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The deals also provide pure-play specialty chemical firms with the edge they need to remain competitive in their core operations against large-scale diversified companies with significant specialty chemical operations including BASF and Dow Chemical. Those companies have the advantage of size, but also are back-integrated, allowing for lower raw material costs compared with pure-play specialty chemical makers.
One of the biggest changes over the past several years has been aggressive moves by large diversified firms to focus on specialties. BASF and Dow have each made several large acquisitions within the past three years. BASF bought Cognis at the end of last year for C3.1 billion ($4.5 billion) as part of its strategy to transition its portfolio downstream toward specialty businesses that are less vulnerable to economic cycles. The purchase expanded BASF's position in personal care, home care, health and nutrition, and functional products. The deal followed BASF's 2009 acquisition of Ciba Specialty Chemicals.
Dow has also been on the move to become more oriented toward specialty chemicals. The company bought Rohm and Haas (R&H) in 2009, which gave it a stronger position in high-growth sectors including electronic chemicals.
One concern is whether Dow and BASF can maintain specialty chemical characteristics and continue to operate the acquired businesses as problem solvers and providers of customized solutions, says Chemtura CEO Craig Rogerson. "Their emphasis historically has been on low-cost operation, integration, scale, and efficiency. It's different than what Rohm and Haas, Ciba or Cognis was doing," Rogerson says.
Several multi-billion dollar deals have been announced since the start of this year (table p. 23). The latest is Ashland's proposed $3.2-billion acquisition of International Specialty Products (ISP; Wayne, NJ). That deal will raise Ashland's presence in higher-growth markets such as personal care and pharmaceutical ingredients. The deal also falls in line with the company's plan to be a pure-play specialty player, and move away from its diversified status. With the ISP assets, specialty chemicals will account for 70% of Ashland's portfolio, up from 19% in 2005. Ashland sold its distribution business, which had accounted for 38% of revenues for the fiscal year ended September 30, last March to TPG Capital (Fort Worth, TX) (CW, April 4, 2011, p. 6).
The ISP deal will also improve Ashland's profitability, executives say. ISP reported an Ebitda margin of 22.5% for the twelve months ended March 31, while Ashland's Ebitda margin for the same period was 12.3% including the divestiture of the company's distribution business. Ashland says the combined companies will post a margin of 14.5%. ISP will account for half of Ashland's pro forma Ebitda of $1.1 billion.
Ashland has actively pumped up its Ebitda margin through specialty chemical acquisitions and …