Dow Chemical Reviews Plastics Business
Dow Chemical Reviews Plastics Business
Options Include Sale
And Joint Ventures
Amid a Shift to Growth
By KEVIN KINGSBURY and ANA CAMPOY
February 26, 2008; Page B10
Wall Street Journal
Dow Chemical Co. is reviewing several of its traditional chemicals and plastics businesses as the company shifts its focus to higher-growth operations.
The chemical giant said it is creating a new business group, Dow Portfolio Optimization, that will evaluate what to do with several businesses that produce plastics used in compact discs, auto tires and food packaging, among other products. The businesses in the new unit generate around $2 billion a year in revenue, said George Biltz, the head of the new group. Dow posted more than $50 billion in sales in 2007.
• The News: Dow Chemical is reviewing several of its traditional chemicals and plastics businesses as the company shifts its focus to higher-growth operations.
• Behind the News: Western chemicals companies face increasing competition from rivals in developing countries.
• The Shift: Dow and others are moving into specialty chemicals, but rivals are following.
The company said it will explore different options for the businesses, including selling them, entering joint ventures or blending them into another company division.
"As we look at where Dow is heading, we want to look for a financial fit, as well as a strategic fit," said Mr. Biltz, who formerly ran Dow's specialty plastics and elastomers portfolio, which included several of the businesses being reviewed.
At 4 p.m. in New York Stock Exchange composite trading, shares of Dow were up 0.65%, or 25 cents, at $39.
Companies in developing regions, such as Asia and the Middle East, are producing more specialty chemicals, increasing competition for the North American and European chemical industries. Many of these firms also have access to cheaper natural gas, a major feedstock, and are pulling down international prices.
Dow's strategy for the past few years has been to expand its specialty-chemical business, which is more profitable and less exposed to the ups and downs of energy markets. The company derives about 50% of its revenue from commodity chemicals, the basic building blocks for more sophisticated chemicals.
Although the businesses under evaluation are part of Dow's specialty-plastics unit, many of the products they make are subject to the same price pressures as commodity chemicals, says Hassan Ahmed, an analyst with HSBC Securities Inc. "If you look at the variety of subgroups [Dow is evaluating], a lot of them aren't really that special," he said.
Given the intense competition in the chemicals industry, rivals immediately try to match when one company comes out with an innovative product, he said. For example, products such as polycarbonates, which are used to make CDs and DVDs, were at the most specialized end of the spectrum less than a decade ago. Today they are fairly common.
Whatever Dow decides to do with the units under review, it will have a small impact on its bottom line, analysts say.
For the moment, the main focus is on a proposed joint venture with Kuwait Petroleum Corp. announced by Dow in December. Under the deal, Dow will shed a big chunk of its less profitable assets by selling a 50% stake in several plants to the Kuwaiti company for $9.5 billion.
"The key investors are looking at is what Dow will do with the money," said Frank Mitsch, managing director at BB&T Capital Markets, which is seeking investment-banking business with Dow.
Dow has said it will use the cash to make an acquisition or for a share buyback. The deal is expected to close before the end of the year.
Comments
I found this article interesting because I think it illustrates how a company is actually “managing the strategy process.� Dow Chemicals approach business decisions seem to indicate that the company uses more of an industrial organization model rather than the resource based model. These articles do not mention the unique resources that Dow can combine to get a superior return, instead they talk about which industries are attractive and which are growing.
The firm is going through the process of external environmental analysis. It is evident from the article that they scanned their environment and have monitored it. Oil prices are high and many companies in emerging markets have government subsidies on oil. Since oil is an important input for plastics it is creating rising costs for Dow. On the other hand, Dow can’t charge more for commodities because so many other firms can produce them and are able and willing to sell them at lower prices. Dow is forecasting that there will be increased demand for specialty plastics and that many rivals that can mass produce commodity plastics do not have the technological know-how to produce the specialty plastics. Dow is also realizing that goods that used to be specialty plastics have become commodities and is being careful about what they define as specialty plastics. The company is now in their assessing stage where they are taking this information and trying to determine the best strategy to fit this changing environment.
Dow is evaluating strategic alliances, acquisitions and divestitures to respond to the influences on its plastics business. Currently, Dow has proposed a joint venture where it sells a 50% stake in some of its plastics plants to Kuwaiti Petroleum Corp. This would be an example of a complementary alliance. If this deal goes through, Dow can get rid of some of its less profitable assets and will be able to obtain cheaper rates on oil. In addition to the joint venture, Dow expects that it will outwardly divest some of its operations. It will likely receive a premium on its sales and so is looking to use the sale proceeds to make acquisitions that fit into its strategy of specialty plastics. The reasons behind an acquisition like this would probably be to decrease the cost of new product development and get new products to market more rapidly.
Posted by: Lisa Wangchuk | February 28, 2008 5:52 AM