Akzo Nobel N.V. Business Information, Profile, and History

Company Perspectives:

Akzo Nobel is a multicultural company. We are market-driven and technology-based, serving customers throughout the world with healthcare products, coatings, and chemicals. Akzo Nobel conducts its diversified activities through Business Units, which report directly to the Board of Management. We maintain a product portfolio with leading positions in important market segments.

History of Akzo Nobel N.V.

The Dutch company Akzo Nobel N.V. is a highly diversified conglomerate that conducts business in more than 75 countries. In 2000, the company ranked as world's largest paint manufacturer, as well as a top chemical manufacturer. Akzo Nobel business operations are organized into three major divisions: Pharma, which manufactures contraceptives, fertility drugs, antidepressants, over-the-counter drugs, and veterinary drugs; Coatings, which produces paint, printing inks, and automotive and marine finishes; and Chemicals, the division responsible for producing functional chemicals, pulp and paper chemicals, polymer chemicals, resins, salt, and plastic additives. Akzo Nobel was formed in 1994, by the merger of Akzo N.V. of the Netherlands, and Nobel Industries of Sweden. Its operations are located in the Netherlands, Germany, and the United States.

Akzo's Early History

The merger of Akzo and Nobel represented the culmination of more than a century of acquisitions and mergers between two companies with long histories. Some of the companies that Akzo acquired can be traced as far back as the 18th century. For example, one of the coating units that it acquired, Sikkens, was formed in 1792. Another subsidiary, a food company named Duyvis, was founded in 1806. Akzo's chemical interests in the United States were tied to Armour & Company, a leading meat-packing firm that began operating in the 1860s.

Akzo's foundation, however, was based on Vereinigte Glanzstoff-Fabriken, a German chemical company formed in 1899. In the early decades of the 20th century, Vereinigte established itself in the chemical industry as a leading producer of rayon and various paints and coatings. In 1929, Vereinigte merged with Nederlandsche Kunstzijdebariek (NK), a competing Dutch manufacturer of rayon. The resulting organization was named AKU.

From the 1930s to the 1960s, AKU became a solid market leader in the development and manufacture of synthetic fibers. In addition to rayon, AKU began producing such breakthrough synthetics as nylon and polyester. Chief among the company's significant innovations was the invention of a material called aramid, a derivative of nylon. AKU experimented with this synthetic fiber in the late 1960s.

Indeed, AKU had enjoyed generous profits from its core synthetic fiber products during the 1960s, and its corporate strategy looked sound for the 1970s. AKU joined forces with KZO--a major Dutch producer of chemicals, drugs, detergents, and cosmetics--in 1969, and the resultant organization became Akzo. Further expansion plans on the part of Akzo were thwarted in the early 1970s, however, when actions by the OPEC oil cartel wreaked havoc with petrochemical markets. Akzo's businesses, particularly those related to synthetic fibers, suffered. In addition to these oil-related problems, the fibers market was affected by turbulence from other quarters. During this period, many synthetic fibers became a commodity product, and low-cost Far Eastern manufacturers took control of many industry segments. Burdened by weak demand and manufacturing overcapacity, Akzo's profits plunged. By the late 1970s, some analysts speculated that Akzo was headed for bankruptcy.

Another setback came when in the 1980s, when the company was selling its new synthetic fiber under the name of Twaron. Unfortunately for AKU, the fiber industry leader du Pont, headquartered in the United States, was simultaneously developing the fabric under the name of Kevlar, and du Pont began selling its product first. As a result, AKU was both shut out of the lucrative U.S. market for the product and also faced stiff competition in its home market of Europe. AKU's failure to carve out a market for Twaron proved to be the culmination of the setbacks that adversely affected its synthetic fibers operations throughout the 1970s.

Reorganization Strategies

Throughout this turbulent period, Akzo executives scrambled to overcome adversity. They reduced the percentage of revenues attributable to synthetic fibers from more than 50 percent in the early 1970s to less than 30 percent going into the 1980s. At the same time, they tried to supplant income from the struggling fiber division with higher margin products such as paint coatings, noncommodity chemicals, and pharmaceuticals. Akzo executives made another significant move toward reorganizing their operations in 1982, when they appointed Arnout A. Loudon as chief executive of the company. Loudon, a 46-year-old attorney turned executive, had demonstrated an impressive financial acumen in turning around Akzo subsidiaries in France and Brazil. Upon assuming leadership of the company, Loudon initiated an aggressive restructuring strategy designed to stabilize Akzo's unwieldy balance sheet and to ensure the company's long-term profitability.

Among other maneuvers, Loudon further reduced Akzo's emphasis on synthetic fibers to only 20 percent of corporate revenues and boosted its position in coatings and industries related to healthcare. He also decentralized decision-making and eliminated management layers. At the same time, Loudon launched an ambitious acquisition drive in 1984 chiefly designed to increase Akzo's presence in the important U.S. market and to diversify into higher profit-margin chemical businesses. Between 1984 and 1990, Akzo purchased more than 30 companies, most in the United States, at a cost of about $1.8 billion. The units were primarily involved in the production of salt, chemicals, and pharmaceuticals. To fund these purchases, Loudon simultaneously jettisoned poorly performing assets that were worth more than $1.5 billion. By the end of the acquisition campaign, Akzo had emerged as the leading global producer of salt and peroxides and one of the top 20 chemical companies in the world. 1990 sales approached $10 billion as profits surged.

Streamlining for Greater Efficiency

During the early 1990s, Akzo concentrated on improving efficiency. Indeed, compared to chemical companies in Japan and the United States, its operations were bloated, chiefly due to restrictive government and organized-labor regulations in Europe. Gradual improvements in efficiency led to marked success in important divisions such as pharmaceuticals, which captured a key position in the reproductive medicine market. Its most notable product was Desogen, the top-selling birth control formula in the world. Similarly, Akzo enjoyed steady market share gains in some of its paints and coatings divisions. The net result was that Akzo sustained steady sales and profits throughout the early 1990s, despite a global economic downturn.

Going into the mid-1990s, Akzo continued to reduce its emphasis on such low-profit commodities as salt and fibers and to boost its dependence on coatings and specialty chemicals. To that end, Akzo consummated a pivotal merger early in 1994 with Nobel Industries of Sweden. Nobel was a major contender in global paint, coatings, and specialty chemical industries. It operated subsidiaries worldwide and enjoyed a relatively strong position in U.S. markets. The company that resulted--Akzo Nobel N.V.--elevated Akzo's revenue figure by more than 25 percent, gave the new company a leadership role in the global paints and coatings industry, and bolstered the former Akzo's stance in the European and U.S. markets. The former Nobel Industries also was able to reduce costs because it could obtain needed materials more cheaply from Akzo, such as inexpensive access to such raw materials as salt and chlorates.

Nobel Industries's Early History: 1864--1984

Akzo's merger partner was originally founded in 1864 by Alfred Nobel, the progenitor of the Nobel Peace prize. Nobel was born in 1833 into a Swedish family that claimed heritage to the 17th-century Swedish prodigy Olaf Rudbeck. Alfred Nobel's father, Immanuel, was a self-educated inventor with an interest in explosives. An unsuccessful businessman, Immanuel was forced to file for bankruptcy in 1832 after the family's home burned down. In 1837, Immanuel moved to Russia, leaving his family behind, to start a new business. There, he invented an explosive device for which demand gradually increased. By 1842, Immanuel had achieved modest success with his invention, and he sent for his family. Alfred's exposure to that environment, combined with his natural interest in chemistry, prompted him to form his own company in 1864 called Nitroglycerin AB.

Alfred's key invention was a process of making nitroglycerin that did not explode during production and handling. However, the perfection of this technique came at a great personal cost for Nobel in that an explosion killed Alfred's brother and four other workers during the testing process. This breakthrough led to Nobel's development of dynamite in 1866, which combined nitroglycerin and an absorbent earthy substance. Nobel went on to create blasting gelatin and smokeless powder, and eventually claimed 350 patents. In an effort to overcome opposition from established gunpowder manufacturers and other competitors, Nobel and several associates formed the Nobel Dynamite Trust in 1886. This cartel eventually dominated five continents and Nobel dynamite factories dotted the globe.

A surprising turn of events occurred for Nobel in 1888 when his brother, Ludwig, died and a local French newspaper accidentally reported Alfred's death instead. To his dismay, Alfred read his own obituary, in which he was described as the inventor of dynamite and the 'merchant of death,' even though most of his explosives were used in nonmilitary applications. This experience motivated Nobel to demonstrate his true intent. Thus, when he died in 1896, Alfred directed that his entire fortune be entrusted to the Norwegian parliament and distributed annually as a reward to individuals who 'shall have conferred the greatest benefit on mankind.' Subsequently, the Nobel Foundation was established and the first prize was awarded in 1901.

After his death, Nobel's conglomeration of businesses was divided into various corporations. Nobel's Swedish companies evolved into two separate organizations. His original company, Nitroglycerin AB, continued to make explosives. Its name was changed to Nitro Nobel in 1965 before it was bought out by a chemical group controlled by the prominent Wallenberg family in 1978. The resultant organization was called KemaNobel. The other segment of the Swedish Nobel operations became Bofors, a manufacturer of munitions. In 1982, Erik Penser, a young Swedish stockbroker, engineered the purchase of Bofors. Two years later, he purchased KemaNobel, reuniting the two divisions in a company he called Nobel Industries.

In 1986, Penser's company won a five-year, $1.2 billion contract to supply field artillery to the Indian government. Business analysts lauded the deal as one of the largest orders ever secured by a Swedish company until it was discovered that Penser may have made illegal, covert payments of $4.5 million into a secret Swiss bank account to get the contract. To make matters worse, it was discovered in 1987 that Nobel Industries had illegally shipped arms to Iran, Iraq, and other countries not sanctioned for arms trade by the Swedish government. Meanwhile, Nobel's U.S. chemical subsidiary, Bofors Nobel, Inc., filed for bankruptcy in 1985, largely because the U.S. Department of Natural Resources had sued the division for $15 million in environmental clean-up costs. Initially, Bofors Nobel had agreed to pay the clean-up expenses, but once the higher-than-expected costs accrued, the division elected to file for bankruptcy instead.

The Merger: 1994

Despite Nobel Industries's setbacks, Akzo executives viewed the company as a potential asset to their organization. In 1994, Akzo completed the merger of Nobel's six business groups, making Akzo Nobel one of the ten largest chemical companies in the world. Shortly before the merger, Akzo had implemented a sweeping reorganization drive to dismantle the company's five major business divisions and recreate them in four new groups--chemical, fibers, coatings, and pharmaceuticals. Akzo continued to develop its U.S. markets aggressively, while it worked simultaneously to penetrate Asian and South American markets. By this time, Akzo had invested about 33 percent of its resources in the Netherlands, 20 percent in Germany, and 22 percent in the United States, with many of its remaining investments scattered throughout Europe. Akzo Nobel's 1994 sales rose slightly to about $11.5 billion, roughly 5 percent of which was netted as income.

Challenges, Restructuring, and Growth

Akzo Nobel faced several challenges as it entered the mid-1990s. In 1995, its pharmaceutical unit, Organon, lost revenues following a scare that its Marvelon and Mercilon oral contraceptive pills were linked to increased risk of thrombosis (abnormal blood clotting). Falling fiber prices, stagnant markets, and declining sales in the coating division also led to a mere 0.3 percent increase in profits in 1996. The firm did make some key partnerships, however, including a joint venture with Courtaulds to develop and market NewCell, a cellulosic filament yarn. The company also spent $240 million to expand its fluidized catalytic cracking (FCC) catalysts and hydroprocessing catalysts (HPC) capacity. The capital investment was made to attract partners to its FCC and HPC business. The firm also began restructuring its specialty surfactants business, which had been dealing with overcapacity as well as a stagnant market. As a result, the unit began cutting costs and consolidating production. Akzo also sold its subsidiary Akzo Nobel Salt, Inc. in 1997 as part of its effort to focus on its core operations.

Akzo's restructuring of its pharmaceutical, coatings, and chemical businesses, began to pay off, and the balance sheet in 1997 reflected this. Akzo recorded a 7 percent increase in sales, and operating profits in its pharmaceutical interests climbed by 17 percent. Its coatings and chemicals divisions secured a 27 percent increase in operating profits. In 1998, the firm focused on making key alliances and acquisitions as well as paring back less profitable operations. An agreement with Bayer AG was formed in which the German-based firm would produce ethylene amines exclusively for Akzo. Three printing ink companies--Louis O. Werneke, Werneke & Mulheran, and Label Inks--were purchased to secure Akzo's position as a leading supplier of printing inks in the U.S. market. The company also acquired Courtaulds plc in July 1998 in a deal that created the world's largest coating company. The firm merged its fiber business into a newly created company, Acordis. At the same time, because of poor growth and overcapacity, the firm continued to consolidate its surfactants operations. The company also sold its plastic packaging and laminate and aluminum tubes interests.

A disappointing 1 percent increase in net profits in 1998 led to a renewed focus on integrating its newly acquired firms into its current businesses. The firm's pharmaceutical operations--growing twice as fast as other companies in the industry--also became a major focus. The division had a strong position in the women's healthcare market, and its Organon business operated as the world's fourth largest producer of oral contraceptives. Akzo also strengthened its Intervet division with the purchase of Hoechst Roussel Vet, a deal that doubled the size of its animal healthcare interest. Perhaps the most important move in 1999 was the sale of Acordis to CVC Capital Partners. The deal marked Akzo's exit from the synthetic fiber business and solidified the company's intent to focus on its core divisions--Pharma, Coatings, and Chemicals.

Positive Advances in the New Millennium

As Akzo entered the new millennium, its Pharma division was the fasting-growing pharmaceutical company in Europe. The unit accounted for 47 percent of Akzo's total profits, and its core operations focused on human and animal healthcare. The company's other divisions also fared well in 2000 despite weakening market conditions. The Coatings division acquired the aerospace and specialty coatings business of Dexter Corporation, which strengthened its position in the global market and significantly increased the size of its aerospace coating operations. The Chemicals division also acquired Hopton Technologies, which was purchased to boost the paper chemicals business in the United States.

Although 2000 was the company's best year in its history, Akzo did have to face an antitrust investigation concerning some of its chemical products. While the company took a charge of $136 million in 2000 for anticipated legal fees and fines, net income increased 25 percent over the previous year. Akzo's strategy for the future included securing leadership positions in its markets, with a continuing focus on its Pharma, Coatings, and Chemicals business units. According to a January 2001 company press release, the firm was, 'sticking to our basic themes of coherence and value. We have created expectations both internally and externally. We now have to live up to them.'

Principal Subsidiaries: Advanced BioScience Laboratories Inc.; Akzo Nobel Coatings Inc.; Akzo Nobel Resins and Vehicles; Akzo Noble Resins Inc.; Akzo Nobel Rheology Additives Inc.; Colbond Geosynthetics; Diosynth Inc.; Eka Chemicals Inc.; Intervet Inc.; Organon Inc.; Organon Teknika N.V.; Rosemont Pharmaceutical Corporation.

Principal Operating Units: Pharma; Coatings; Chemical.

Principal Competitors: PPG Industries Inc.; Imperial Chemicals Industries plc; Dow Chemical Co.; BASF AG.

Chronology

• Key Dates:

• 1929: Vereinigte Glanzstoff-Fabriken, a German manufacturer of paint and rayon, merges with the Dutch company Nederlandsche Kunstzijdebariek, a competing rayon producer, and forms Algemene unstzijde Unie (AKU).
• 1969: AKU merges with Koninklijke Zout Organon (KZO) to form Akzo.
• 1979: Akzo profits continue falling due to weak demand and overcapacity.
• 1982: Arnout A. Loudon is named CEO.
• 1984: Nobel Industries is created by the merger of KemaNobel and Bofors.
• 1990: Following the merger, Akzo acquires more than 30 firms and sales reach $10 billion.
• 1994: Akzo completes the merger of Nobel's six business groups, and Akzo Nobel becomes one of the ten largest chemical companies in the world.
• 1996: The firm's finances suffer due to flat markets and falling prices.
• 1998: The firm acquires Courtaulds, a coatings a fiber manufacturer.
• 1999: The firm purchases Hoechst Roussel Vet, a unit of Hoechst AG, and divests its Fibers unit.
• 2000: Akzo Nobel achieves record earnings and growth.