Dow Chemical has agreed to sell its Chlor-alkali assets and associated derivatives businesses to Olin Corporation in a transaction that in one stroke separates Dow from its main heritage business and makes Olin the largest domestic chlor-alkali producer. Dow will end up owning about half of Olin’s stock (to be eventually spun off to Dow’s shareholders) and has a 20-year contract to supply ethylene to Olin’s vinyl chloride and other chlorine derivatives businesses it will now own. Readers will recall that Dow was never a PVC (polyvinyl chloride) producer (except in a very minor way), and sold its styrene/polystyrene and polypropylene businesses a number of years ago. It remains a large polyethylene producer, where its proprietary technology and low cost ethylene production has given it some competitive advantage in this otherwise relatively commoditized business. Dow is getting closer to its announced goal to be largely a producer of specialty chemicals and differentiated consumer-oriented products.
It is hard to avoid comparing this and other Dow transactions to what happened with England’s premier chemical firm ICI over the last decades of the Twentieth Century: Yes, “breaking up is hard to do” when companies want to transform themselves from being largely a commodity producer to a producer of specialties. ICI failed spectacularly in this respect, following a different playbook than Dow. It decided to (a) divest its chlor-alkali and polyethylene businesses and (b) to split off as a stand-alone company its highly specialized and profitable pharma, ag chemicals and other businesses in a so-called demerger. As a much leaner firm, it then acquired a number of relatively specialized businesses from Unilever, making ICI, at one time one of the largest and most successful global chemical firms, a much smaller company with several partly differentiated businesses. Unable to establish itself as a important player with a bright future, ICI eventually was acquired by Dutch producer AKZO, which coveted ICI’s valuable coatings and adhesives businesses, bringing to the end a failed strategy of transformation for a storied company.
Dow followed a somewhat similar, but strategically superior path. Its transformation got off to a bad start when it acquired Union Carbide, which greatly increased Dow’s exposure to the wild ups and downs of the petrochemical industry. Then, seeing the light, it embarked on its own quest to become a much more differentiated chemicals producer. Already engaged in supporting strongly its differentiated plastics and performance chemicals businesses, it acquired Rohm and Haas, one of the world’s leading specialty chemical companies(electronic chemicals, coatings) in the process taking on so much debt that its future financial condition for a time became uncertain and its management under stress. (Dow had expected the Kuwaitis to buy part of Dow’s commodity assets but the Kuwaitis reneged on the deal, leaving Dow very short of cash to pay for Rohm and Haas). But Dow had continued and still continues to spend a lot of money on research to create and/or acquire additional differentiated businesses(e.g. batteries, solar roof panels, water treatment). It had also kept some of the excellent specialty businesses (e.g. ag chemicals) that ICI spun off in its demerger. Dow has also greatly benefited from the “shale revolution” giving it a very low cost ethylene business, as mentioned earlier. It is now financially sound and is highly diversified, smaller than before, and completely different from what it looked like in the past – no longer recognizable by the ghost of Herbert Dow, its iconic creator who started to produce bromine derivatives in Michigan in the late Nineteenth Century and who died in 1930. It is now probably time to move Dow’s headquarters from Midland to a more cosmopolitan venue, a move that was always resisted by Dow’s traditional management.
While a few U.S. chemical companies (Westlake Chemicals comes to mind) are still in commodity petrochemicals, most of the other large firms (think Eastman Chemicals, Ashland, Huntsman) have largely transformed themselves into producers of differentiated chemicals. Dow, always considered a leader, has now come around to recognize that commodities cannot be an important part of its future even though the shale revolution briefly gave the U.S. petrochemicals industry a typical exciting interval.