basf corporate strategy and portfolio development

1 Torsten Arnold – BASF Corporate Strategy and Portfolio Development

Strategy Case Study: Corporate Strategy and Portfolio Development

Tuebingen, 2011/01/24

University of Tuebingen

A case study in the context of the masters seminar

Competitive Strategies

Winter semester 2010/2011

Prof. Dr. Wilhelm Rall

Torsten Arnold


Purpose and Organization of the Research


Questions to be answered

1. BASF will have a new CEO at the end of the year. This is a perfect time to

think through the portfolio restructuring of the last 10 years. What was the

strategic rationale behind it? Do you think this rational is still valid and

should be further pursued?

2. The corporation is thinking about further major enhancements of efforts in

the agrobusiness. This means that they would have to up-scale their

respective R&D even further, but potentially make some aquisitions as

well. There is an option to acquire a major EU seed company for about 1.5

– 2.0 bn USD. Is this option worth to be pursued further?


Outline

1. Understanding the context

1.1 BASF – The Chemical Company

1.2 Portfolio Analysis – Basic Methods

2. BASF - Acquisitions and Divestures

2.1 Empirical Analysis

2.2 Strategic Rationales

2.3 A New Acquisition Target



1.1 BASF – The Chemical Company


BASF – The Chemical company

• Remain the world`s leading chemical company

• Committed to operational excellence, innovation and

investment in growth markets

• Actions are guided by sustainability

• Distinguish from competitors through innovation

(R&D investments consistently high)

• Increase competitiveness through active portfolio

management


Four strategic guidelines form the basis of

BASF`s activities

Activities

Earn a premium on the cost of

capital

Form the best team in the industry

Ensure sustainable

development

Help the customers to

be even more

successful


Growth in almost all segments (2001-2006)

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

2001 2002 2003 2004 2005 2006

Sale

s p

er

sege

mn

t (i

n m

illio

n €

)

Chemicals Plastics Performance Products Agricultural Products & Nutritions Oil & Gas

Figure 1: Sales per segment from 2001-2006, Source: BASF Annual Reports


Increasing fluctuation in the industry

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

2007 2008 2009

Sale

s p

er

sege

mn

t (i

n m

illio

n €

)

Chemicals Plastics Performance Products

Functional Solutions Agricultural Solutions Oil & Gas



Integrated production – The Verbund concept

• Production plants at large sites, closely interlinked,

creating efficient value chains

• Production plants, energy, waste flows, logistics and

site infrastructure are all integrated

• Cost-efficient production through six world-scale

Verbund sites in all major regions

• Savings of around € 500 Mio each year only at its

Ludwigshafen site.

• BASF`s greatest asset when

it comes to efficient use of

resources


Vertical integration and resource efficiency

Oil & Gas Basic

Chemicals Intermediates

Plastics & Performance

Products

Agricultural Solutions & Functional Solutions

• Creating value-adding chains from basic chemicals to

higher value products

• Implement all business segments into the production

process using interdependence

• Provides new opportunities for more flexible

response to economic fluctuations



1.2 Portfolio Analysis – Basic Methods


Why do we need portfolio analysis?

• Portfolio-optimization is one of the corner stones of

value creation

• Gives a direct overview of the existing portfolio

• Portfolio planning methods help selecting strategic

options (future acquisitions or divestures)

• How to set up a flow of capital and other resources

among the business units of a diversified company


The Nine-box matrix – The basic framework

of portfolio planning methods

Figure 3: Nine-box matrix. Source; McKinsey and Company. 2000. Thinking strategically.


• Nine-box matrix only applies to product markets

(selling goods and services to customers)

• However a strategy also needs to help the company

to analize business units on a higher level

(acquisitions, mergers, joint-ventures, sale)

A new advanced analytical framework is

needed

Market activated corporate

strategy (MACS) framework


MACS – Key Insights

• Adds a measure of a business`s units suitability for

sale to other companies.

• Analize a corporation`s ability to extract value from a

business unit relative to other potential owners

• Less to do with the unattractiveness of a business unit

but more whether a corporation is suited to run it

• The tool can be used to plan acquisitions or

dispositions and to identify the efforts a parents

corporation should be engaged in


MACS - Overview

Figure 4: Market activated corporate strategy framework. Source; McKinsey and Company.

2000. Thinking strategically.


• Sale of structurally attractive businesses if they are

worth more to somebody else

• Keep structurally moderate or even poor business

units if you can extract more value out of them then

somebody else

• Top priority to business units at the far left of the

matrix

MACS – Possible strategic results

Finding the best combination of corporate capabilities

and business units that provide the best overall

scope for creating value.


What about risk?

• Almost all theories of portfolio management were

established on the foundation of the financial portfolio

theory (risk vs. return)

• However until now “risk” is not considered

• Similar risk profiles of the business units can lead to

an unforeseeable overall risk

• Including risk in the analysis can radically change the

expected value of a companies portfolio

Combining the basic MACS framework

with a risk perspective


Contemporary portfolio theory – Risk/Return

Matrix

• Combination of a business units’

attractiveness and its risk component

• Both factors are assessed on a stand alone

base and under the consideration of overall

portfolio interdependences

Figure 5: Risk/Return Matrix. Source; Rall, W. and König, B., 2003. Aktuelle Herausforderungen an das strategische Management. Handbuch

strategisches Management



2.1 Empirical Analysis


Empirical Analysis: Basic Methods (1/3)

1st step: Based on second generation portfolio theory

• „stand-alone attractiveness“

Market position, competitive situation, product

differentiation, growth potential

• „parenting advantage“

Synergistic effects through integration (Verbund), scale

effects, effects on exisiting market position

At best: A

D



2nd step: risk integration

• „stand-alone business risk“

• „correlation with portfolio risk“

Effects of acquisition/divesture on overall portfolio risk

(increase/decrease)

Assumption: acquisitions are negatively correlated with

portfolio since they are supposed to reduce risk in overall

portfolio in the long term

At best:

A

D



3rd step: Third generation portfolio theory

• „expected rentability“

• „risk delta of portfolio“ (combining stand-alone risk with

risk impact on portfolio, ex-ante)

Investors dislike high volatilities of portfolio return

At best: A

D


BASF Acquistions - 1st Step:

Strengthen portfolio plus high ROI chances


BASF Acquistions - 2nd Step:

Decrease overall portfolio risk


BASF Acquisitions - 3rd Step:

Risk/Return integration

01

07

03

04

05

06

08

09

10

11

12

13

14

15 16 17

18

21

22 23

24

25

26

27

28

29

30

31

32

33 34

02

1 Cyanamide/AHP: agricultural products Agricultural Solutions

2 Treffert Group: Foil Coatings business (outside of Germany) Functional Solutions

3 Foam Enterprises: American rigid polyurethane foam producer Plastics

4 Merck KGaA electronic chemicals business Chemicals

5 BASF Coatings Japan Ltd. Functional Solutions

6 Orgamol: Swiss fine chemicals Chemicals

7 BASF Akzo Nobel --> BASF Coatings Australia Functional Solutions

8 Huntsman: global TDI business Plastics

9 Leuna-Miramid GmbH: engineering plastics Europe Plastics

10 Rhenania Coatings GmbH: coil coatings business Functional Solutions

11 Degussa: construction chemicals business Functional Solutions

12 Engelhard: catalysis and surface finishing Functional Solutions

13 Johnson Polymer: resins Performance

Chemicals

14 Lanxess: SAN business Plastics

15 CropDesign: biotechnology company Agricultural Solutions

16 PEMEAS: fuel cell components

17 Chinese motorcycle catalyst business Functional Solutions

18 Chinese Hi Con: concrete admixtures Chemicals

19 Billakksenteret AS: Coatings, R-M sales activities Functional Solutions

20 Autolacke Handel GmbH: Coatings,R-M sales activities Functional Solutions

21 Dutch Polymer Chemical Company: Polyurethane System

House

Plastics

22 DERIS and Château-Arnoux Peinture: Coatings, R-M sales

activities

Functional Solutions

23 Michel DE-RIS S.A.S. France Functional Solutions

24 SABIC Innovative Plastics joint venture Plastics

25 BCD Rohstoffe für Bauchemie HandelsGmbH (Austria) Chemicals

26 Multi Chemical Est.:: polyurethane business Plastics

27 Yasar BASF Automotive Coatings Ltds Functional Solutions

28 Revus Energy ASA (Wintershall) Oil & Gas

29 Recticel: car windows, polyurethane specialities business Plastics

30 Ciba Holding AG. Chemicals

31 Sorex pest control business, Whitmire Micro-gen Agricultural Solutions

32 NOF Thailand: motorcycle coatings business Functional Solutions

33 Kejie: concrete admixture business Chemicals

34 Cognis Holding Luxembourg S.à r.l. Functional Solutions

19 20


BASF Divestitures – 1st Step: Sell units with low level

of attractiveness and low parenting advantage


BASF Divestitures – 2nd Step:

Reduce overall portfolio risk


BASF Risk/Return Matrix: Divestitures

02

03

04

05

06 07 09 10

11

12

13 14

15

16

17

18 19 20 21 22

23 01

08

1 pharmaceutical and nutrition

market

Pharmaceuti

cal

2 Phenoxy Business Agriculture

3 Fiber Board Coating business in

Spain and Italy (Treffert)

Functional

Solutions

4 Polystyrene Specialty

Compounds business

Plastics

5 Dystar BASF Chemicals

6 triforine business Agriculture

7 polystyrene business: U.S.,

Canadian

Chemicals

8 sell stakes in Basell Functional

Solutions

9 decoration color business Performanc

e Products

10 14 percent shareholding in DENC

11 major assets of Micro Flo Comp. Agricultural

Solutions

12 global terbufos insecticide

business

Agricultural

Solutions

13 animal feed premix sites,

Netherlands

Chemicals

14 Chemische Fabrik Wibarco GmbH Chemicals

15 exit human nutrition premix

marketplace

Chemicals

16 rail cargo company RAIL4CHEM

17 Seal Sands site, UK Chemicals

18 Shreveport site Pharmaceuti

cal

19 China process catalysts site Functional

Solutions

20 Ako site to Kansai Paint Functional

Solutions

21 styrene monomer site in Korea

22 polystyrene business in Brazil

23 European starch business Chemicals



2.2 Strategic Rationales


BASF`s strategic rationales - Overview

BASF Core Business

Acquisitions

• High attractiveness (e.g. eROI), low portfolio risk

• Strengthen less cyclical businesses (specialty chemicals)

• Penetrate emerging markets

• Hedge against environmental risks

Divestures

• Low attractiveness and high portfolio risk

• Low synergies

• Non-strategic

• Improve leadership in other segments

Figure 6: BASF strategic rationales, Reasons for Acquisitions and Divestures; Source: Own illustration


Hedge against cyclicality and widen R&D

intensive businesses

Figure X: EBIT by segments. Source: BASF Homepage, Strategy, Portfolio Optimization

Oil & Gas plus

Agricultural solutions

build a stable earnings

base -> Strengthen

Divest unattractive and

cyclical segments


• Strengthen less cyclical businesses

“The strategic logic of the transaction is convincing, since the combined businesses

will be strengthened sustainably and positioned for long-term profitable

growth.” (Dr. Jürgen Hambrecht, Chairman of the Board on the acquisition of Ciba

Holding AG)

“The aim is to strengthen our involvement in less cyclical areas that are driven by

innovation and offer growth above the average of the chemicals market.” (Dr. Hans-

Ulrich Engel, Member of the Board on the largest acquisition within the last years)

“Construction chemicals is an innovative business area with cyclically resilient

margins that we will develop into a profitable growth sector in BASF’s portfolio.” (Dr.

Andreas Kreimeyer, Member of the Board on the acquisition of Degussa's

construction chemicals)

Strategic rationale – Acquisitions of BASF


• Penetrate emerging markets:

“Our investment programs are geared to growth markets and to Asia and China in

particular. Examples include the $1.4 billion expansion of our Verbund site in

Nanjing, China” (Dr. Hans-Ulrich Engel, Member of the Board)

• Hedge against environmental risks

“Through this, we open up further opportunities for a long-term and reliable supply of

Russian natural gas in Europe to competitive conditions." (Dr. Jürgen Hambrecht,

Chairman of the Board on the joint venture between Gazprom and Wingas)

Strategic rationale – Acquisitions of BASF


Strategic rationale – Divestures of BASF

• Low synergies and non-strategic for BASF

“We have identified some products such as triforine that offer limited synergy for

us, however are clearly a better strategic fit for a specialized company” (Hans

W. Reiners, President, BASF Agricultural Products division on the sale of its triforine

business to Sumitomo Corporation)

“BASF considers the LAB business as non-strategic mainly due to its lack of

integration into the Verbund” (Patrick Prévost, head of BASF’s Performance

Chemicals division on the divesture of the Wibarco GmbH to Hansa Chemie

International AG)

“As the starch business is a regional, stand-alone business offering few synergies

with BASF’s paper chemical operations, we have taken the decision to divest this

business” (Christian Schulz, Vice President Business Management Paper Coating

and Starch Europe on the sales the European starch business)



2.3 A New Acquisition Target


Acquisition Target – Overview

• Top-10 seed companies with strong position in corn,

sugar beet and wheat Strengthens BASF`s leading position

Fits into historical acquisition scheme of BASF (e.g.

Agricultural: Cyanamide/AHP 2000, € 3.8 bn; Biotechnology:

CropDesign, 2006; Sorex pest control, 2008)

• High one-digit growth rates in the last five years,

ROE 12 – 14 % range High attractiveness

Lowers overall portfolio risk

• R&D intensive business High entry barriers

Distinguish from competition


• BASF Annual Report 2009 on agricultural solutions:

“Innovation is decisive for success. That is why we

continuously invest in our active ingredients pipeline

and develop improved formulations. Successful

growth also means using the potential of new

business models and developing new market

segments, through acquisitions when appropriate”

Acquisition Target – BASF statement


• 1st step: Based on second generation portfolio theory High “stand-alone attractiveness” (high growth rates & high

ROE)

High “parenting advantage“ (strenghten leading position)

Acquisition Target – Portfolio analysis (1/3)

AT


• 2nd step: Risk Integration Low „stand-alone business risk“ (high growth rates, global scale

for already 30 years)

Relatively high negative correlation with portfolio risk“ (two

existing R&D cooperations with BASF)


AT


• 3rd step: Thrid generation portfolio theory High attractiveness for the overall business of BASF

Low „risk delta of portfolio“ -> relatively low volatility of portfolio

returns


AT Strong buying

option for BASF


Thank you for your attention!


List of figures



Figure 3: Nine-box matrix. Source; McKinsey and Company. 2000. Thinking strategically

Figure 4: Market activated corporate strategy framework. Source; McKinsey and Company. 2000. Thinking strategically.

Figure 5: Risk/Return Matrix. Source; Rall, W. and König, B., 2003. Aktuelle Herausforderungen an das

strategische Management. Handbuch strategisches Management

Figure 6: BASF strategic rationales, Reasons for Acquisitions and Divestures; Source: Own illustration

basf corporate strategy and portfolio development

Documents