American Chemical Corporation

American Chemical Corporation

External Analysis

In June 1979, American Chemical Corporation (ACC) announced a tender offer for any or all of the shares of Universal Paper Corporation. ACC was one of the largest diversified chemical companies in the US. Universal's management opposed the take over and sued in federal court to have the tender blocked on the grounds that ACC would in essence violate the Clayton anti-trust Act of 1914. Universal alleged that its acquisition by ACC would drastically reduce competition among sodium chlorate producers, particularly in the Southeastern US market where both firms operated. The US government joined Universal in seeking an injunction to stop the tender.

While ACC denied the charges, it prevented a preliminary injunction by agreeing to divest its sodium chlorate plant located in Collinsville, Alabama should ACC acquire Universal. Subsequently, ACC was successful in acquiring over 91% of Universal's shares.

In October of 1979, ACC began searching for a buyer for the Collinsville plant. There were a number of buyers to approach, including Dixon Corporation, a speciality chemicals company. After lengthy negotiations, Dixon agreed to purchase the net assets of the Collinsville plant from ACC for $12million, subject to board approval.

The performance of ACC leading up to the acquisition of Universal was positive. They had been a stable profitable company. There was however, a drop in their net income for three years from 1974-1976. Compared to other chemical companies, ACC was similar in some ways, they had a stable profit margin and rising sales. During the 3 year decline of net income, they also suffered a decline in their net earnings per share, but yet they were still able to increase their dividends which made the company look like a good overall investment. Investors would be attracted to ACC because of the growing dividends. So long as the market stayed strong, they could expect good returns.

As a speciality chemicals company that produced a number of chemicals for sale primarily in the paper and pulp industry, Dixon Corporation's acquisition of the Collinsville Plant made perfect sense. Its principal products included sulfuric acid, aluminum sulfate and liquid sulfur dioxide. Sulfuric acid was used together with sodium chlorate to produce chloride dioxide, the active ingredient used to bleach pulp.

Nearly 85% of the sodium chlorate produced in the US was sold directly to the paper and pulp industry where it was used in the bleaching of pulp. The remaining 15% was used in soil sterilants in oxidizers for use in uranium mining and in producing various chemicals.

Sales of sodium chlorate had grown rapidly during the 1970s from 220,000 tons in 1970 to an expected 435,000 tons in 1979. Sales increased by approximately 8.6% per year between 1970 and 1974, with a 12% decline in 1975. Subsequently, sales recovered and grew by more than 10% per year between 1975 and 1979.

Demand for sodium chlorate from pulp producers was expected to continue increasing at 8%-10% per year. While pulp production was projected to increase at a slower rate of about 3%-4%, the use of sodium chlorate was expected to grow more rapidly since the use of sodium chlorate helped solve their plant waste problems. In addition to this, other uses of sodium chlorate were also expected to grow at roughly 8%-10% per year.

Capacity of sodium chlorate had not been able to keep pace with the sales growth during the 1970. While sales had increased by over 95% between 1970 and 1979, capacity had only increased by about 70%. The results of this under capacity drove prices up and resulted in substantial profit margins for companies in the sodium chlorate business.

In late 1979 there were a dozen domestic producers of sodium chlorate, largely dominated by four companies (Hooker, Pennwalt, ACC, and Kerr-McGee). The majority of sodium chlorate plants were located in the Southeastern US, where roughly two thirds of the product was consumed