Wagner (left) and Jones

Marc S. Reisch
C&EN Northeast News Bureau

Last year at this time, Air Products & Chemicals and its ally, Air Liquide of France, were planning the joint $11.2 billion acquisition and division of the U.K.'s BOC , the second largest industrial gases producer. It was the best of times for Air Products as it solicited government approvals and planned for the integration. It was also the worst of times as Air Products' income slipped because of a combination of raw material price increases and stagnant prices for the chemical products it sells.

But all that is history, points out Harold A. (Hap) Wagner, 64, Air Products' chairman and chief executive officer since 1992. Air Products and Air Liquide--the number-one producer of industrial gases--gave up on the BOC acquisition when the two could not secure approval from the Federal Trade Commission (FTC) . The plan announced in July 1999 was trounced in May 2000. The cost to Air Products: $483 million, which included a $50 million termination fee to BOC as well as adviser fees, currency contracts, and other expenses.

Now Air Products is sharpening its concentration on the fundamentals, and both the company's sales and income have improved in 2000, says John Paul Jones, 49, president and chief operating officer since 1998 and the person who will succeed Wagner when he retires, an event expected this fall. Jones, a 28-year veteran of the company, has a B.S. degree in chemical engineering from Pennsylvania's Villanova University.

The potential acquisition of BOC was a once-in-a-lifetime opportunity, Wagner says. "Every company in the industrial gases business was nibbling at BOC. We would have been remiss if we had not gone after it," he explains. Air Products and Air Liquide decided to seize the moment before someone else did. "We weren't pursuing BOC out of desperation or confusion about our future. It was opportunistic," Wagner says.

However, the pursuit of BOC was expensive, he acknowledges. The $483 million charge to earnings in the company's third quarter, which ended June 30, forced Air Products to report a loss of $94 million on sales of $4 billion for the first nine months of fiscal 2000 versus net income of $335 million on sales of $3.8 billion for the comparable period in 1999. Without the special charge, Air Products would have earned $394 million, up 18% from the previous year.

Incurring those charges to realize an ambition that would have made Air Products the number-two industrial gases company worldwide--compared with its number-four spot today, following Praxair--means an increase in debt on the company's balance sheet. In June 1999, the company recorded long-term debt of $2.3 billion. At the end of June 2000, that debt level had risen 22% to $2.8 billion. "It is a significant impact," Wagner acknowledges. "The fact that we can absorb it says something about the breadth and strength of the company. We have to be more sensitive with regard to how much more debt we have on the balance sheet as a result. But otherwise I don't think it has an impact on our strategy."

Air Products at a glance
Headquarters: Allentown, Pa. Sales: $5.0 billion Net income: $451 million Capital spending: $889 million R&D: $123 million Employees: 17,000 Principal products: Industrial and specialty gases such as nitrogen, oxygen, hydrogen, argon, helium, carbon dioxide, carbon monoxide, tungsten hexafluoride, and nitrogen trifluoride; equipment for air separation, natural gas liquefaction, hydrogen purification, and air pollution control systems; chemicals, including vinyl acetate emulsions, polyvinyl alcohol, epoxy resins and additives, surfactants, amines such as monopropylamine, and polyurethane chemicals and intermediates such as dinitrotoluene and toluenediamine Website: http://www.airproducts.com/ Note: All figures are for fiscal 1999.

Anyway, the BOC deal is gone, Wagner states. "What FTC did or does is what they do," Wagner says. Still, Air Products' long-term strategy remains in place, Jones asserts. And that strategy, he says, includes a focus on expanding markets for electronic chemicals and specialty gases, as well as on supplying customers in the chemical and processing industries with industrial gases and equipment. It also includes a concerted effort to enlarge its involvement in Asia.

If the acquisition had been approved, Air Products would have been much further along in its growth plans for Asia, Jones says. "Our current Asia business is strong, and we are pleased with that," he says. Even while Air Products and Air Liquide wrangled with FTC over how to divvy up BOC in ways that would satisfy the government regulator, "we did about $200 million in acquisitions, primarily in Asia."

Jones recites a list of recent Asian investments. In South Korea, Air Products bought the remaining 51% of its partner, Korea Industrial Gases, and now owns 100%. The company also bought a majority interest in Hanyang Technology, a Korean specialty gas equipment manufacturer for the semiconductor industry. In Malaysia, Air Products increased its holdings in Sitt Tatt Industrial Gases from 30% to 70%. And in Southern China, Air Products acquired the remaining 50% of Chun Wang Industrial Gases, which it now owns entirely.

If it has any impact at all on the company growth philosophy, the failure to purchase BOC probably will make Air Products more acquisitive. Because it could not suddenly make the leap in size and geographic reach it had aimed for through the BOC acquisition, Air Products will continue its emphasis on growth through joint ventures. "No other company has pursued joint ventures as Air Products has," Wagner insists. "We've taken minority positions in many joint ventures all over Asia, parts of Europe, and in Mexico.

"As these companies get bigger, and as they ultimately sell out to Air Products, we do not have to go out and acquire a business we do not know anything about," Wagner says. It's a natural turn of events for the businesses Air Products has been working with for 10 to 20 years to "come home."

When Air Products does acquire a majority stake in these developing businesses, "suddenly people will say your Asian business looks terrific," Wagner says. "Well, it's always been terrific. But until we acquire a majority interest, the numbers never get consolidated, and it's not obvious." Between 1997 and 1999, Air Products' consolidated Asian assets nearly doubled to $442 million, and its sales almost quintupled to $87 million. Jones expounds: "We'll continue to use partnerships and joint ventures. Where we have a partner that has the infrastructure and the knowledge of the local market, we bring our technical strength, our operational excellence programs, and our safety programs."

Countries such as China, South Korea, and Thailand are well along in their industrialization efforts, but India is just at the beginning. Air Products recently acquired a 49% interest in Industrial Oxygen Co. of India. "Our strategy is to find a very good partner, get a line with it, and not worry about whether we are a majority or a minority partner. The point is, we think we are aligned with the best industrial gas company in India. And we think that, over time, we can develop a very strong market position," Wagner says. "We've been working with [Industrial Oxygen] for over 10 years in various industrial gas endeavors. So we knew each other" even before the formal alliance, Jones says.

Air Products' expansion into Southeast Asia in particular is tied to growth of the region's electronics and chemical manufacturers, as well as its petroleum refining activities. Sixty percent of the company's business in the region is tied to those three industries, Jones points out. And those industries also happen to be Air Products' most profitable worldwide.

Air Products took close to 100 people "off-line" to work on ways to best integrate half of BOC into Air Products, Jones says. "And they not only worked on how you piece the two companies together," he explains. They also had an opportunity to "step back" and examine best practices and decide "from an economic point of view what industries we should pursue in the future."

The exercise confirmed Air Products' focus on the chemical and process industries and its position as a supplier to the electronics industries. Considering Air Products' own chemical capabilities, "we identified opportunities to grow our electronics position faster than originally anticipated," Jones says.

In addition, Air Products examined its portfolio of existing businesses and thought about businesses that it might exit. "We made a decision to pursue alternatives for our polyvinyl alcohol business." The company now has an agreement to sell the business, which has $200 million in annual sales, to Celanese for $326 million (see page 7).

Financial analyst Robert Ottenstein at New York City-based brokerage Morgan Stanley Dean Witter says the proposed sale of the polyvinyl alcohol business "is a positive. This business has taken the brunt of the company's raw material margin pressure and has historically shown erratic earnings." Air Products is not back-integrated into vinyl acetate, as Celanese is. He suggests that the company may also sell its smaller power generation and flue-gas desulfurization businesses. Though Ottenstein says many investors still remain cautious about Air Products because of the failed BOC acquisition, he "believes that management has learned much from the experience and that a repeat is not likely."

In the key electronics business, Jones says this year Air Products is experiencing "tremendous growth." In addition to supplying semiconductor makers with bulk gases such as nitrogen, specialty gases such as nitrogen trifluoride, and dopants from its Schumacher unit, "we are trying to become the portal of choice in terms of bringing materials and services to electronic fabrication facilities."

The list of services available to the electronic fabrication industry is lengthy. Air Products provides services through the Megasys Total Gas & Chemical Management System, which places Air Products personnel in a customer's facility. Those personnel manage and supply not only a customer's electronic gas requirements, but through an alliance with Honeywell formed in 1998, they also provide electronic wet-process chemicals. The company offers additional services through the Trimega joint venture formed in March 1999 with USFilter , a subsidiary of French utility Vivendi. Trimega joins USFilter's ability to supply process piping as well as high-purity water and wastewater treatment services with Air Products' electronic gases and chemical supply capabilities.

"We currently have 450 of our people in 69 semiconductor fabrication facilities in 12 countries," Jones says. Because of the growth of that business, "we are currently in the process of hiring another 150 people for the new facilities we are going to take on." Jones says the growing electronics business will garner $800 million in sales for Air Products for 2000 and will approach $1 billion in 2001.

The chemical and process industries also look good to Air Products. Government mandates to produce cleaner fuels have increased demand for hydrogen. Refiners use more hydrogen as they process heavy crude oils to make cleaner, lighter fuels and remove sulfur, Wagner says.

As much as markets to supply electronic chemicals and process industry customers prosper in 2000, slow growth in global manufacturing, cyclical downturns in industrial gas markets for steel and electronics, and rapid increases in raw material prices in chemicals hurt profit margins in 1999. Wagner and Jones wrote in the company annual report that "we did not perform well in 1999, and our management team didn't react quickly enough to fully mitigate these negative conditions as they occurred."

The slow reaction, Wagner explains, was not because Air Products was preoccupied with the BOC acquisition. A slowdown in Asian markets also affected U.S. manufacturing, he says. "As we were going through that period," he asserts, "you could read in every magazine that the U.S. was not being impacted by Asia. Wrong! And that negative factor chewed up all of our productivity programs."

Increases in costs for natural gas typically can be passed along to industrial gas customers because of the contractual relationship Air Products has with its customers, Jones explains. But raw material price increases for chemicals in 1999 and 2000 "have had a major impact. We've had feedstock impacts on vinyl acetate monomer driven by ethylene. The total impact [on our polymers business] is probably close to $70 million. We've been able to offset much of that cost increase this year with productivity programs."

But the productivity programs alone have not done the trick in all cases, Wagner says. "We've been initiating price increases, particularly in chemicals. There is a six- to nine-month lag before the price increases take full effect. And with the severity of the raw material price increases during the past 12 months, we've been fighting to get caught up, and we have not caught up yet. Our chemical business is suffering somewhat because of that."

And Jones says pricing has also failed to keep up with increased costs. "Historically, we've had price erosion of about a percent or two a year in our industrial gases business," he states. This year, energy cost increases have driven up the cost, for instance, of operating the fleet of vehicles that Air Products maintains to make delivery to customers who do not have piped-in gases or on-site gas generation. Air Products has recently been able to put through price increases for industrial gases as well as surcharges that have "successfully mitigated the price erosion," Jones says.

Changes in market circumstances can not only affect prices, but they can also affect relationships with customers. Pharmacia's recent acquisition of Monsanto and Dow's pending acquisition of Union Carbide could affect the relationship Air Products has with both Monsanto and Union Carbide, some industry observers suggest. Air Products supplies 100% of both Monsanto's and Union Carbide's amine requirements. In Monsanto's case, Air Products supplies monopropylamine, a key ingredient in the manufacture of the herbicide Roundup. The relationship with Monsanto, Wagner says, "should continue to build and be every bit as good and, hopefully, broader as a result of getting to know the Pharmacia people. Perhaps we can find relationships we can build with Pharmacia ."

As for Union Carbide , assuming the merger with Dow gets final approval, the relationship should grow and get even broader there, too, Wagner says. "You always need to be diligent about changes that are going on in the marketplace," he observes. Jones adds, "If you do your job well each and every day, when your customers go through transitions like these, it's not traumatic."

But 1999 and a good part of 2000 were traumatic for Air Products. Fiscal 2000 will likely close with better operating profits than it had in 1999, Wagner and Jones suggest. And as Air Products puts the failed BOC acquisition behind it, Wagner says, "we are right back at the same game. We only got sharper as a result of the attempted BOC acquisition in terms of what we want to do and what we think we should do. And now, it's full speed ahead."

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