money has gone into new plants, which is causing overcapacity.

BTP, with approximately 40% of its sales in North America, promised to increase Clariants presence in that important market. BTP also had multisite operations, with fine chemicals plants in the UK, France, Italy and the US. Clariant expected to take advantage of these widespread operations to enter those markets. The company also expected to gain lucrative custom manufacturing contracts with drug giants including Roche, DuPont, Warner-Lambert and Pfizer. BTP supplied Pfizer with a key ingredient for the impotence drug Viagra. Clariant was expecting that the merger would also make it a strong player in leather chemicals. Its dyes and finishing products were to complement BTPs wet-end chemicals. The two companies already had joint development projects in that market. The acquisition of BTP was also to give Clariant new sites that complied with current Good Manufacturing Practices.

For BTP, the deal was very attractive. The chemical industry was witnessing a major consolidation phase, and with sales of 374 million, it was too small to compete for independent survival against the might of Degussa, Clariant, Dow, etc., with sales in the billions. Yet, its fine chemicals business was doing well. It was the number-three player in the fine chemicals business, an area where Clariant wanted to consolidate. The Archimica fine chemicals company, which BTP acquired in 1998, was the third largest in the world. According to BTPs CEO, Steve Hannam, the industrial logic was the clinching factor in making the deal. In addition, the price offered to BTP was too good to ignore. Appendix 4 provides the financial details of the deal. Based on the bid, BTPs market capitalization was 28% of that of Clariant, even though it realized only 10% of Clariants sales.

11 Quoted in M&A activity peaks: Will values hold?, in Chemical Week, September 9, 1998.


Last, both companies believed they had a cultural fit. John Kettely, BTPs Chairman, said that their management philosophies are remarkably similar.12 Yet, some analysts had doubts about how well the companies cultures would fit together. BTP will have different ways of doing business than Clariant, whose operations tend to be heavily influenced by general economic trends, said Denise Anderson, an analyst at Bank Sarasin in Zurich.13

12 Quoted in Clariant appears to gain control of BTP Chems in Chemical Market Reporter, January 31, 2000. 13 Quoted in Clariant appears to gain control of BTP Chems in Chemical Market Reporter, January 31, 2000.

Copyright 2006 INSEAD 12 04/2007-5268

Appendix 1 First Acquisition Wave (1997-98): Acquisition Price, Transaction Multiples, Premium Paid, Market Reaction

Premium paid Market reaction

at announcement Target Acquirer Bid value Target firm

value* Target firm value/ sales

Target firm value/EBITDA

1 month** 1 week 1 day

Haltermann Ascot 0.13 bn 0.13 bn 0.68 n/a n/a n/a n/a + (2a)***

Inspec Laporte 0.85 bn 1.06 bn 1.89 10.48 29.7% 53.5% 2.3% + (2b)

Archimica BTP 0.19 bn 0.19 bn n/a n/a n/a n/a n/a + (2c)

Gist Brocades DSM 1.22 bn 1.58 bn 1.22 10.91 37.5% 23.8% 10.0% + (2d)

Holliday Yule Catto 0.35 bn 0.41 bn 1.75 10.17 24.5% 35.3% 0.5% 0 (2e)

Mean 0.55 bn 0.67 bn 1.38 10.52 30.56% 37.5% 4.27% * Target Firm Value = Market capitalization (i.e., bid value or transaction equity value) + long term debt cash

o The net debt is taken into account in order to make deals comparable irrespective of their financing structure as well as making them comparable to current multiples. o When assessing the transaction equity value, the equity value includes the market capitalization (number of shares * price/share) and the premium paid for the target.

** The one-month premium is the difference between the price of the target share proposed by the acquirer at the announcement and the price of the share one month before the acquisition

announcement.

*** See evolution of Ascots stock price in Appendix 2, Figure a.


Appendix 2 Figure a: Stock Performance of Ascot vs. S&P Specialty Chemicals Index

80

85

90

95

1 00

1 05

1 10

1 15

09.1

1 .98

11.1

1 .98

13.1

1.98

15.1

1 .98

17.1

1 .98

19.1

1 .98

21.1

1 .98

23.1

1.98

25.1

1 .98

27.1

1 .98

29.1

1.98

01.1

2 .98

03.1

2 .98

05.1

2 .98

07.12

.98

09.1

2 .98

11.1

2 .98

13.1

2 .98

15.1

2 .98

17.1

2 .98

19.1

2 .98

21.1

2 .98

23.1

2.98

25.1

2 .98

27.1

2 .98

29.1

2.98

31.1

2 .98

02.0

1 .99

04.0

1 .99

06.0

1 .99

08.0

1 .99

x

Announcement Ascot/Haltermann deal 08.12.98

Stock priceSC Index

80

85

90

95

1 00

1 05

1 10

1 15

09.1

1 .98

11.1

1 .98

13.1

1.98

15.1

1 .98

17.1

1 .98

19.1

1 .98

21.1

1 .98

23.1

1.98

25.1

1 .98

27.1

1 .98

29.1

1.98

01.1

2 .98

03.1

2 .98

05.1

2 .98

07.12

.98

09.1

2 .98

11.1

2 .98

13.1

2 .98

15.1

2 .98

17.1

2 .98

19.1

2 .98

21.1

2 .98

23.1

2.98

25.1

2 .98

27.1

2 .98

29.1

2.98

31.1

2 .98

02.0

1 .99

04.0

1 .99

06.0

1 .99

08.0

1 .99

x

Announcement Ascot/Haltermann deal 08.12.98

Stock priceSC Index

Figure b: Stock Performance of Laporte vs. S&P Specialty Chemicals Index

70 ,000

75 ,000

80 ,000

85 ,000

90 ,000

95 ,000

100 ,000

105 ,000

110 ,000

06.07

.98

08.0

7 .98

10.0

7 .98

12.0

7 .98

14.07

.98

16.0

7 .98

18.0

7 .98

20.0

7 .98

22.0

7 .98

24.0

7 .98

26.0

7 .98

28.0

7 .98

30.0

7 .98

01.0

8 .98

03.0

8 .98

05.08

.98

07.0

8 .98

09.0

8 .98

11.0

8 .98

13.0

8 .98

15.0

8 .98

17.0

8 .98

19.0

8 .98

21.0

8 .98

23.0

8 .98

25.0

8 .98

27.0

8.98

29.0

8 .98

31.0

8 .98

02.0

9 .98

04.09

.98

x

Announcement Laporte/Inspec deal 05.08.98

Stock priceSC Index


Appendix 2 (Contd) Figure c: Stock Performance of BTP vs. S&P Specialty Chemicals Index

8 0,0 00

8 5,0 00

9 0,0 00

9 5,0 00

10 0,0 00

10 5,0 00

11 0,0 00

11 5,0 00

12 0,0 00

05.0

6 .98

07.0

6 .98

09.0

6 .98

11.0

6 .98

13.0

6 .98

15.0

6 .98

17.0

6.98

19.0

6 .98

21.0

6 .98

23.0

6 .98

25.0

6 .98

27.0

6 .98

29.0

6 .98

01.0

7 .98

03.0

7 .98

05.0

7 .98

07.0

7 .98

09.0

7 .98

11.0

7 .98

13.0

7 .98

15.0

7 .98

17.0

7.98

19.0

7 .98

21.0

7 .98

23.0

7 .98

25.0

7.98

27.0

7 .98

29.0

7 .98

31.0

7 .98

02.0

8 .98

04.0

8 .98

06.0

8 .98

x

Announcement BTP/Archmica deal 06.07.98

Stock priceSC Index

8 0,0 00

8 5,0 00

9 0,0 00

9 5,0 00

10 0,0 00

10 5,0 00

11 0,0 00

11 5,0 00

12 0,0 00

05.0

6 .98

07.0

6 .98

09.0

6 .98

11.0

6 .98

13.0

6 .98

15.0

6 .98

17.0

6.98

19.0

6 .98

21.0

6 .98

23.0

6 .98

25.0

6 .98

27.0

6 .98

29.0

6 .98

01.0

7 .98

03.0

7 .98

05.0

7 .98

07.0

7 .98

09.0

7 .98

11.0

7 .98

13.0

7 .98

15.0

7 .98

17.0

7.98

19.0

7 .98

21.0

7 .98

23.0

7 .98

25.0

7.98

27.0

7 .98

29.0

7 .98

31.0

7 .98

02.0

8 .98

04.0

8 .98

06.0

8 .98

x

Announcement BTP/Archmica deal 06.07.98

Stock priceSC Index

Figure d: Stock Performance of DSM vs. S&P Specialty Chemicals Index

9 0,00 0

9 5,00 0

10 0,00 0

10 5,00 0

11 0,00 0

11 5,00 0

12 0,00 0

23.0

1.98

25.0

1 .98

27.0

1 .98

29.0

1 .98

31.0

1 .98

02.0

2 .98

04.0

2 .98

06.0

2 .98

08.0

2 .98

10.0

2 .98

12.0

2.98

14.0

2 .98

16.0

2 .98

18.0

2 .98

20.0

2 .98

22.0

2 .98

24.0

2 .98

26.0

2 .98

28.0

2 .98

02.0

3 .98

04.0

3 .98

06.0

3 .98

08.0

3 .98

10.0

3 .98

12.0

3 .98

14.0

3 .98

16.0

3 .98

18.0

3 .98

20.0

3 .98

22.0

3 .98

x

Announcement DSM/Gist Brocades deal 23.02.98

Stock priceSC Index

9 0,00 0

9 5,00 0

10 0,00 0

10 5,00 0

11 0,00 0

11 5,00 0

12 0,00 0

23.0

1.98

25.0

1 .98

27.0

1 .98

29.0

1 .98

31.0

1 .98

02.0

2 .98

04.0

2 .98

06.0

2 .98

08.0

2 .98

10.0

2 .98

12.0

2.98

14.0

2 .98

16.0

2 .98

18.0

2 .98

20.0

2 .98

22.0

2 .98

24.0

2 .98

26.0

2 .98

28.0

2 .98

02.0

3 .98

04.0

3 .98

06.0

3 .98

08.0

3 .98

10.0

3 .98

12.0

3 .98

14.0

3 .98

16.0

3 .98

18.0

3 .98

20.0

3 .98

22.0

3 .98

x

Announcement DSM/Gist Brocades deal 23.02.98

Stock priceSC Index


Appendix 2 (Contd) Figure e: Stock Performance of Yule Catto vs. S&P Specialty Chemicals Index

8 0 ,0 00

8 5 ,0 00

9 0 ,0 00

9 5 ,0 00

1 0 0 ,0 00

1 0 5 ,0 00

1 1 0 ,0 00

1 1 5 ,0 00

1 2 0 ,0 00

1 2 5 ,0 00

1 3 0 ,0 00

07.1

1 .97

09.1

1 .97

11.1

1 .97

13.1

1 .97

15.1

1 .97

17.1

1 .97

19.1

1 .97

21.1

1 .97

23.1

1 .97

25.1

1 .97

27.1

1 .97

29.1

1 .9 7

01.1

2 .97

03.1

2 .97

05.1

2 .97

07.1

2 .97

09.1

2 .9 7

11.1

2 .97

13.1

2 .97

15.1

2 .97

17.1

2 .97

19.1

2 .97

21.1

2 .97

23.1

2 .97

25.1

2 .97

27.1

2 .97

29.1

2 .97

31.1

2.9 7

02.0

1 .98

04.0

1 .9 8

06.0

1 .98

08.0

1 .98

x

Announcement Yule Catto/Holliday deal 08.12.97

Stock priceSC Index

8 0,0 00

8 5 ,0 00

9 0 ,0 00

9 5 ,0 00

1 0 0 ,0 00

1 0 5 ,0 00

1 1 0 ,0 00

1 1 5 ,0 00

1 2 0 ,0 00

1 2 5 ,0 00

1 3 0 ,0 00

07.1

1 .97

09.1

1 .97

11.1

1 .97

13.1

1 .97

15.1

1 .97

17.1

1 .97

19.1

1 .97

21.1

1 .97

23.1

1 .97

25.1

1 .97

27.1

1 .97

29.1

1 .9 7

01.1

2 .97

03.1

2 .97

05.1

2 .97

07.1

2 .97

09.1

2 .9 7

11.1

2 .97

13.1

2 .97

15.1

2 .97

17.1

2 .97

19.1

2 .97

21.1

2 .97

23.1

2 .97

25.1

2 .97

27.1

2 .97

29.1

2 .97

31.1

2.9 7

02.0

1 .98

04.0

1 .9 8

06.0

1 .98

08.0

1 .98

x

Announcement Yule Catto/Holliday deal 08.12.97

Stock priceSC Index


Appendix 3

Fine Chemicals Peer Group Sales Multiples

Current Enterprise

Value / Sales Current Enterprise

Value / Sales 1998 2000 Recordati SpA 0.97 1.82 Sigma-Aldrich Corp 3.07 2.96 Siegfried Holding AG 1.37 1.59 Cambrex Corp 1.60 2.62 Average 1.75 2.24


Appendix 4 Clariant-BTP Deal

Deal Reference: R98,273

Target(s): BTP Plc Bidder(s): Clariant AG Acquiring Sub: Clariant Plc Bid Value Euro: 1,766,149,000 Rank Value Euro: 1,931,480,000 Equity Value 100% Euro: 1,724,939,000 Net Debt & Liabilities Euro: 165,331,000 Enterprise Value Euro: 1,931,480,000 C O M P A N Y D E T A I L S: T A R G E T B I D D E R BTP Plc Clariant AG Nationality: United Kingdom Nationality: Switzerland Public Status: Public Public Status: Public Listing: London Listing: Switzerland Ticker: BTP Ticker: CLN Employees: 2,800 Employees: 29,279 Internet Address: Internet Address: http://www.clariant.com/ Telephone No..: +44 (0)161 775 3945 Telephone No.: +41 61 469 5111

NAICS: 32599 All Other Chemical Product and Preparation Manufacturing

NAICS:

32513 Synthetic Dye and Pigment Manufacturing 32599 All Other Chemical Product and Preparation Manufacturing

SIC: 2899 Chemical preparations, NEC SIC: 2816 Inorganic pigments 2899 - Chemical preparations, NEC

SIG: CHDI Chemicals-Diversified SIG: CHSP Chemicals-Specialty

Shareholders Approval: No

Business:

Manufacturer of specialty chemicals and materials for a wide range of consumer and industrial products.

Business: Manufactures chemicals, dyes, pigments and additives

S H A R E D E T A I L S: (Prices in local currencies) Target Currency: Pound Sterling Initial Bid Price: 6.000 Price, Pre 1 Month: 3.300 Price, Pre 1 Week: 3.475 Price, Pre 1 Day: 5.275 Number of O/S shares at Ann. Date: 175,800,000


Appendix 4 (Contd)

F I N A N C I A L D E T A I L S: (All figures in millions and local currencies) T A R G E T B I D D E R Currency: Pound Sterling Currency: Swiss Franc BALANCE SHEET Current Assets Current Assets Cash & Equivalents: 31.900 Cash & Equivalents: 490.000 Short-Term Invs: 4.900 Short-Term Invs: Trade Debtors: 78.400 Trade Debtors: 1,571.000 Stocks: 77.400 Stocks: 2,026.000 Notes Receivable: Notes Receivable: Other Current Assets: 11.200 Other Current Assets: 478.000 Total Current Assets: 203.800 Total Current Assets: 4,565.000 Long-Term Assets Long-Term Assets Long-Term Investments: 1.000 Long-Term Investments: 15.000 Property, Plant & Equip Net: 208.700

Property, Plant & Equip Net: 3,899.000

Goodwill & Intangibles: Goodwill & Intangibles: Deferred Charges: Deferred Charges: Other Long-Term Assets: 140.900 Other Long-Term Assets: 1,160.000 Total Long-Term Assets: 350.600 Total Long-Term Assets: 5,074.000 TOTAL ASSETS: 554.400 TOTAL ASSETS: 9,639.000 LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities Current Liabilities Notes Payable: 17.700 Notes Payable: 672.000 Trade Creditors: 53.200 Trade Creditors: 898.000 Current Portion of LTD: Current Portion of LTD: Accrued Liabilities: Accrued Liabilities: Income Taxes Payable: Income Taxes Payable: Other Current Liabs: 82.000 Other Current Liabs: 1,542.000 Total Current Liabilities: 152.900 Total Current Liabilities: 3,112.000 Long-Term Liabilities Long-Term Liabilities Long-Term Debt: 120.200 Long-Term Debt: 2,974.000 Deferred Tax: Deferred Tax: Commitment & Contig: Commitment & Contig: Minority Interest: Minority Interest: Other LT Liabilities: 43.300 Other LT Liabilities: 794.000 Total LT Liabilities: 163.500 Total LT Liabilities: 3,768.000 TOTAL LIABILITIES: 31.,400 TOTAL LIABILITIES: 6,880.000 Shareholders Equity Preferred Stock: Preferred Stock: Common Stock: 204.900 Common Stock: 727.000 Share Premium: Share Premium: Reserves: 32.700 Reserves: 1,971.000 Treasury Stock: Treasury Stock: Other Equity: 0.400 Other Equity: 61.000 Total S/holder Equity: 238.000 Total S/holder Equity: 2,759.000 Total Liab & S/H Eqty: 554.400 Total Liab & S/H Eqty: 9,639.000 INCOME STATEMENT Sales Revenue: 336.400 Sales Revenue: 9,535.000 Cost of Goods Sold: 234.300 Cost of Goods Sold: 6,032.000 Gross Profit: 102.100 Gross Profit: 3,503.000


Operating Expenses: 54.700 Operating Expenses: 1,831.000 Op Profit (EBITDA): 47.400 Op Profit (EBITDA): 1,057.000 Deprec/Amortiz: 22.800 Deprec/Amortiz: 615.000 Other Income (Exp): 63.700 Other Income (Exp): 14.000 Profit Pre Int (EBIT): 88.300 Profit Pre Int (EBIT): 1,071.000 Interest Expense: 7.400 Interest Expense: 238.000 Interest Receivable: Interest Receivable: Pre-Tax Profit (NIBT): 80.900 Pre-Tax Profit (NIBT): 833.000 Income Tax: 37.100 Income Tax: 309.000 Profit After Tax: 43.800 Profit After Tax: 524.000 Minorities: Minorities: 5.000 Extraordinary Items: Extraordinary Items: Net Income: 43.800 Net Income: 519.000 Dividends: Dividends: Retained Earnings: Retained Earnings: EPS: 0.252 EPS: 35.680

CASH FLOW Cash Flow Operations: 47.500 Cash Flow Operations: 740.000 Cash Flow - Investing: 10.400 Cash Flow Investing: -330.000 Cash Flow Financing: -51.000 Cash Flow Financing: -581.000 Net Cash Flow: 6.900 Net Cash Flow: -171.000 R A T I O S T A R G E T B I D D E R

Current Ratio: 1.333 Current Ratio: 1.467 Cash Ratio: 0.209 Cash Ratio: 0.157 Debt Ratio: 0.571 Debt Ratio: 0.714 Debt/Equity Ratio: 1.329 Debt/Equity Ratio: 2.494 Equity Multiple Ratio: 2.329 Equity Multiple Ratio: 3.494 Profit Margin: 0.240 Profit Margin: 0.087 Return on Assets: 0.146 Return on Assets: 0.086 Return on Equity: 0.340 Return on Equity: 0.302 Op Profit (EBITDA)/Sales: 0.141 Op Profit (EBITDA) / Sales: 0.111 Pre-Tax Profit (NIBT): 13.350 Net Income: 24.658 Shareholders Equity: 4.538 E X C H A N G E R A T E S: Currency To STG To US$ To Euro Bid Currency 1.00 0.6061 0.6115 Target Currency 1.00 0.6061 0.6115 Bidder Currency 2.6327 1.596 1.6104 Note: 1 euro = 0.6115 British pound sterling

To order INSEAD case studies please contact one of the three distributors below:

ecch, UK and USA Centrale des Cas et de Mdias Pdagogiques

ecch UK Registered Office: ecch USA Registered Office: www.ecch.com www.ecch.com www.ccip.fr/ccmp/ Tel: +44 (0)1234 750903 Tel: +1 781 239 5884 Tel: 33 (0) 1.49.23.57.25 Fax: +44 (0)1234 751125 Fax: +1 781 239 5885 Fax: 33 (0) 1.49.23.57.41 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected]

Boulevard de Constance, 77305 Fontainebleau Cedex, France. 1 Ayer Rajah Avenue, Singapore 138676 Tel: 33 (0)1 60 72 40 00 Fax: 33 (0)1 60 74 55 00/01 www.insead.edu Tel: 65 6799 5388 Fax: 65 6799 5399 Printed by INSEAD

insead busienss case

Documents