Pattern Of Success
Management Differentiates Winners Among Chemicals Spinoffs
Is there a proven management recipe for turning a chemical industry spinoff into a success story? Camelot Management Consultants analyzed the history and performance of 20 such spinoffs. Despite individual differences between these firms, we saw a clear picture: Although there was no one-size-fits-all approach, we found a pattern of management actions that distinguished successful players — a pattern that seemed trivial but was not easily translated into action.
Covestro’s recent initial public offering is only the latest of many spinoffs in the European chemical industry, which include Clariant, Trevira, Rhodia, Celanese, Basell, Cognis and Lanxess, to name but a few. Their mother companies, mostly chemical/life science conglomerates, divest businesses they no longer consider “core,” often because of diminishing margins due to maturing product portfolios and low-cost competition. While some of the new players remain listed, others were taken over from the start or later by private investors.
These investors fall into two categories: On the one hand are private equity firms such as Blackstone (Celanese), Platinum (DyStar) and Permira (Cognis, CABB); on the other hand are private investors or privately held companies such as Access (LyondellBasell, which originated as a spinoff from BASF and Shell), Ineos (acquiring businesses from, e.g., BP, ICI, BASF and Lanxess) and Koch Industries (Invista, combining businesses from DuPont and Hoechst, among others).
In contrast to private equity firms, investors in the latter category tend to pursue a buy-and-hold strategy. The emergence of these players strongly supports the finding that success can be related to good management practices, at least to some extent. Some private equity firms even focus on restructuring companies immediately after a spinoff, while others target restructured spinoffs to pursue growth strategies.
What Makes The Difference?
But what is the connection between management and success?
To answer this question we must first define how success can be measured. Profitability in terms of net income and profitable growth in terms of increasing sales and net income are sound indicators. In the case of listed companies, (relative) stock market performance can be used as an approximation that is often correlated with net income growth. Good management is only one of many factors that influence shareholder value. Nevertheless, among the analyzed cases there are some peculiarities that strongly hint at management as a differentiator.
The success stories of Celanese and LyondellBasell cannot be fully explained by reference to the careful timing of entries and exits of their new investors, or (in the case of LyondellBasell) by the influence of shale gas. Celanese’s performance following the IPO has deviated significantly from its pre-Blackstone performance, even if the higher stock market valuation in the US is taken into account. The stock also outperformed its peers. LyondellBasell shows the same picture in comparison with the past (before the financial crisis/Chapter 11) as well as with its peers.
Clariant started during an economic boom, boosted further by the specialty-chemicals hype of those days. After the boom subsided, complex structures, reluctant restructuring and portfolio management, disappointing earnings and disappointed expectations led to a long slump that ended only when new management took over in 2008. In contrast, Lanxess came into being in the context of a weaker economy but surprised the financial community with energetic and convincingly communicated restructuring measures. In terms of share price, it strongly outperformed its peers in the early years.
Pragmatism And Speed
The findings strongly suggest that certain approaches contributed to better performance, whereas others did not. But which management actions are most likely to make spinoffs successful? We typically see two periods or rather threads of action after a company has been spun off: The restructuring phase is followed by a growth period, which means growing profits rather than sheer size. Whether spinoffs use that simple logic or break it down into a four-stage master plan, such as the one Lanxess promoted after 2005, it is important that a compelling rationale drives stakeholders’ expectations and serves as a benchmark for successful implementation.
Both phases can be associated with certain success factors and pitfalls. Removing an inherited burden of layers of corporate overhead, complex or bureaucratic processes and blurred responsibilities is sometimes sufficient to restore profitability. Restructuring means pragmatism and speed — short payback periods are key. Internal benchmarking with robust metrics is often sufficient to identify best performers (that will become the new standard) or low performers (that will be eliminated) whether it regards products, plants or sales offices.
After James Gallogly took over as CEO of LyondellBasell in 2009, he benchmarked all production assets in order to obtain the same cost structure, performance and head count as those of comparable facilities. Similar patterns can be derived from Dave Weidman’s actions as the new CEO of Celanese in 2004. Strong management incentives ensure a tenacious approach to implementation. Leave no stone unturned.
Preventing businesses from destroying value, either through restructuring or divestment, is even more important. Therefore, the organizational structure should facilitate smooth portfolio management. Celanese, for example, divested and acquired businesses amounting to a third of the revenue from 2005 to 2007.
Delayed or protracted restructuring is a key reason for underperformance. Companies sometimes ease off rigorous cost cutting once the business outlook improves, and sometimes they are reluctant to pursue active portfolio management. Managing the transition to a growth strategy is a considerable challenge as well. Stakeholders should not be allowed to perceive cost cutting as a thing of the past — they should understand that only the methods change. Now more systematic approaches such as operational excellence, lean supply-chain management or Six Sigma must deliver steady, incremental improvements over a longer period. Digitization becomes a priority to prevent complexity from overwhelming a business.
While complexity is one pitfall of a growth strategy, bad timing is another. Private companies should be in a better position to pursue anti-cyclical investment (something that Koch Industries has emphasized). Another success factor is balancing external against organic growth and achieving organic growth with reasonable capital expenditures. LyondellBasell was able to profit from the US shale gas boom ahead of its competitors. Rather than building new crackers, Gallogly expanded capacity at his existing plants and converted them to use feedstock made from natural gas. Capacity was increased within two years, while building new plants would have taken six. That helped turn LyondellBasell into a “cash machine” (Forbes) that realized superior shareholder value.
What is remarkable about successful spinoffs is not the ingenuity of their plans but how effectively they are implemented. It is all about setting the right priorities, being pragmatic in analysis and problem-solving while being tenacious in realization. Provided that spinoffs deliver on their plans, shareholder recognition will not fail them.