February 28, 2008

Dow Chemical Reviews Plastics Business

Dow Chemical Reviews Plastics Business
Options Include Sale
And Joint Ventures
Amid a Shift to Growth
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.

GM to Expand Its Ethanol Capabilty
Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 7, 2008.

General Motors Corp. said half of its U.S. vehicle volume will be able to run on ethanol by 2012, just as partner Coskata Inc. is expected to be ramping up ethanol production.
In a speech at the Chicago Auto Show, GM North America President Troy Clarke said GM will have 11 ethanol-capable vehicles on the market this year and 15 in 2009. Mr. Clarke also announced that GM will be producing its first four-cylinder ethanol-capable model, the FlexFuel Chevrolet HHR, in 2010.
"We don't only want to respond to the needs of the market. We want to anticipate them," Mr. Clarke said.
Mr. Clarke also said that Warrenville, Ill.-based Coskata, which announced its partnership with GM in January, has formed an alliance with ethanol-plant engineering firm ICM Inc. to build its first plant, which is expected to open in late 2010.
Coskata President and Chief Executive Bill Roe said the company plans to announce the location of that plant and another plant in the next few weeks, and construction on both will start this year. ICM's production process currently is being used for half of all U.S. ethanol production.
Coskata said it will be able to mass-produce ethanol at the plant for less than $1 a gallon using a unique process that converts feedstock, biomass, agricultural waste and even municipal solid waste to ethanol.
Mr. Clarke said GM is continuing to research hybrids, plug-in electric vehicles and other fuel-saving technology, but believes ethanol can provide the quickest reduction in emissions. The U.S. already has a fueling infrastructure for ethanol, and consumers would have to make minimal changes in behavior, he said.
He said that if GM, Ford Motor Co. and Chrysler LLC meet their promises for the number of ethanol-capable vehicles they will have on the road by 2020, there would be a reduction of 29 billion gallons of fuel annually, or 18% of the country's usage. GM now has 2.5 million ethanol-capable vehicles on the road and expects to have up to 20 million by 2020, Mr. Clarke said.

February 27, 2008

In Merger Matters, Little Talk About Travelers

Published: February 26, 2008
MARCH MADNESS may soon be upon us. No, you haven’t stumbled by mistake onto the sports pages. When I talk about March Madness and the makeup of the Final Four, I’m talking about the airline industry in the United States and the prospect that it is on the verge of fundamental consolidation.

Mergers now being negotiated among the so-called legacy carriers could soon leave the industry with four legacy carriers, rather than six.

And that does not include possible moves by some foreign carriers, which have already begun to lay down their own strategic bets and look for prospects.

So far, the discussion of any looming deals has focused on the Wall Street aspects, and not on how any mergers might affect customers and the routes they need to fly.

I asked an industry analyst, a frequent business traveler who studies brand loyalty, and a foreign airline’s chief executive how they see things shaping up.

“I see a reduction of options for the passengers along with an increase in fares,? said William F. Shea, a former associate administrator of the Federal Aviation Administration and a former aviation director in Portland, Ore., who is now a lecturer on aviation issues. “I am also very concerned about the smaller communities that I see losing more air service.?

Air service has already been reduced in many small and even some midsize markets. The trend is accelerating as major airlines use fewer small, fuel-inefficient regional jets and shift bigger aircraft to profitable international routes and to domestic routes that will provide feeder traffic for international connections.

At some airports that now depend on small regional jet service, “the runways are limited — they can’t handle bigger planes,? Mr. Shea said.

James T. Kane, who studies brand loyalty — and flies frequently — as a partner at Brookeside Group, expressed resignation at the prospect of mergers.

“The airline industry and the banking industries are the most hated industries on the planet, with the most disloyal customers,? he said.

“From my standpoint, if mergers simply reduce the bad choices from six to four, fantastic. Go for it,? he added.

Mr. Kane said he was amazed at how little the needs of customers were figuring into merger discussions and negotiations.

“All the talk is about fuel prices, pilot contracts, share prices,? he said. “They’re not even talking about customers.?

Mr. Kane predicted that low-cost domestic airlines would increasingly take business from the legacy carriers, defined as American, United, Delta, Continental, US Airways and Northwest.

Already, aggressive low-fare competitors with solid brand loyalty, including Southwest Airlines and JetBlue Airways, are adding flights and even buying planes to compete more aggressively for the aggrieved business traveler.

Meanwhile, foreign airlines are waiting for the start of the Open Skies agreement between the United States and Europe, the first phase of which takes effect next month. Ultimately, several major foreign airlines hope, Open Skies will allow them to acquire attractive low-cost carriers in the United States, rather than merely hold minor stakes in them.

The big German carrier Lufthansa recently acquired a 19 percent stake in JetBlue, which, in turn, recently expanded some domestic routes and flights.

In an interview, Wolfgang Mayrhuber, Lufthansa’s chief executive, described the JetBlue stake as “a financial investment with strategic implications.?

Initially, the prize is JetBlue’s strong brand loyalty and its wealth of slots in New York at Kennedy Airport. Those augment Lufthansa’s own slots there and can form the basis of a fledgling network, with JetBlue feeding Lufthansa international flights and Lufthansa feeding JetBlue’s domestic flights.

“Jointly, we can optimize? the Kennedy slots, Mr. Mayrhuber said. “At the end of the day, they would have bigger planes, and we would coordinate the traffic flows so we can bring more passengers through each slot.?


February 26, 2008

Why M&A Is Back, for Now

Despite a credit crunch and recession worries, the dealmakers have returned to Wall Street.

Their current run includes Microsoft's (MSFT) $44 billion bid for Yahoo! (YHOO). Major U.S. air carriers are reportedly talking about mega-mergers. And a wave of smaller deals has hit the headlines, including Reed Elsevier's (RUK) $4 billion buyout of ChoicePoint (CPS).

So far it's a pale imitation of 2007, when private equity firms used cheap credit to gobble up company after company. That pumped up the stock market in the first half of the year, just before the credit crunch took it down again.

Fears of a Coming Antitrust Crackdown
The credit crisis still drags on, and private equity players sit on the sidelines, unable to obtain financing for billion-dollar deals. So what's behind this encore performance of the M&A boom? And how long can its run last if the economy continues to deteriorate?

One factor is the Presidential election. The next U.S. President will appoint regulators who can decide whether to challenge deals on antitrust grounds. They will determine whether a proposed combination would restrict competition or create a monopoly. Some deals are being rushed to get them approved before President George W. Bush leaves office on Jan. 20, 2009.

Most deals ultimately get approved, but the process can create a headache for CEOs and shareholders. On Feb. 19, the proposed merger between XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI) hit its one-year anniversary as the controversial deal still waits for word from the Justice Dept.'s Antitrust Div.

Obama Has Criticized Bush's Antitrust Record

All else being equal, most assume a Democrat in the White House will be more suspicious of proposed mergers. But it's hard to know what the next President will do. Antitrust regulation is the sort of topic that makes voters' eyes glaze over, so it rarely gets attention on the campaign trail.

Senator Barack Obama [D-Ill.] was the only current candidate to respond to a questionnaire from the American Antitrust Institute last year. Obama criticized the Bush Administration for "the weakest record of antitrust enforcement of any administration in the last half century." He pledged to "reinvigorate" enforcement, and cited health care, including the insurance and pharmaceutical industries, as a sector where the lack of competition has raised prices for consumers.

Delta Air Lines (DAL), Northwest Airlines (NWA), Continental Airlines (CAL), and United Airlines (UAUA) are among the carriers said to be discussing mergers. Airline deals have gotten close scrutiny from regulators in the past, and that's likely to happen again. On Feb. 14, Senator Hillary Clinton [D-N.Y.] said the mergers should prompt "a hard look at the potential effects on workers" before they're approved.

Federal Judges Have the Ultimate Say

Antitrust law is full of "squishy language that reasonable people can disagree on," says Robert Lande, a University of Baltimore law professor who co-founded the American Antitrust Institute. While all regulators may worry that a merger would raise prices, Democrats are more likely to consider other factors, such as whether a merger would restrict consumer choices, Lande says. That approach could threaten mergers of media companies, for example, under an Obama or Clinton Administration.

Still, many argue antitrust policy won't change much even if Democrats take the White House. For one thing, political appointees don't make ultimate decisions on mergers -- federal judges with lifetime appointments do.

Also, a new Administration may affect "close cases," but there is a consensus on most questions, says antitrust expert Paul Denis, now at the law firm Dechert LLP. As a Justice Dept. lawyer in the early 1990s, he helped draft merger guidelines still in place today. The political parties may be split on many other important issues, but antitrust "is an issue where there is probably more agreement than disagreement," Denis says.

A Leadership Vacuum Could Stall Approvals
The 2008 election does create problems for dealmakers, however, Denis says. The transition to a new administration in 2009, often a chaotic process, could create a leadership vacuum, he says. Under normal circumstances, deals under review can stall for months and months, with the average review taking seven-and-a-half months, Denis says. The change in power in early 2009 could add to delays even if Republicans remain in power. Companies have just a few more months to put together big deals before they run the risk of getting stuck in post-election limbo.

For large, controversial mergers like the airline deals or the possible Microsoft-Yahoo combination, the 2008 election is undoubtedly at least one consideration. But otherwise, M&A experts say, the Presidential election is a sideshow to a number of bigger factors shaping the M&A market in 2008.

First, companies are finding more bargains when they look for acquisition targets. The weak stock market has lowered share prices. And private equity firms aren't around anymore to bid up buyout offers. Before the credit crunch made many leveraged buyout deals impossible, companies "got to the point where they didn't feel like they could compete" with private equity buyers, Denis says.

Foreign Buyers Eye Global Brands
A weak U.S. dollar adds to the advantages for foreign buyers. Strong respective currencies are helping Canadian, Asian, and European firms see lots of good prices in the U.S. stock market. "You can afford some deals that you couldn't afford before," says Stefano Aversa, co-president of AlixPartners, a global consulting firm. The most recent example is Anglo-Dutch firm Reed Elsevier's $4 billion offer for ChoicePoint on Feb. 21.

Buyers from India and China may be especially active in 2008, Aversa says. In the consumer space, foreign buyers may be attracted to global brands with great long-term value, Aversa says. In technology, firms in emerging markets with production capacity may want to buy U.S. tech firms for their respected brands and their access to technology and Western consumers, he says.

It won't just be foreign buyers on the prowl for bargains, says Mike Hogan, managing director at Harris Williams. The weak economy may be prompting more CEOs of all stripes to find ways to expand their companies through acquisitions, he says. With his firm focusing on M&A's "middle market" -- companies under $1 billion -- Hogan says the buyout market is "still very active."

More Banking Mergers Are Expected

Popular targets of M&A activity are firms in energy, technology, transportation and logistics, and commodities, Hogan says. For smaller firms, antitrust rules aren't much of a worry. However, the election may have an impact: Buyers of family-controlled firms may want to sell before Democrats allow Bush's cuts to capital-gains and estate taxes to expire, he says.

In other sectors, trends are pushing companies toward consolidation, says Mike Moriarty, a partner at A.T. Kearney, a management consulting firm. Banks, for example, will still want to merge to compete with global giants such as HSBC (HBC) and JPMorgan Chase (JPM). Given the trends in banking, "Aspiring to be the Wal-Mart (WMT) of banking is not a bad idea," he says. Hotels, publishing, aluminium, and steel are other industries undergoing consolidation, he says.

A variety of factors, from elections to strategy to good bargains, may be pushing players toward more M&A activity this year. But it won't be easy for dealmakers: A slowing economy and wild financial markets have many players sitting on the sidelines. Moriarty argues that smart CEOs will see past the current difficulties. If they do, they'll be rewarded. M&A is "such an important part of every successful company's strategic kit," he says. Despite the tough market and weak economy, "Companies are going to find a way to make that happen."

That might be true for the bravest players. But until the economic climate clears up, many firms will be reluctant to spend their rainy-day funds on expensive mergers.

Copyright © 2008 The McGraw-Hill Companies Inc. All rights reserved.