The high cost of ICI’s fall from grace

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The fate of ICI demonstrates how the market disciplines unsuccessful choices of strategy; in the case of ICI it is almost unfortunate that it does so.

In 1926 four companies – Nobel Industries, United Alkali, British Dyestuffs and Brunner, Mond – merged to create Imperial Chemical Industries. For most of the rest of the 20th century, ICI was Britain’s leading industrial company.

Last week, ICI halved its dividend. It had done the same a year previously. The fall in its share price may mean expulsion from the group of 100 UK companies that make up the FTSE index. ICI’s largest business today is its pension fund, whose £7.5bn ($12.2bn) value considerably exceeds the market capitalisation of the company.

Such are the vagaries of capitalism, you may say. Technology changes, competition reigns, the fortunes of individual companies wax and wane. But ICI did not fail in the marketplace.

When Harry McGowan, the irascible Glaswegian who had joined Brunner, Mond as a clerk, put together ICI 77 years ago, his objective was to establish a British chemical company that could compete – or, to be more honest, divide the world market – with the two established giants of the industry, America’s DuPont and Germany’s IG Farben.

McGowan succeeded. And the company he created was in many respects the most successful of the three. IG Farben, which was closely identified with Hitler, was broken up by the Allies after the war, although the three constituent businesses of BASF, Bayer and Hoechst all became powerful companies.

The chemical industry requires continuous transition into new businesses. DuPont failed to make a successful postwar evolution into drugs. In contrast, ICI’s pharmaceuticals division is one of the achievements of modern British manufacturing industry.

ICI is no longer an important force in British life, or world business, because the company restructured itself in the 1990s. The trigger came in 1991, when the acquisitive Hanson acquired a 3 per cent stake. Intensive lobbying of political and City institutions saw off the bid threat and Hanson sold its stake (at a rewarding profit).

From McGowan’s days onwards, ICI executives had treated securities markets with disdain. But after 1991 this no longer seemed possible. The investment bankers who had defended ICI proposed that the company should split itself in two. The idea was that the ratings of the glamorous drugs and agrochemical businesses were dragged down by boring activities in traditional chemicals. Separation would produce a “release of energy”. In 1993 Zeneca was demerged from ICI.

There was not much sign of released energy in the activities left behind. The unglamorous and lowly rated paints, plastics, fibres and heavy chemicals remained unpopular and lowly rated. The next wheeze was to transform the company from a collection of cyclical, slow-growing businesses that the market hated into a collection of fast-growing speciality businesses that the market would love. But it proved easier to buy the exciting new businesses, at high prices, then to sell the dull old ones, even at low prices. The reinvented ICI, burdened by debt, was forced to retrench: the growth of the acquired businesses did not live up to expectations. Hence last week’s announcement.

Does it matter that Britain’s largest industrial company has been destroyed in this way? In a sense, the successor business to ICI is not the one that today bears that name but AstraZeneca – a good drugs company, if not in the first league. AstraZeneca stock has done well enough for the original ICI shareholders not to have fared too badly overall.

But perhaps great companies have a public role that extends beyond the creation of shareholder value. If you value ICI’s significant contribution to the evolution of the modern corporation in the UK; if you recognise the crucial role it played in attracting able graduates into commercial research and professional management; if you understand how the success of its drugs research not only benefited ICI but also laid the foundations for Britain’s modern pharmaceuticals industry; if you admire the way in which the capabilities of ICI scientists and managers generated successive rounds of applied innovations, in agricultural chemicals, artificial fibres and new plastic materials, you may feel that there is more to regret in the decline of ICI than is measured by the fall in its share price.

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