ICI/Zeneca

ICI/Zeneca

ICI HAS declared itself interested in buying parts of Zeneca's specialty chemicals business, which was put up for sale this week with a price tag of anything up to pounds 2bn. What singles this expression of interest out from the general run of merger and acquisition activity is that this business was until five years ago actually owned by ICI. There could hardly be a more vivid illustration of what my colleague Hamish McRae has called the age of the "velcro company" - a pull them apart and stick them together again orgy of corporate activity.

What's caused the phenomenon is growing pressure on managements to "focus" on particular activities. This pressure comes from two quarters. First and foremost, it comes from investors, who want to encourage focus as a way of making companies, the quality of their management, and the returns they achieve, more open to scrutiny and comparison. It is all too easy to obfuscate poor performance in a multi-business company.

But perhaps more important, the pressure comes from the market place. For many companies, the customer base is now a global one; managements that don't focus 100 per cent of their time on servicing it in the most competitive and cost-effective way can expect to fail.

So how did ICI get from point A, when it owned these businesses, to point B where it now wants to buy them again?

Zeneca, ICI's fast growing pharmaceuticals arm, was demerged from the main company in 1993, again, to use the jargon, to allow management to focus on core competences. Strangely, agrochemicals and specialty chemicals were demerged with it, the justification being that these businesses were closer to Zeneca than they were to ICI.

In point of fact, the real reason was to give Zeneca some extra bulk. ICI shouldn't have bothered. Since then Zeneca's stock market value has risen and risen and ICI's has, well, sunk and sunk. Today Zeneca is worth more than five times as much as the old rump ICI business. More alarmingly, ICI is now worth only 80 per cent of what it paid Unilever for its specialty chemicals division a year and a half ago. Unilever sold, again in the name of focus, so that it could concentrate on its consumer product interests. At ICI, the idea was to transform the group from a low-margin bulk chemicals company into a higher-margin specialty chemicals concern.

Plainly the strategy hasn't worked. At Unilever, Niall Fitzgerald is laughing all the way to the bank. Meanwhile ICI's Charles Miller Smith is sinking under a mountain of debt, apparently unable to match what it paid Unilever with the promised asset disposals in bulk chemicals and elsewhere. Sensing ICI's distress, potential buyers, to the extent that there are any for these interests, are holding out for fire-sale prices.

In ICI's case, then, the velcro has failed to connect. So what on earth is ICI doing trying to buy Zeneca's specialty chemicals? Some of these businesses, resins in particular, fit the strategy alright, but the truth of the matter is that Mr Miller Smith has barely enough money to keep paying the dividend, let alone go on another shopping spree. Because of the history, ICI still has pre-emption rights over some of these businesses, but it is hard to see how it can afford to exercise them.