Case F3
Business Divorce 1
Two breakups: ICI and Hanson
In 1993 and 1996 respectively, ICI (Imperial Chemical Industries) and Hanson plc demerged. ICI was split into two, and Hanson was divided into our. !his type o "usiness reorganisation is a radical strategy to adopt, and is li#ely to "e only underta#en in the ace o growing organisational and inancial pressures. $oth ICI and Hanson aced such pressures. %rom a tradition traditional al economic economic point o view view it might might simpl simply y "e argued argued that "oth ICI and Hanson had grown too "ig, with diseconomies o scale reducing their proits and ma#ing them less competitive. !o some degree this was true. ICI, in particular, prior to the late 19&'s, was seen as a highly highly "ureaucratic "ureaucratic conglomerate conglomerate that had little strategic ocus and was slow to respond to change. ven so, demerger was a radical orm o surgery to deal with what was essentially a orm o organisational ineiciency. In act, when we loo# more closely at ICI I CI and Hanson we ind that that their pro"lems were more to do with how they how they grew, and not necessarily with the process o growth itsel. $oth ICI and Hanson pursued growth strategies which involved diversiying their "usiness interests. !here were dierences "etween them, however. hereas ICI might claim that its diversiication came mainly mainly rom new product development development and its own *+ investments, investments, Hanson diversiied diversiied "y ac-uiring other companies via merger and ta#eover. $ut despite these dierent approaches to the process process o diversi diversiic icatio ation, n, "oth compani companies es came to eperie eperience nce very very simil similar ar pro"lem pro"lemss and a need radically radically to restructure restr ucture their "usiness "usiness operations.
The case of ICI ICI was created in 19/6, ollowing the merging o the $ritain 0s our "iggest chemical companies $runner 2ond, o"el Industries, 4nited 5l#ali and $ritish yestus. !he merger was motivated "y growing growing inter internati nationa onall compe competitio tition, n, especi especiall ally y rom ermany ermany.. ICI0s "ig "rea# came in 1933, when, "y accident, it discovered polyethylene, or, as we #now it "y its trade name, Polyt name, Polythene hene.. It has "een calculated that, since 1933, ICI has patented a urther 33 ''' new inventions. ICI remained irmly rooted in the 47 mar#et until the 196's, where it operated as a virtual monopol monopoly y. In the 196's 196's it "egan "egan to "roaden "roaden its hori8ons hori8ons and moved, moved, usually usually via merger merger and ac-uisition, into urope and the 4nited tates. 5t this stage o its epansion, ICI sought to produce produce in these countries countries simi similar lar products products to those it was producing producing at home (which (which covere covered da very wide range o products indeed). In the 19&'s, as competition in the chemical industry intensiied and ICI 0s growth slowed, rather than reorganise its "usiness interests "y reducing its product range and ocusing more closely upon its core "usiness activities, ICI maintained "usiness as usual. :ne o the principal reasons why it did not reorganise was simple inertia and opposition within its organisational structure. ven where products were ailing, and clearly alling "ehind the products o rival compani companies, es, powerul powerul divisio divisional nal directors directors were reluctant reluctant to relin-u relin-uish ish or scrap part o their their domain. Change was very diicult to implement in the ace o such vested interests. ICI0s "usiness environment was to ta#e a turn or the worse with the 47 recession in the early 19;'s. !he depth and length o the recession hit ICI hard, orcing it once again to loo# at its
also "egan to devolve more responsi"ility or strategy and investment decisions to the company 0s divisions. $y the early 199's, ollowing a urther review o ICI 0s strategy and organisation, it was decided that ICI would ocus more clearly on core "usiness activities, concentrating resources on pharmaceutical products, agrochemicals and seeds, specialities, eplosives, paints, materials, and industrial chemicals. Its organisational structure was also revised, with clearer lines o responsi"ility esta"lished "etween dierent management levels. In 2ay 1991, the ac-uisition o /.; per cent o ICI 0s shares "y Hanson, a company with a reputation or ac-uiring "usinesses that it considered had undervalued stoc#, orced ICI once again to loo# at its organisational structure and at whether it was enhancing shareholder value. $y this point in time, the pharmaceutical division o ICI was "y ar the most proita"le component o the company. >roits rom it were used to prop up the less proita"le divisions, which tended to drag ICI share prices down. In other words, various parts o ICI were more valua"le than the whole. It was -uic#ly realised that, unless shareholder value was enhanced, a ta#eover might "ecome inevita"le. It was decided that radical surgery was necessary and that ICI should "e split along technological lines. :n one side, there were the divisions o pharmaceutical and "ioscience? related activities, and, on the other, ICI0s traditional chemical divisions. ach group o "usinesses were argued to orm an industrial cluster, where there eisted strong technological and manuacturing lin#s. %or eample "oth pharmaceutical production and agrochemicals com"ined "iology and organic chemistry in their research and development programmes. !he supporters o ICI0s demerger argued that the synergy "etween its parts would "e enhanced "y creating these two clusters, which under the old ICI structure had deteriorated over time. !he deterioration had occurred "ecause "usinesses within ICI had "ecome too diverse. !hey came less and less to share the same technological and manuacturing re-uirements. !hus services provided centrally "y "eing part o ICI, such as access to technology and reputation, were either o no use, or something that each division could more successully provide itsel. In 1993 the pharmaceutical and "ioscience divisions o ICI were demerged to orm a new company called @eneca. !he chemical division "ecame the new ICI. $usiness organisation ollowing the demerger o ICI was simpler, and corporate o"=ectives more easy to identiy. In addition, as :wen and Harrison (199<) remar#, the challenges acing managers at @eneca and the new ICI could now "e dealt with more eectively, given that the dierences "etween them no longer orced them to compromise. Zeneca’s task is to manage high growth based on innovative new products; the emphasis is on strengthening the company’s Worldwide sales organisation and on improving the productivity of research and development. ... ICI’s chemical businesses by contrast are cyclical supplying such industries as mining te!tiles and construction. "hey are mostly capital intensive and much less dependent than Zeneca on research. "heir goal is to achieve world market leadership for the areas in which ICI has a technological advantage; and their continuing urgent need is to reduce overheads improve the utilisation of assets and raise manufacturing efficiency. # !he #ey to understanding ICI0s pro"lem lies in the diversity o its "usiness interests, and the act that this diversity, primarily as a result o technological change, grew over time. ierent divisions within ICI0s operations re-uired dierent strategies and approaches, which were either o no use to other divisions or even generated a conlict o interest.
The case of Hanson plc
that the conglomerate, with a turnover o A1/ "illion, was to split into our companies covering energy, Imperial !o"acco, chemicals and "uilding materials. 4nli#e ICI, Hanson operated via a relatively simple organisational structure, in which the head-uarters involved itsel very little in the ormation o each "usiness0s individual strategy. $usinesses within Hanson were run very much as Bstand?alone0 "usiness units. !he head-uarters was more decisive when it came to inance and investment, where strict controls were imposed over ependiture decisions. !he reasons or such a policy were clearly identiied in what ord Hanson saw as the corporation0s principle aim "o invest in good $uality basic businesses providing essential goods and services for the consumer and industry and to obtain an improving return for shareholders by ma!imising earnings per share and dividend growth. % >redicta"ly, tight inancial controls over investment and growth were put in place, as investment and growth tended to depress proita"ility and shareholder value in the short run. 5s a conse-uence, the avoured means o "usiness growth or Hanson was via urther ac-uisitions, rather than through strengthening eisting "usiness interests. In total, it is estimated that Hanson "ought 3< companies in agreed ta#eovers and a urther si via hostile ta#eovers. It made 1< unsuccessul "ids and too# signiicant share holdings in a urther // companies or a signiicant period o time. 3 Hanson0s ac-uisition strategy was to "uy companies he thought were undervalued. !he purchase o the Imperial roup in 19;6 is one such eample. Hanson purchased it at three times the "oo# value. He su"se-uently sold many o Imperial0s assets to ma#e a si8ea"le proit. !hings "egan to go wrong or Hanson in the 19;'s, as growth "egan to slow and Hanson attempted to maintain high share dividends. In the past, the pro"lem was easily overcome "y ac-uiring new "usinesses. $ut now Hanson plc had "ecome a victim o its own success. !he si8e o the necessary ac-uisitions to meet the dividend re-uirements o shareholders was growing ever larger. !his raised the pro"lem not only o inding large potential ac-uisitions to meet the company0s re-uirements, "ut also o unding them. 5s a result o Hanson0s ac-uisition strategy, it had "ecome reliant on natural resource companies which operated with wea# cash lows. 5s a conse-uence, unds or urther ac-uisitions could only "e raised "y selling eisting "usiness assets, usually the most proita"le ones. !he diiculty was that Hanson0s portolio o "usinesses was steadily wea#ening over time, as the "est?perorming stoc# was sold to purchase low?perorming assets. In addition, many mar#et analysts came to -uestion the wisdom o Hanson0s ac-uisitions, and the degree o diversiication it was creating. &P 'organ and Company has developed a () *Corporate Clarity Inde!’ which $uantifies a company’s corporate clarity or degree of focus in its business portfolio by identifying the different industries in which the firm operates relative si+e of sales in each segment and operating similarities among the firm’s different businesses. ,irms are assigned a score on a #--point scale/ single segment firms score #--; widelydiversified firms typically score around 0-. 1pplied to #00 () firms between #22- and #223 the stock market rewarded clarifying firms in a twoyear period following a ma4or business shift as follows/ clarifying firms outperformed the stock market by 5.6 per cent annually and outperformed diversifying firms by #3.6 per cent annually. In a twoyear period firms with increasing diversification and reducing clarity scores e!perienced a 7.- per cent marketad4usted decline. "hus investors penalised conglomerates for unrelated diversification and rewarded firms with improved corporate clarity and sharper focus. 3
clarity, and "y 1996, with share prices alling, Hanson announced the conglomerate0s demerger.
Questions
1. Identiy the dierent types o diseconomy o scaleD How might these "e relevant in eplaining the ortunes o ICI and HansonD /. hat advantages and disadvantages are there with a growth strategy o diversiicationD *elate this to the eperiences o ICI and Hanson. 3. 4sing company reports and other inancial mar#et sources consider what has happened to ICI and Hanson shares prior to and ollowing demerger. 4sing share value as a guide to perormance, do the various companies created rom demerger appear to have "een successulD
1
:wen and ! Harrison, Bhy ICI Chose to emerge0, 8arvard 9usiness :eview (5pril 199<)
/
*edmayne, Bemerger o the Hanson Conglomerate0, Company 1ccountant (5pril 1996)
3
2 ynn, B!he Hanson Inheritance0, 'anagement "oday (Eune 1996)
F
> tonham, Bemergers and the Hanson perience0, uropean 'anagement &ournal (Eune 199&)
