The Global Economic Impact of Private Equity Report 2008 - World ...

ealized it was not possible to grow the company organically.Messer had specialized in building plants to produce gases,but he wanted to expand into production of gases. To thisend, he searched for a strong partner, and entered intodiscussions with BASF, a global chemicals company, whichproposed a 50–50 share split, with each party getting 50%voting rights. While negotiations were underway, chemicalsand pharmaceutical giant Hoechst came into the picture;a Frankfurt‐based company with operations in over 100countries, Hoechst was known for its strong R&D, and highlydiverse portfolio. By 1965, Messer merged with Hoechst’sKnapsack‐Griesheim, forming Messer Griesheim as atwo‐thirds subsidiary of Hoechst concentrated in threeareas: welding technology, cryogenics and industrial gases.As part of the deal, the Hoechst team had to take on someof the proposed BASF acquisition deal structure. Notably, theMesser family expected to retain the same voting rights theywould have received in the BASF acquisition, even thoughtheir share of equity – only one‐third of shares in the Hoechstdeal – was lower than what had been envisioned with BASF.This set the stage for ongoing Messer family‐Hoechstnegotiations, essentially giving the Messer family an importantveto right on any subsequent sale of the Hoechst shares.The 1970s saw continued growth as the companyestablished more branches in Western Europe, includingFrance, Great Britain and Spain, and North America.With borders opening in Eastern Europe by the end of the1980s, newly established associated companies leveragedinvestment and sales opportunities and the company passedDM2 billion (equivalent to €1 billion), with annual net profitsof DM133 million (equivalent to nearly €68 million). 13Up until the mid 1990s, the Messer Griesheim enterprisewas considered one of the pearls of Hoechst’s diversifiedportfolio. Relations between Messer Griesheim and Hoechstmanagement were for the most part very good, andcollaborations worked without any problems. MesserGriesheim investments were financed by its ongoing cashflow, making the company generally relatively independentfrom Hoechst. But as conditions shifted across Hoechst,Messer Griesheim’s glow began to fade.Messer Griesheim 1994–2001: part of a shiftingHoechst portfolioIn 1994, former Hoechst CFO Jürgen Dormann took overas CEO, and shifted Hoechst’s strategy to focus on its coreactivities with the ultimate aim of turning the company intoa “pure” life‐sciences company. Hoechst’s low‐profit basicandspeciality‐chemical divisions were sold off as was itscosmetics unit, leaving Hoechst focused on agricultural andpharmaceutical products. As one report noted, Dormann,or “Mr. Shareholder Value” as he was known, lived up to hisname – Hoechst shares more than doubled in value between1994 and the end of 1998. 14Dormann’s strategy was to keep only the entities in whichHoechst was able to hold a lead or second market position.At that time, Messer Griesheim did not hold a lead marketposition in many of its activities, and Dormann’s eventual aimwas to sell Hoechst’s shares in the firm. However, MesserGriesheim’s management felt their parent company did nothave a full appreciation for the regional nuances of theirbusiness. “The criteria used by Dormann to assess leadposition could not be readily applied to our market. Industrialgases are a very regional business, it is more important totake into account the leadership within a region rather thanon a national or even global scale,” a member of the currentmanagement team recalled.With the decision taken to divest its Messer Griesheimshares, Hoechst worked to grow Messer Griesheim’sbusiness to make it more attractive to potential buyers.Herbert Rudolf, member of the management board andpost‐1993 CEO, followed an aggressive expansion strategy,supported by Dormann, acquiring existing companies andbuilding new ASU plants, and establishing a strongerpresence in Latin America, Africa, Asia and Eastern Europe.With the death of H. Messer in 1997, the next generationMesser – son Stefan Messer – was appointed to themanagement board in January 1998. That year, MesserGriesheim had 24 new plants under construction, and hadnegotiated new contracts to build 20 cryogenic and 65non‐cryogenic plants. 15 And in 1999, Messer Griesheimannounced plans to build a 3,000‐tons‐per‐day plant forThyssen/Krupp, requiring an investment of €50 million. 16Rudolf had the support of the Hoechst management andBoard (AR) and was able to act independently from Hoechst.“We wanted to make the pig more beautiful before we founda buyer,” an insider noted. Hoechst believed it would be easierto find a buyer with a larger business with a greater numberof global entities. In December 1999, Hoechst merged withRhône‐Poulenc to form Aventis, the world’s sixth‐largestpharmaceutical group, with Dormann becoming CEO.The Messer Griesheim expansion came at a cost. Accordingto one source, Messer Griesheim spent €2 billion between1995 and 2000 on capital investments, “a whopping25%–30% of its sales,” while operating margins and returnson capital lagged behind industry averages. 17 Even theemployee section of the Board voiced concerns over theinvestments under Rudolf. “It was problematic that Messer13The Euro estimates are based on the €–DM exchange rate of €1=DM1.95583.14Richard Tomlinson, “CEOs Under Fire. Mission Impossible? Jürgen Dormann’s Job: To Save ABB From Itself”, Fortune, 5 November 2002,http://www.cata.ca/files/PDF/Resource_Centres/hightech/elearning/Fortune_com.pdf, accessed 15 October 2007.15“Case Study: Messer Griesheim LBO,” Goldman Sachs, Vallendar, 27 April 2007.16“Case Study: Messer Griesheim LBO,” Goldman Sachs, Vallendar, 27 April 2007.17According to Deutsche Bank analysts, cited in Natasha Alperowicz, “Messer does an about-turn: New ownership focuses on debt reduction”,Chemical Week, 27 February 2002, http://goliath.ecnext.com/coms2/summary_0199-1480758_ITM, accessed 2 November 2007. Capex for1998–99 was 30% of sales according to Goldman Sachs.The Global Economic Impact of Private Equity Report 2008 Case studies: Messer Griesheim 93