UK: That demerger (2) - some caveats about following the trend - ICI.

UK: That demerger (2) - some caveats about following the trend - ICI. - Demergers can be good, says Robert Heller, but success is not necessarily automatic.

by Robert Heller.
Last Updated: 31 Aug 2010

Demergers can be good, says Robert Heller, but success is not necessarily automatic.

Statistically, three repetitions are nearly certain to be no coincidence. Does the proposed bifurcation of ICI, coming after Racal and Courtaulds doing the splits, indicate a new and powerful trend? If so, it's one that British management, for a change, has led: IBM is the only American superpower volunteering (so far tentatively) to divide in order to conquer.

The historical evidence supports the conquest theory - if you define victory as higher market value. In 1982, after fighting tooth and claw to preserve itself from antitrust break-up, IBM was worth $33.6 billion. This July, the figure was $56 billion: as Fortune notes, all but $5 billion of the increase was shareholders' own ploughed-back wealth.

In black-and-white contrast, AT and T lost its telephone monopoly, also in 1982, in a settlement its chairman called "exactly what the government wanted". The value of AT and T in 1982 was $47.5 billion. The value of the eight fragments of the behemoth 10 years later?: $180 billion. That 279% vault took the market worth to twice book value; 10 years ago, before break-up, book value was discounted in the market.

Nor is this the only precedent. Historians have calculated that the trustbusters did shareholders an equal power of good when splitting the Standard Oil Trust into pieces, including the mighty Exxon. Very near home to ICI is the case of Germany's three world chemical leaders, each now easily outranking the Britons. Nobody doubts that their collective strength (sales 3.7 times higher) exceeds anything that their monolithic womb of IG Farben, broken up by the victorious Allies, would have achieved.

There are positive and negative reasons why parts so embarrassingly outvalue the whole. Negatively, the misguided efforts of central management to direct enterprises over too wide a field (in products and/or geography) lead to delays, overlapping jurisdictions, bureaucratic interference, muddled priorities, and poor decisions taken too far away from the customer.

Positively, break-up devolves power to smaller units, which not only mitigates the above problems of size, but puts new people in authority. The shock of the new, will, with luck, encourage the fresh regimes to sweep away organisational cobwebs and start again. In that, the impact is similar to the impetus of management buy-outs. To complete the similarity, split managers will be very foolish if they don't incentivise themselves with share lollipops.

In conglomerates, splitting may also pull apart what should never have been put together: BAT's spun-off retailing and paper, an obvious example, had no more in common than, say, tobacco and insurance, which remain yoked in BAT (perhaps not for long). The logic of placing like-minded, like-industry 38e managements in the same box, while removing the misfits, constantly reasserts itself: even though managers often do precisely the opposite. But is the former what's happening at ICI?

Each proposed half is composed of highly disparate elements. The only unifying aspect of the continuing "ICI", comprising paints, explosives, materials and industrial chemicals, is that these low-growth, low-profit businesses (trading margin, 3.6%) quite simply bore the stock market to tears. ICI Bioscience would contain pharmaceuticals, agrochemicals and speciality chemicals: their similarity lies only in their superior overall trading margins (18.5%) and loftier market love.

But even within "speciality chemicals", say, there's little relationship save that ICI owns the businesses and that overall margins (unlike those on drugs) are miserable, at 3.8%. There's no visible connection between these operations and pharmaceuticals, despite Sir Denys's assertion that "synergies, technology and organic chemistry all run strongly through the biosciences businesses".

That's reminiscent of a Dunlop chairman's attempt to justify his onetime mish-mash: "What do rubber and its successors do? They absorb shock. They cushion. They grip. They bounce. What binds us together is the extension of these kinds of things." What binds ICI Bio is merely that the non-drug elements can be parcelled together with the pharmaceuticals, without exciting too many loud guffaws.

The drug business has been making vigorous efforts, aided by the Tom Peters organisation, to change its culture - not for its own sake, but to overcome such basic competitive disadvantages as taking years longer than rivals to bring new drugs to market. In management terms, the issue is whether the separated top teams, operating under the same chairman (Henderson) and from the same Millbank offices, will facilitate the pursuit of such initiatives with greater independence and faster impact.

A more radical prescription still, creating more independent ICIs and locating them further apart, both geographically and in spirit, would stand a better chance. Head office has no God-given right to exist. As Sir Derek Birkin, RTZ's chairman, has said, its job is to add value.

The essence of the AT and T division was that the old centre lost all authority over the seven devolved "Baby Bells": they were on their own (as was the centre itself) to add value for whatever they were worth (a lot more, as noted).

While AT and T was freed to concentrate on long-distance, international and computing, the babes, no longer in the wood, were liberated to develop their own life-styles. The key to the management value (as opposed to the putative stock market gains) of ICI's plans is the extent to which the components (and not the headquarters) of the two halves can pursue their own destinies - irrespective of the long traditions of the present ICI.

Indeed, ceasing to revere those traditions (apart from the group's fundamental decency) is basic to the new order. ICI is the product of a past in which businesses and plants were added together, without too much rhyme and reason, in too great a number.

In early dyestuffs history, for example, the once-dominant Brits were leap-frogged by the Germans, who used state-of-the-art technology on a single enormous site. The successor managers at ICI have been lumbered with many uncomfortable inheritances from such historic failures of concentration.

They have been compounded by the latter-day business bungling which led to forced abdications like those from polyester and polyethylene - world industries which ICI created. Cranfield professor D R Myddleton wrote a damning indictment of the most recent period in a letter to the Financial Times. A specialist in finance and accounting, he calculated that, in real terms, ICI's dividend was lower than in 1959. Rewriting the accounts in constant purchasing power, he reckoned that "ICI has actually made a loss in 10 of the last 15 years".

So much for adding value centrally. The counter trend is towards recognising that, if large businesses stand on their own feet, the latter are more likely not to be flat. At General Electric, chief executive Jack Welch has just named every divisional head "chief executive officer": a symbolic step to signal that their businesses, if independent, would rank in the Fortune 500, if not the 100.

Independent direction of free-standing businesses is the best outcome of demergers. But their benefits, of course, are not automatic: two lemons will never make an orange.

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