From ICI to Akzo Nobel division: what went wrong?

From world-beating power player to Akzo Nobel business unit, we chart the demise of this once-great chemical company and ask how merger and acquisition can go so wrong

Will Beacham/London

“The death of a symbol of British industrial power” screamed the tabloid newspapers as the takeover announcement of the UK’s ICI by Dutch coatings and speciality chemicals firm Akzo Nobel’s sank in last year.

There is no doubt that ICI was once a leading global commodity chemical company with sizeable specialty and pharmaceutical divisions. By the time the business finally merged into Akzo Nobel this year, it had shrunk into a mid-sized specialty concern.

What went wrong? For many, the 1993 spin-off of the pharmaceutical and agrochemical businesses into Zeneca marked the start of the rot. These were real jewels in the crown of the company. Supported by cash from the commodities businesses, they had developed into centres of real innovation.

With hindsight it is easy to criticise this as a poor decision. Yet management was merely following the enduring stockmarket fashion for creating “shareholder value” by breaking up conglomerates of unrelated businesses.

The group was also under a lot of pressure from a darling of 1980s Thatcherism in Britain, the entrepreneur Jim Hanson. With ICI underperforming, he took a 3% stake in the company and applied a huge amount of pressure for change.

Shareholders in ICI who took Zeneca share options at the time of the split have achieved shareholder value since then, as shares in what became AstraZeneca have risen from £6 ($11.9, €7.9) to peaks of over £30.

But it is impossible to claim the same for ICI stockholders since then. ICI shares were trading at a little over £6 when the de-merger occurred and achieved only £6.70 at the Akzo Nobel takeover.

As Robin Cook, a former ICI senior personnel manager, pointed out in a recent letter (ICIS Chemical Business, January 7, 2008): “Taking into account inflation over the last 15 years, this is a miserable return by any standards.”

The strength of shareholder activism in the UK may have played a larger role than those not privy to boardroom conversations may realize. Contrast the pressure applied in the UK with Germany, for example, where shareholders have a much less visible and public role in decision-making.

This could help explain why Germany’s BASF has grown into a world-leading chemical company that has retained a diversified portfolio, including many commodity chemicals.

OVERPRICED BUY

The next major milestone in ICI’s history was the highly controversial purchase of Unilever’s specialty chemicals business in 1997. It is not so much the businesses themselves that were at fault, say the critics, but the £4.9bn price paid.

Much venom is reserved for Charles Miller Smith, who was CEO at the time of the Unilever acquisition. After a 30-year career at Unilever, he moved to ICI and presided over the purchase from his former employer.

Echoing the sentiments of many, Cook declared: “I believe that history has already judged this purchase as ill-timed and vastly over-priced, subsequently leaving ICI as a distressed seller of its former bedrock commodity businesses in a bid to try and reduce the suffocating debt burden with which it had saddled itself.”

The purchase took place towards the peak of an economic cycle, leaving the company exposed as the cycle turned downwards.

Since 1997, disposal of the commodities and intermediates businesses continued and was completed through over 50 separate deals.

Despite the disposals, the burden of debt was still too great for the company to consider further major acquisitions. Some specialty businesses were even sold, notably catalyst producer Synetix, flavors and fragrances group Quest International and surfactants manufacturer Uniqema.

STRATEGY IMPLEMENTATION

Not everyone pins the blame for ICI’s demise on a particular CEO or even a flawed overall strategy. For ex-ICI executive Bob Walker, the company’s overall long-term plans were correct. It was the implementation that was flawed. He says: “My view was, and is, that the strategic decision to reduce or exit commodity chemicals in the business environment post the two oil crises of the ’70s and early ’80s was right. The attempt to shift to higher added-value/knowledge-dependent specialties was correct.”

Walker, who held senior positions in petrochemicals and plastics businesses from 1971 until his retirement in 2000, believes the decision to exit commodities goes back to 1980, when the company decided to divest its polyethylene business.

He points to several weaknesses and failures in the execution of the strategy, rather than condemning the direction in which the company was trying to move:

* Building two 650,000 tonne/year ethylene crackers in the late 1970s, then undermining their competitiveness through the polyethylene sale

* Expanding ICI’s global reach through investments in commodities, then re-focusing on specialties too hastily

* Acquiring composite plastic maker Beatrice Chemical in 1985 just when the end of the Cold War cut demand for those products

* Overpaying for Unilever’s specialty businesses

* Failing to sell or float the commodity business after gathering them into one subsidiary, ICI Chemicals and Polymers.

Walker says achieving the last point on the list would have been difficult, given its size and diverse mixture, yet the favorable timing of the commodity cycle in the late 1980s provided a chance. “But the chance was lost, implementation failed, and ICI found itself selling in the early ’90s when the cycle was nearer its trough.”

As parts of the business were sold off piecemeal, value was further destroyed as the business was no longer integrated up the production chain. By the time Miller Smith took over as CEO, “there was no strategic, long-term future for those remaining businesses within ICI. They had better chances of survival in other commodity competitors’ hands,” he adds.

ATTITUDE COUNTS

Another ICI veteran believes the company lost its way when it underwent a fundamental shift in attitude from risk-taking to risk-averse. Paul Hodges, an executive from 1978 until 1995, said in a letter (ICIS Chemical Business, November 12, 2007): “During the 1990s, ICI became too complacent. It lost the cutting edge, the drive to try out new directions. Instead, ‘no surprises’ became the motto.”

He recalled how, as a young graduate, managers insisted they took risks. Better to make a wrong decision – which can usually be put right – than no decision at all.

The reasons, he suggested, could be because the board gave up its strategic role, or responded to shareholder pressure instead.

Zoe Shapiro, who worked for ICI in Teesside, northeast England, from 1991-97, says executives were too protective of under-performing staff. Now a management consultant, she says: “Managers didn’t really know how to get work out of people. They recruited a lot of clever people but not always a lot of doers. It didn’t have that edginess that you need in manufacturing.”

Whatever the causes of ICI’s demise, what comes across is an enormous sense of loyalty and sadness at the outcome. In Walker’s words: “My overall feeling, after a lifetime of work, is of huge frustration and regret that the collective efforts of so many capable and professional people should not have had a better outcome.”

There is also little doubt that ICI’s demise means the long-term future of the UK as a centre of excellence in chemistry has been damaged, and with it, the country’s ability to generate wealth.