An increasing number of major global chemical firms are adopting a similar approach to constructing their companies: assembling a handful of diverse and established chemical and material businesses each with a high manufacturing entry barrier. Lux calls this approach the Multifortress Strategy. The high entry barrier creates the fortress-like nature of the individual businesses. The revenue of the various businesses added together creates a corporate entity of sustainable size. The multiple businesses also offer some protection from a downturn in one or a few businesses.
When pursuing this strategy initially, a company must be active in mergers and acquisitions as well as divestments. Desirable companies in desirable markets must be brought in and undesirable businesses in nonstrategic markets must be jettisoned. In a sense, major chemical firms using this strategy are playing a version the children’s card game Go Fish – picking up and passing around smaller business as they attempt to develop a winning hand out of the same 52 cards. If a company is successful in implementing this strategy and assembles a good stable of businesses, the deal-making would be expected to drop off.
In practice, a Multifortress chemical firm with around $10 billion in annual revenue would be comprised of approximately a dozen businesses organized into something like five business groups. The size of the individual businesses in this example would range from around $500 million to $3 billion. Companies organized like this include Solvay and the proposed HuntsmanClariant. Smaller firms with something like $3 billion in revenue can apply the same strategy, but would have fewer individual businesses and fewer business groups. One example is KMG Chemicals, which has assembled a strong electronic chemicals business and is in the process of developing a lubricant and sealant business. Very large chemical and materials companies have a similar organizational structure with something like 50 roughly $1 billion businesses folded into a half dozen or so business groups.
When employing this strategy, the most critical aspects of the individual businesses are the large entry barrier for manufacturing and size. Size is required for ease of management – running 10 businesses is typically easier than running 100 businesses. The large barrier to entry is needed to achieve good margins.
The individual fortress businesses fall into two general groups: one with mature markets and moderate growth and the other with emerging markets with higher growth. Using Solvay as an example, one of its mature businesses is its legacy soda ash business. Here, Solvay has an excellent market position sustained by low-cost production in a commodity chemical that will continue to grow with industrial production for the foreseeable future. One of Solvay’s higher growth businesses is its Composite Materials business, which it acquired by buying Cytec in 2015. Here, the market is more competitive, but the projected growth higher.
To Lux, the Multifortress Strategy is certainly logical. Clariant and Huntsman have stated that they believe that within the next 10 years, the specialty chemical industry will be dominated by six to eight global companies, each with sales in the $14 billion to $17 billion range. If this future does emerge, Lux expects each of the remaining global firms all to be similar Multifortress firms. If so, it will be critical over the next few years for specialty chemical companies to assemble their best possible business portfolio.
In the future envisioned by Clariant and Huntsman, Lux wonders if criteria other than high barriers to entry, size, market sustainability, and growth will matter when picking companies to include in a firm’s business portfolio. For example, will technical synergies – be they in applications, manufacturing technology, or feedstocks – among businesses be important? What about market, customer, and regional synergies?
Lux also wonders what will be the role of innovation as chemical companies build their fortresses. Will it take a back seat to mergers and acquisitions? Will it be only focused on incremental efforts within existing businesses? Will developing breakthrough technologies that could create new businesses be neglected? Will these future Multifortress firms become more vulnerable to disruptive innovation from outside their markets?
We expect (and hope) that there will be more in the future for the chemical industry than mere financial engineering. The best-performing companies will likely have a business portfolio that includes synergies between its businesses and find many ways to continue to innovate.
By: Matthew Wagner