Why Big Oil bombs in specialties

石油会社などのコモディティ会社がスペシャルティ会社を買収して失敗する理由を分析した論文。文化の違いが最大の理由。

（Chemical Week 1982/8/25）

　　When Gulf Oil acquired pint-size Kewanee Industries in 1977, its main target was Kewanees oil and gas reserves. But Gulf was clearly pleased to get Harshaw Chemical and Millmaster Onyx Group, the two rapidly growing specialty chemical companies owned by Kewanee that came with the deal. In the merger, the two companies were placed under Gulf Oil Chemicals' umbrella, and all parties hoped for a tranquil and fruitful union. "We didn't have any idea of what our relationship with Gulf was going to be,' recalls Irving Gaines, Millmaster's president. "But we hoped Gulf would be flexible."
　　It didn't work out that way. For the first year, Millmaster's freewheeling style was tolerated. Then came a visit from then-Gulf Chairman Jerry McAfee. McAfee's visit was in every way amicable, but it turned out to be an omen. Soon Millmaster found itself under increasing pressure to conform to Gulf's more rigid management values and to follow a new strategic course charted by Gulf. The honeymoon was over. Now, five years later, both companies are suffering stunted growth, and Gulf has put them on the block.
　　Gulf's brief courtship and eventual disenchantment with specialties is not uncommon in the oil business. Although some oil companies have had excellent showings in specialties, others have traveled eagerly downstream, only to wind up on the rocks. What they failed to realize is that while specialties offer big profits for low-capital investments - quite unlike the battering that the oil companies have suffered in petrochemicals - they need financial support in other areas. Marketing costs for specialties can run to 45% of sales, as opposed to 10% for commodities, and specialty research requires a hefty commitment as well.
　　But perhaps the biggest obstacle is one of beliefs and values. The rigid, hierarchical style of Big Oil simply doesn't mix with the entrepreneurial approach of specialties. And the result can be a powerful clash of corporate cultures. As Millmaster's Gaines puts it: "Large companies ultimately impose the same standards that have made them successful, and the bureaucracy eats the smaller organization up."
　　This cultural collision is by no means limited to the oil industry. Commodity companies - be they in oil, steel, or even chemicals - depend on selling tons of virtually undifferentiated products. For them, marketing, research and service take a back seat to production, engineering and finance as the most valued skills. Managers in these companies are generally sober types who are adept at deciding how to get the best return on the huge sums they invest in plants and equipment.

Call it a clash of cultures: the rigid oilies contending with the laid-back entrepreneurs

　　The specialty business, on the other hand, belongs to entrepreneurs who can recognize a market opportunity and quickly exploit it. They also need skilled salesman ith a mastery of the technical ins and outs of their customer's business. And they pay those salesmen well. Indeed, Erode Nordhoy, president of Strategic Analysis, a Reading, Pa., consulting firm, says a major source of friction in some specialty acquisitions is that the salesmen earn more than the parent company's middle managers.
Horse flies. The cultural gaps seem to be widest for oil companies, which often have little or no experience in down-stream products and are among the most monolithic of corporations. Although some top oilmen are former wildcatters, they are more often generalists with little patience for the mavericks who run specialty operations. What's more, the sheer size difference between Big Oil's petrochemical facilities, with their huge reactors and continuous processes, and the pot-and-paddle specialty companies exaggerates the problem. A tiny acquisition won't make a dent in an oil company's earnings, but if it isn't kept in line, it can be as irritating as a fly on a borse's rump.
Reins. Even the advantages that oil companies have in hydrocarbon feed-stocks and technology can actually become drawbacks downstream. The oil company typically wants its specialty acquisition to use its raw materials or polymer technology. But that in turn may hamper the specialty salesman's ability to offer a customer a tailor-made product. "The research that oil companies do on materials is rarely complementary to what a specialty company wants to do," says Elliot H. Barber, manager of chemical-specialties consulting at Arthur D. Little.
　　Another industry observer suggests that oil companies simply think in terms that are too grandiose. "They'll get into a specialty, and their idea is that they'll make it a $10-million product," he says, adding that the tiny quantities in which many specialties are sold rarely earn such revenues. In fact, experts say Big Oil's obsessive drive to push high volumes has already wreaked havoc in chemical commodities. "There's a saying in the chemical industry," remarks Charles H. Kline, a Fairfield. N. J., consultant, "that oil companies ruin every business they get into -polyethylene, fertilizer, it doesn't seem to matter."
　　Those familiar with Big Oil's history say the emphasis on volume is deeply ingrained. Howard M. Schwartz, vice-president of the Management Analysis Center (Cambridge, Mass.), traces the mania for quantity to the 1950s, when petroleum was cheap and plentiful and profits were made by investing in down-stream, high-volume crude uses. In those days, he says, the oil companies were willing to lose money downstream because they made up for it at the well-head. When the cost of crude shot up in the mid-1970s, the formula came apart. "But," explains Schwartz, 'the culture remains."
　　The markings of that culture can be highly visible. They even pervade Exxon, which has had a fairly high degree of success in many of its specialty operations. For instance, a sales report from a chemical salesman at Exxon must include, along with the usual invoice data, an indication of how much throughput of crude the sale represents. "This is the clearest example that they really don't understand the fundamentals" of making profits downstream, says Robert W. Gunn, a principal at A.T.Kearnev. a New York management consulting firm.
　　And indeed, even Exxon has done miserably in some of its nonoil ventures: The company reportedly has lost billions in such areas as electric motors, office systems, and mining. Exxon now has a project in Greenville, S.C., to make carbon fiber from petroleum pitch. But analysts are skeptical that the company will be able to sell the high-priced, advanced-composite material in a market dominated by Hercules. Celanese and Union Carbide, even if it does possess superior technology. Notably, Exxon last month shed a small maker of silicon carbide, also a reinforcement material, to Atlantic Richfield. another oil major. Says one observer: "Exxon has a tendency to thrash around wildly, then say the hell with it."
Poor learners. The skepticism is not surprising, since oil companies are notoriously poor marketers of anything unrelated to oil. The tricks they used to gain customer loyalty for their gasolines - credit cards, free glasses, and sweepstakes - simply do not work in the specialties. For one thing, oil companies have never had a knack for getting shelf space in supermarkets. Shell, for example, reportedly had problems distributing its No-Pest Strip household insecticide, which it finally sold to MortonNorwich Products in 1979.
　　Industrial specialties present a different set of marketing problems. Even oil companies with basically salable products tend to forget that customers also expect them to provide technical support. For example, Cities Service and Hexcel in 1978 created Saytech, a joint venture to sell brominated flame-retardants for use in plastics. Although Hexcel had been in the business for many years, Cities had the controlling interest, and it got to call the shots. Instead of using well-versed salesmen who could explain to customers how to use the flame-retardants, Cities tried to distribute the additives through its bulk-resin salesmen.

Specialties have to be fast or they lose the deal. Big Oil plods as it pleases

　　The business foundered, and it did so in part because Cities salesmen were neither versed in the technical properties of Saytech's products nor given incentives to push them. They made more money - and with less effort - selling commodity thermoplastics. "Cities had the commodity approach that says a good salesman can sell any product," recalls Joseph Green, former vice-president of marketing and technology at Saytech and now manager of polymer additives at FMC. "But if a salesman has a barrel of flame retardant and a truckload of polyethylene in his portfolio, you know which one he's going to sell." In 1980, Saytech was spun off to Ethyl, where its annual sales volume has since doubled to $20 million.
　　Unfortunately for Cities, that experience was not the only such disaster. In 1970. Cities bought Albi Manufacturing, a $2-million/year maker of intumescent coatings, which are used to prevent steel beams from melting in fire. William A. Rains, formerly Albi's general manager and now executive vice-president at Roger Williams (Princeton N. J.), says his business experienced "cultural shock" under Cities. For one thing, he says, Cities imposed its own accounting practices on Albi and "saddled it with large corporate overhead." Worse, says Rains, Albi reported through Cities plastics group, whose managers were "ultimately stymied" by the operation. Cities in 1975 sold Albi to StariChem (East Berlin, Conn.), a small coatings manufacturer, where it has reportedly been turned into a thriving business.
　　Cities has since retreated almost entirely from chemicals, but it is one of the few oil companies to do so. Atlantic Richfield is trying to diversify further downstream, and Arco Chemical has been worming its way into specialties. such as multifunctional monomers and urethane intermediates.
One sorry tale. Arco's track record with specialties, however, is in some regards not much better than Cities'. More than a decade ago, Arco developed PermaGrain, a methyl methacrylate-impregnated floor tile. Arco had the plastic and radiation technology needed to make the tough-as-nails material, and its commercial development department was on the prowl for a way to distribute it. In the mid-1970s, Arco signed up Bruce Hardwood Floors, a leading floor-tile company, to be PermaGrain's distributor. But Bruce's salesmen apparently were not used to calling on architectural specifiers, and the venture was a flop. PermaGrain was finally sold to a group of Arco employees in 1978. E. E. Winne. the Yardsley, Pa., investment banker who coordinated the spin-off, says the product line has been expanded and the business is thriving. But, he adds, "it's still too small to be worthwhile to Arco."
　　Arco seems determined not to repeat its mistakes. In 1978 the company started up Arco Performance Chemicals, a water-treatment and oil-field services unit, and it lured some of the best names in the industry to run it. The division is headed by William R. Britton. formerly a super salesman at Betz Laboratories, a Trevose, Pa., water-service company. Says Britton: "Arco knew from the opening gun what the situation was - that you couldn't take oilies to run a business like water treatment. My very presence here is proof that they understand this."
　　Not all observers are ready to bank on such thinking, however. Although Britton insists that technical support is one of his company's strongest selling points. ADL's Barber maintains that Arco Performance Chemicals is not pushing service as much as it should. Arco makes its own polymers, while nearly all of its competitors purchase their raw materials outside. Thus, says Barber, Arco attempts to sell a water-treatment program based on the performance of its chemicals, rather than on the technical service provided by the salesman. "This is a poor or suboptimal strategy at best," says Barber, "and if it reflects their level of understanding. I don't see much hope for them in chemical specialties."
Scale. Another major failure, Tenneco's fling in the dye business, may also have been a case of too much integration. Because dyes are manufactured in small batches, the economies of scale needed to succeed in the business are available only to the largest manufacturers. Many U. S. chemical companies have had disheartening experiences in dyes, but Tenneco, because it had the capability to make its own dye intermediates, felt it had a leg up on the competition. Quite the opposite was true. Indeed. the company was unable to survive in a market dominated by Swiss and German dye makers. In fact, its colors division, which was spun off to North American Philips in 1973, became the property of Switzerland's Ciba-Geigy two months ago. "Tenneco never understood the dye business,' asserts a former executive in the company's colors division. "They weren't making the volume, so how the hell could they be competitive with imports?"
Stymied growth. But it is Gulf, perhaps more than any other, that typifies the cultural barriers oil companies face in specialties. By imposing its methodical strategic planning on Harshaw and Millmaster, Gulf may have inadvertently stymied the rapid development that made the two companies successful in the first place. 'Generally speaking," says Philip F. Kirk, president of Harshaw, "decision-making' under Gulf tended to be slowed down by the bureaucratic process."
　　When Kewanee bought Harshaw and Millmaster in the mid-1970s, all three together pulled in less than $500 million a year. Kewanee saw in the companies a way to diversify away from the oil business, and the two chemical units welcomed the chance to become part of a larger organization that promised not to interfere with them. Indeed, the chemical companies went on an acquisition spree themselves and grew rapidly as a result. By the time Gulf bought; Kewanee in 1977, Millmaster alone had become a $150-million operation.
　　Although Kewanee, as an oil company, could have fallen into the same cultural pitfalls as its larger industry colleagues, it was too small and too new to have rules and methods engraved in stone. "At Kewanee," says Millmaster's Gaines, "there was no need to conform to a corporate culture because it was still being evolved. When Gulf bought us, we were injected into a culture already formed and in operation.'
Lost deals. Gaines says there was no real synergism between Gulf Oil Chemicals (GOCHEM) and Millmaster. Indeed, Millmaster's line of textile chemicals, fatty acids and printing inks was a new area for Gulf. GOCHEM tried its best to be helpful anyway, he says, but its "rigidly structured planning cycle" caused Millmaster to miss out on at least two acquisitions it considered valuable for continued growth.
　　Harshaw' s experience was similar, even though the catalysts it produced provided a good fit with Gulf's refining and processing operations. There are rumors that Gulf wants to preserve Harshaw's catalyst business and sell off its four other departments, but Kirk, Harshaw's president, denies this is true. He will not reveal who is bidding for his Cleveland company, but he says, "I would like to see somebody acquire Harshaw who has an interest in maintaining it as a company.
　　Both Gaines and Kirk have the full sympathy of managers at the parent company. "I'd have to agree that by nature of the fact that we're a big company, there's more bureaucracy and paperwork," acknowledges William C. Roher, GOCHEM's president. And Joseph H. Piper, the Gulf vice-president who oversaw the specialty operations until he took early retirement this month, allows that the two specialty entrepreneurs" never come to terms with Gulf's style." And he understands Gaines's frustration over not being able to close a deal in time: "He was encouraged to proceed and struggled and struggled, and what he finally got was a no."
　　Gaines is equally sympathetic to Piper's position. Piper says the reason he left Gulf was that, "in effect, my job was eliminated." Gaines describes it in more colorful terms: "Piper had one leg on both sides of the chasm, and the chasm kept widening." Indeed, along with Harshaw and Millmaster, Piper was responsible for Gulf's Javhawk ammonium-nitrate plant near Pittsburgh, Kan., which the company has been trying to sell since March.
Some observers suggest that Gulf wants out of specialties altogether. Says one analyst: "There's a rumor that if you had a checkbook, you could buy all of Gulf's　chemical operations." 　Roher hotly denies this, pointing to the specialty resins, explosives and ferroalloy products Gulf is retaining. He does concede, however, that Gulf is "focusing its talents and resources in petrochemicals."

It only works when the parent, perhaps against all instinct, lets the specialty run itself

Some notable successes. All this is not to say there are no successful marriage between Big Oil and specialties.
　　Chevron's Ortho Div. has successfully marketed an impressive lineup of consumer pesticides, while Amoco's Patchogue-Plymouth division is a leader in plastics fabrication. And Ashland Chemical has been successful in selling high-purity chemicals to the electronics industry, as well as keeping a lucrative business in metal-finishing and specialty cleaners.
　　Still, even those who praise Ashland as a parent have their reservations. Charles A. Aldag, president of Sherex Chemical (Dublin, O.), says his company under Ashland was thriving when Schering (West Germany) bought it in 1979. Yet Aldag recalls that he was unable to convince Ashland that Sherex, a maker of fatty acids and other specialties, needed capital to develop process technology. Because technology for petroleum refining can often be licensed, Ashland apparently expected Sherex to get its technology by license as well. "It was a bone that stuck in my throat," says Aldag.
　　Ashland is getting another chance to prove itself a good parent for a specialty company. Last year it purchased Drew Chemical, a leading water-treatment company. Drew salesmen will soon begin distributing Ashland products as well as their own, while Ashland salesmen will channel some of their products through the franchise Drew has built. The jury remains out on whether the merger will work. Drew executives say they hope to remain autonomous. But an industry analyst predicts that Drew's experience may in the end prove similar to those of Millmaster and Onyx. "The danger may come along in the second year, when Ashland thinks it understands the business," he warns.
A Drew story. Drew's chances for autonomy are probably better with Ashland than with many oil companies. Ashland has always been crude-poor and thus has never developed the typical oil company culture. It is a fairly decentralized company that derives a large portion of its earnings from distribution. formulated products. and service.
　　Similarly, Burmah Oil, which recently set up Burmah Specialty Chemicals, has never concentrated on one facet of the oil business. Instead, it has been involved in shipping, exploration and refining. And despite some fairly expensive false starts in the past Burmah is developing a good track record in many downstream products, such as lubricants made by its Castrol division.
At the core. Of course, the Castrol lubricants are petroleum-derived and thus not an alien product for Burmah. Indeed, oil companies do seem to fare better with specialties that relate to their core businesses. For example, Mobil, Shell and others have found a niche in catalysts, synthetic lubricants, and marine coatings. Several, including Exxon, Amoco and Arco, have moved into oil-field chemicals, on the theory - that as end-users they know how to market the products. Success has been limited, however, by the apparent reluctance of oil companies to do business with competitors. "Texaco doesn't want an Arco person walking around its reserves, says an analyst.
　　Moreover, notes ADL's Barber, a comfortable fit with the core business is only one of three conditions of success for a tonnage company moving into specialties. Just as important is that the acquired company have a solid competitive position to carry it through the first year or so. This is the period in which the new managers are getting acquainted with the new business and are most likely to make costly mistakes. But most important, Barber declares, the acquisition must be large enough to get attention from the corporation, ideally as a core for additional product lines. Without these three "nonnegotiable" criteria, Barber will not recommend that his clients proceed with an acquisition. He adds, "You'll note that this says nothing of profitability and growth rate."
　　Barber says that Sun Oil's 1978 acquisition of Carboline (St. Louis, Mo.), a maker of specialty coatings, gave Sun the opportunity to build a successful downstream operation. Carboline, with sales of around $60 million/year, was the right size to be a nucleus for smaller specialty acquisitions, he explains. The method also has worked well for
　　W.R. Grace, which entered the specialties business in the 1950s by acquiring Dewey and Almy Chemical and Davison Chemical. These big units became the building blocks for Grace's specialty-chemical organization.
　　Generally speaking, commodity chemical companies, despite their tonnage thinking, have had a better understanding of how to absorb and best utilize a specialty business. They seem more willing to shield specialty operations from the host culture, to let them stand on their own. Dow Chemical, the biggest bulk chemical supplier in the U.S., has since 1934 provided autonomy to its Dowell Div., which performs oil-field services. "They know their day-to-day business better than anyone in Midland, Mich. [Dow's headquarters]," says Duane C. Nuechterlein, director of planning for Dow U. S. A. "We make a fetish at Dow of pushing strategic planning on the people who have to live with their decisions."
　　Similarly William Wishnick, chairman and chief executive of Witco Chemical (New York), says his company buys only firms that seem to know what they are doing and thus can be granted a fair measure of autonomy. He explains that Witco, which has acquired numerous small specialty firms, will not bid for a company unless it feels comfortable with its product line and intends to hold on to its managers. He adds that Witco absorbs many of its divisions' costs, such as legal fees, rather than pass them back. Finally, he says, Witco has never fiddled with the compensation system of an acquired company, even if it runs counter to Witco's general pay rules. "If their company car is a Cadillac, we leave them alone, even though ours is a Chevy," says Wishnick.
　　Union Camp seems to have taken a page from Witco's book. Peter J. McLaughlin, Union Camp's president and chief executive, says all acquisitions are made "with the view to having management come along." The big forest-products producer acquired Nelio Chemical (Jacksonville, Fla.) in the 1960s and kept most of its managers. Nelio was already in the business of making downstream products from such forestry and pulp-related by-products as terpenes and aromatics, and Union Camp was able to use it as the nucleus for building a large business in pulp-related specialties. Although Nelio no longer exists as a separate company within Union Camp, many of its original managers remain. Union Camp is now bidding to buy Tenneco's Bush Boake and Allen Div., a small manufacturer of flavors and fragrances.
　　Union Camp's secret may be that, although basically a commodity company, it is willing to give its specialty branch the freedom and capital it needs to develop its markets. When that support is not there, the sparks can fly between the parent and the specialty executives.
　　Food giant CPC International is a case in point. In the 1970s, CPC, the country's largest corn-milling company and maker of such products as Skippy peanut butter and Mazola margarine, was looking to diversify. It gobbled up two highly profitable little companies: Amerchol (Englewood Cliffs, N. J.), a fatty chemicals producer, and Penick (Lindenhurst, N. J.), a maker of pharmaceuticals.
Poor relations. The marriages were anything but tranquil. Both businesses have reportedly gone stale. And while the lackluster economy must take part of the blame for the decreased profits, the former heads of both the acquired companies complain that CPC never gave them the research dollars they needed to remain competitive.
　　"Their mentality was: We've got it, now let's hope it doesn't make a lot of noise," says Charles J. Ziel, Penick's retired president. Ziel says CPC only tolerated its specialty units as long as they weren't a drain on profits. "We weren't encouraged or nurtured," he recalls.
　　W. Roy Kesting, who resigned as Amerchol's president last year when his research and development budget was slashed, echoes that sentiment. 'CPC ever knew what it had," he says. Kesting, now head of commercial development at Olin, says that when CPC bought Amerchol, the specialty company was basically a maker of lanolin and derivatives. But Amerchol, says Kesting, was trying to take a new direction and become a leader in cosmetics ingredients. "We had an absolutely dynamite program that was going to leapfrog us into skin care," Kesting asserts. But, he says, when Amerchols sales leveled off in 1981 because of the economy, CPC withdrew its support "at the very point we were about to be most successful.' CPC, as he asserts, was "enamored with Amerchol's financial performance" in the past, but simply "didn't understand why it was profitable."

Big Oil thinks in volume, and it's an obsession that can ruin many a specialty

　　William F. Cody, CPC's vice-president of diversified business, does not buy the complaints. He notes that Penick, for one, is in the nutrition field, which is not far removed from CPC's corn oil business. And Cody doesn't share Kesting's view that Amerchol could outgrow its basic lanolin business. "Maybe we did more diversifying than anyone would say was a good idea," Cody allows. "And you always do a lot more with some investments than with others. 　　But Amerchol and Penick were definitely not poor relations."
Despite such unhappy marriages, big companies seem determined to chase after specialties because of the high margins they provide. Unfortunately, chances are good that untenable mergers will continue to outnumber the successful ones. Consultant Kline calculates that one out of every three specilty acquisitions fails, either to be sold or abandoned.
　　Not surprisingly, Kline is losing patience with clients who still perceive of specialties as a trouble-free route to high profits. He recalls fidgeting recently while an oil company client spoke for several minutes about buying into a specialty in which the company had no expertise. Says the consultant: 'I finally couldn't resist asking: What are you going to bring to that business?" The oil executive boasted of the parent's skill in long-range capital planning. Kline says he shot back. My God, that would ruin any specialty company !"