City: Breaking up is no longer hard to do

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The Independent Online
Little more than six months ago I attended a private lunch at ICI's headquarters on Millbank, near the Houses of Parliament, at which Sir Denys Henderson, ICI's chairman, and his team repeated their commitment to the concept of an integrated chemicals group encompassing the whole gamut of chemical production from bog-standard industrials through paints, plastics and speciality chemicals right up to pharmaceuticals.

At that stage, ICI was still under takeover threat. Hanson would undoubtedly have advocated some sort of break-up had it ever got round to bidding for ICI, and Sir Denys was setting out the case for the status quo. I never believed Hanson to be a suitable custodian for such an important chunk of British manufacturing industry; it is too much driven by short-term considerations, and its pursuit of shareholder value to the exclusion of virtually all else didn't seem to me to be the best way to develop export-orientated high-tech businesses such as ICI's.

But although Sir Denys's arguments in favour of ICI's present integrated structure were eloquent and articulate, they were not wholly convincing. As events have now proved, I doubt whether Sir Denys entirely believed them himself. To hear Sir Denys and his chief operating officer Ronnie Hampel talking today about the irresistible logic of the present plan to split ICI into two separate companies - one comprising the high-tech end of pharmaceuticals and agrochemicals, and the other the lower-tech commodity chemical interests - you wonder why on earth the whole thing wasn't done years ago.

Can Hanson legitimately claim the credit for this apparent conversion on the road to Damascus? Or is it more complex than that? Sir Denys's problem at that lunch last January was that he couldn't be seen to be backing Hanson's plans for ICI to any degree. With the enemy at his door, everything had to be black and white - Hanson black, ICI white. To have conceded that Hanson might at least in part be right would have looked defeatist; it might even have given Lord Hanson the fingerhold he needed to launch a credible bid. If ICI was thinking of breaking itself up anyway, why not let me do it instead, Lord Hanson would have said to the politicians and the City.

Behind the public facade, ICI was already beginning to think in terms of the most dramatic shake-up since the company was formed in the mid-1920s. With the benefit of hindsight, it is possible to see footprints in the sand from as early as September 1990, when a number of internal task forces were set up to look at how to take the group forward into the next century. At that stage, Sir Denys already knew that with the worldwide chemicals industry in a state of rapid change, something had to be done; he just didn't know what.

There were always two main arguments in favour of keeping ICI as an integrated whole. The first - that there are often research and development spin-offs between the various bits of the group - is by far the most feeble. Once upon a time it may have had some merit, but it is not very likely these days that you are going to find a cure for cancer while conducting research on industrial paints.

The second argument is a little more persuasive but, when you think about it, hardly any more alluring. It is that recession-proof pharmaceuticals and higher-tech chemicals act as a prop for the group when the going gets tough, as it presently is, for the cyclical commodity interests. There is of course plenty of truth in this, but investors on the whole don't buy shares in a company to gain access to a balanced portfolio of unrelated businesses. If that is what they wanted they might as well go for a unit or investment trust.

ICI's high-tech and low-tech interests have become fundamentally different businesses with different needs. There's no reason they should continue to co-exist in the same group. It is by no means certain, however, that demerger is of itself going to create extra value for shareholders. ICI shares are already on a pretty fancy rating in anticipation of a big recovery in bulk chemical profits. There's no reason to believe the sum of the parts is going to be worth any more than the whole. Longer-term, however, the demerger ought to create a platform for radical change in both parts of the group, and that's were the real opportunity for investors lies.

Sir Denys believes the pharmaceuticals industry is set for a period of significant change. Attempts by governments to trim health expenditure and the ever-escalating cost of research and development will combine to reduce the spectacular returns enjoyed by the industy. To stay in the race you need to get bigger. With the industry so fragmented, the opportunities for expansion for a strong company with a good stock market rating look to be legion.

All of which brings us back to the original question. Why didn't ICI do it sooner? Consolidation has been a trend in the pharmaceuticals industry for some years, and it is possible that ICI has already missed the boat. The choicest partners and acquisitions may already have gone. The answer I guess is that ICI has always been an intensely bureaucratic and cautious company. For Sir Denys to embark on this course is by ICI's standards a dramatic and brave path to tread. Having seen off the Hanson threat, Sir Denys could have looked forward to an easy retirement in three years' time. Instead he has chosen a controversial route which could easily backfire. If things go wrong and one or both companies get gobbled up by foreign or other predators, he will go down in history as the man who destroyed ICI. But my guess is that he's got it right and that other companies with a similar mix of glamorous and commodity-based businesses may soon be tempted to follow his lead.