hanson plc case study

8/10/2019 Hanson PLC Case Study

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Case F3

Business Divorce

Two breakups: ICI and Hanson1

In 1993 and 1996 respectively, ICI (Imperial Chemical Industries) and Hanson plc demerged. ICI

was split into two, and Hanson was divided into our. !his type o "usiness reorganisation is a

radical strategy to adopt, and is li#ely to "e only underta#en in the ace o growing organisational

and inancial pressures. $oth ICI and Hanson aced such pressures.

%rom a traditional economic point o view it might simply "e argued that "oth ICI and

Hanson had grown too "ig, with diseconomies o scale reducing their proits and ma#ing them

less competitive. !o some degree this was true. ICI, in particular, prior to the late 19&'s, was

seen as a highly "ureaucratic conglomerate that had little strategic ocus and was slow to respond

to change. ven so, demerger was a radical orm o surgery to deal with what was essentially a

orm o organisational ineiciency.

In act, when we loo# more closely at ICI and Hanson we ind that their pro"lems were more

to do with howthey grew, and not necessarily with the process o growth itsel. $oth ICI and

Hanson pursued growth strategies which involved diversiying their "usiness interests. !here

were dierences "etween them, however. hereas ICI might claim that its diversiication came

mainly rom new product development and its own *+ investments, Hanson diversiied "y

ac-uiring other companies via merger and ta#eover. $ut despite these dierent approaches to the

process o diversiication, "oth companies came to eperience very similar pro"lems and a need

radically to restructure their "usiness operations.

The case of ICI

ICI was created in 19/6, ollowing the merging o the $ritain0s our "iggest chemical companies

$runner 2ond, o"el Industries, 4nited 5l#ali and $ritish yestus. !he merger was motivated

"y growing international competition, especially rom ermany.

ICI0s "ig "rea# came in 1933, when, "y accident, it discovered polyethylene, or, as we #now

it "y its trade name,Polythene. It has "een calculated that, since 1933, ICI has patented a urther

33''' new inventions.

ICI remained irmly rooted in the 47 mar#et until the 196's, where it operated as a virtual

monopoly. In the 196's it "egan to "roaden its hori8ons and moved, usually via merger andac-uisition, into urope and the 4nited tates. 5t this stage o its epansion, ICI sought to

produce in these countries similar products to those it was producing at home (which covered a

very wide range o products indeed).

In the 19&'s, as competition in the chemical industry intensiied and ICI0s growth slowed,

rather than reorganise its "usiness interests "y reducing its product range and ocusing more

closely upon its core "usiness activities, ICI maintained "usiness as usual. :ne o the principal

reasons why it did not reorganise was simple inertia and opposition within its organisational

structure. ven where products were ailing, and clearly alling "ehind the products o rival

companies, powerul divisional directors were reluctant to relin-uish or scrap part o their

domain. Change was very diicult to implement in the ace o such vested interests.

ICI0s "usiness environment was to ta#e a turn or the worse with the 47 recession in theearly 19;'s. !he depth and length o the recession hit ICI hard, orcing it once again to loo# at its

i ti l d t t t $ t 19&; d 19;& ICI t h d


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also "egan to devolve more responsi"ility or strategy and investment decisions to the company0s

divisions.

$y the early 199's, ollowing a urther review o ICI0s strategy and organisation, it was

decided that ICI would ocus more clearly on core "usiness activities, concentrating resources on

pharmaceutical products, agrochemicals and seeds, specialities, eplosives, paints, materials, and

industrial chemicals. Its organisational structure was also revised, with clearer lines o

responsi"ility esta"lished "etween dierent management levels.In 2ay 1991, the ac-uisition o /.; per cent o ICI 0s shares "y Hanson, a company with a

reputation or ac-uiring "usinesses that it considered had undervalued stoc#, orced ICI once

again to loo# at its organisational structure and at whether it was enhancing shareholder value. $y

this point in time, the pharmaceutical division o ICI was "y ar the most proita"le component o

the company. >roits rom it were used to prop up the less proita"le divisions, which tended to

drag ICI share prices down. In other words, various parts o ICI were more valua"le than the

whole. It was -uic#ly realised that, unless shareholder value was enhanced, a ta#eover might

"ecome inevita"le.

It was decided that radical surgery was necessary and that ICI should "e split along

technological lines. :n one side, there were the divisions o pharmaceutical and "ioscience?

related activities, and, on the other, ICI0s traditional chemical divisions.

ach group o "usinesses were argued to orm an industrial cluster, where there eisted

strong technological and manuacturing lin#s. %or eample "oth pharmaceutical production and

agrochemicals com"ined "iology and organic chemistry in their research and development

programmes.

!he supporters o ICI0s demerger argued that the synergy "etween its parts would "e

enhanced "y creating these two clusters, which under the old ICI structure had deteriorated over

time. !he deterioration had occurred "ecause "usinesses within ICI had "ecome too diverse. !hey

came less and less to share the same technological and manuacturing re-uirements. !hus services

provided centrally "y "eing part o ICI, such as access to technology and reputation, were either

o no use, or something that each division could more successully provide itsel.In 1993 the pharmaceutical and "ioscience divisions o ICI were demerged to orm a new

company called @eneca. !he chemical division "ecame the new ICI.

$usiness organisation ollowing the demerger o ICI was simpler, and corporate o"=ectives

more easy to identiy. In addition, as :wen and Harrison (199


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that the conglomerate, with a turnover o A1/ "illion, was to split into our companies covering

energy, Imperial !o"acco, chemicals and "uilding materials.

4nli#e ICI, Hanson operated via a relatively simple organisational structure, in which the

head-uarters involved itsel very little in the ormation o each "usiness0s individual strategy.

$usinesses within Hanson were run very much as Bstand?alone0 "usiness units. !he head-uarters

was more decisive when it came to inance and investment, where strict controls were imposed

over ependiture decisions. !he reasons or such a policy were clearly identiied in what ordHanson saw as the corporation0s principle aim

"o invest in good $uality basic businesses providing essential goods and services for the

consumer and industry and to obtain an improving return for shareholders by ma!imising

earnings per share and dividend growth. %

>redicta"ly, tight inancial controls over investment and growth were put in place, as investment

and growth tended to depress proita"ility and shareholder value in the short run. 5s a

conse-uence, the avoured means o "usiness growth or Hanson was via urther ac-uisitions,

rather than through strengthening eisting "usiness interests.

In total, it is estimated that Hanson "ought 3< companies in agreed ta#eovers and a urther

si via hostile ta#eovers. It made 1< unsuccessul "ids and too# signiicant share holdings in a

urther // companies or a signiicant period o time.3Hanson0s ac-uisition strategy was to "uy

companies he thought were undervalued. !he purchase o the Imperial roup in 19;6 is one such

eample. Hanson purchased it at three times the "oo# value. He su"se-uently sold many o

Imperial0s assets to ma#e a si8ea"le proit.

!hings "egan to go wrong or Hanson in the 19;'s, as growth "egan to slow and Hanson

attempted to maintain high share dividends. In the past, the pro"lem was easily overcome "y

ac-uiring new "usinesses. $ut now Hanson plc had "ecome a victim o its own success. !he si8e

o the necessary ac-uisitions to meet the dividend re-uirements o shareholders was growing ever

larger. !his raised the pro"lem not only o inding large potential ac-uisitions to meet thecompany0s re-uirements, "ut also o unding them.

5s a result o Hanson0s ac-uisition strategy, it had "ecome reliant on natural resource

companies which operated with wea# cash lows. 5s a conse-uence, unds or urther

ac-uisitions could only "e raised "y selling eisting "usiness assets, usually the most proita"le

ones. !he diiculty was that Hanson0s portolio o "usinesses was steadily wea#ening over time,

as the "est?perorming stoc# was sold to purchase low?perorming assets. In addition, many

mar#et analysts came to -uestion the wisdom o Hanson0s ac-uisitions, and the degree o

diversiication it was creating.

&P 'organ and Company has developed a () *Corporate Clarity Inde! which $uantifies

a companys corporate clarity or degree of focus in its business portfolio by identifyingthe different industries in which the firm operates relative si+e of sales in each segment

and operating similarities among the firms different businesses. ,irms are assigned a

score on a #--point scale/ single segment firms score #--; widelydiversified firms

typically score around 0-. 1pplied to #00 () firms between #22- and #223 the stock

market rewarded clarifying firms in a twoyear period following a ma4or business shift as

follows/ clarifying firms outperformed the stock market by 5.6 per cent annually and

outperformed diversifying firms by #3.6 per cent annually. In a twoyear period firms

with increasing diversification and reducing clarity scores e!perienced a 7.- per cent

marketad4usted decline. "hus investors penalised conglomerates for unrelated

diversification and rewarded firms with improved corporate clarity and sharper focus.

3

Hanson plc clearly ell into the category o diversiied "usinesses that had a reducing level o


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1 :wen and ! Harrison, Bhy ICI Chose to emerge0,8arvard 9usiness :eview(5pril 199

hanson plc case study

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