Case F3
Business Divorce
Two breakups: ICI and Hanson
In 1993 and 1996 respectively, ICI (Imperial Chemical Industries) and Hanson plc demerged.
ICI was split into two, and Hanson was divided into four. This type of business reorganisation is
a radical strategy to adopt, and is likely to be only undertaken in the face of growing
organisational and financial pressures. Both ICI and Hanson faced such pressures.
From a traditional economic point of view it might simply be argued that both ICI and
Hanson had grown too big, with diseconomies of scale reducing their profits and making them
less competitive. To some degree this was true. ICI, in particular, prior to the late 1970s, was
seen as a highly bureaucratic conglomerate that had little strategic focus and was slow to
respond to change. Even so, demerger was a radical form of surgery to deal with what was
essentially a form of organisational inefficiency.
In fact, when we look more closely at ICI and Hanson we find that their problems were
more to do with how they grew, and not necessarily with the process of growth itself. Both ICI
and Hanson pursued growth strategies which involved diversifying their business interests.
There were differences between them, however. Whereas ICI might claim that its diversification
came mainly from new product development and its own R&D investments, Hanson diversified
by acquiring other companies via merger and takeover. But despite these different approaches to
the process of diversification, both companies came to experience very similar problems and a
need radically to restructure their business operations.
The case of ICI
ICI was created in 1926, following the merging of the Britain’s four biggest chemical
companies: Brunner Mond, Nobel Industries, United Alkali and British Dyestuffs. The merger
was motivated by growing international competition, especially from Germany.
ICI’s big break came in 1933, when, by accident, it discovered polyethylene, or, as we know
it by its trade name, Polythene. It has been calculated that, since 1933, ICI has patented a further
33 000 new inventions.
ICI remained firmly rooted in the UK market until the 1960s, where it operated as a virtual
monopoly. In the 1960s it began to broaden its horizons and moved, usually via merger and
acquisition, into Europe and the United States. At this stage of its expansion, ICI sought to
produce in these countries similar products to those it was producing at home (which covered a
very wide range of products indeed).
In the 1970s, as competition in the chemical industry intensified and ICI’s growth slowed,
rather than reorganise its business interests by reducing its product range and focusing more
closely upon its core business activities, ICI maintained business as usual. One of the principal
reasons why it did not reorganise was simple inertia and opposition within its organisational
structure. Even where products were failing, and clearly falling behind the products of rival
companies, powerful divisional directors were reluctant to relinquish or scrap part of their
domain. Change was very difficult to implement in the face of such vested interests.
ICI’s business environment was to take a turn for the worse with the UK recession in the
early 1980s. The depth and length of the recession hit ICI hard, forcing it once again to look at
its organisational and cost structure. Between 1978 and 1987 ICI was to shed some 50 000 jobs.
It also began to devolve more responsibility for strategy and investment decisions to the
company’s divisions.
By the early 1990s, following a further review of ICI’s strategy and organisation, it was
decided that ICI would focus more clearly on core business activities, concentrating resources
on pharmaceutical products, agrochemicals and seeds, specialities, explosives, paints, materials,
and industrial chemicals. Its organisational structure was also revised, with clearer lines of
responsibility established between different management levels.
In May 1991, the acquisition of 2.8 per cent of ICI’s shares by Hanson, a company with a
reputation for acquiring businesses that it considered had undervalued stock, forced ICI once
again to look at its organisational structure and at whether it was enhancing shareholder value.
By this point in time, the pharmaceutical division of ICI was by far the most profitable
component of the company. Profits from it were used to prop up the less profitable divisions,
which tended to drag ICI share prices down. In other words, various parts of ICI were more
valuable than the whole. It was quickly realised that, unless shareholder value was enhanced, a
takeover might become inevitable.
It was decided that radical surgery was necessary and that ICI should be split along
technological lines. On one side, there were the divisions of pharmaceutical and biosciencerelated activities, and, on the other, ICI’s traditional chemical divisions.
Each group of businesses were argued to form an industrial cluster, where there existed
strong technological and manufacturing links. For example both pharmaceutical production and
agrochemicals combined biology and organic chemistry in their research and development
programmes.
The supporters of ICI’s demerger argued that the synergy between its parts would be
enhanced by creating these two clusters, which under the old ICI structure had deteriorated over
time. The deterioration had occurred because businesses within ICI had become too diverse.
They came less and less to share the same technological and manufacturing requirements. Thus
services provided centrally by being part of ICI, such as access to technology and reputation,
were either of no use, or something that each division could more successfully provide itself.
In 1993 the pharmaceutical and bioscience divisions of ICI were demerged to form a new
company called Zeneca. The chemical division became the new ICI.
Business organisation following the demerger of ICI was simpler, and corporate objectives
more easy to identify. In addition, as Owen and Harrison (1995) remark, the challenges facing
managers at Zeneca and the new ICI could now be dealt with more effectively, given that the
differences between them no longer forced them to compromise.
Zeneca’s task is to manage high growth based on innovative new products; the emphasis is
on strengthening the company’s Worldwide sales organisation and on improving the
productivity of research and development. ... ICI’s chemical businesses, by contrast, are
cyclical, supplying such industries as mining, textiles, and construction. They are mostly
capital intensive and much less dependent than Zeneca on research. Their goal is to
achieve world market leadership for the areas in which ICI has a technological
advantage; and their continuing urgent need is to reduce overheads, improve the
utilisation of assets, and raise manufacturing efficiency.1
The key to understanding ICI’s problem lies in the diversity of its business interests, and the fact
that this diversity, primarily as a result of technological change, grew over time. Different
divisions within ICI’s operations required different strategies and approaches, which were either
of no use to other divisions or even generated a conflict of interest.
2
The case of Hanson plc
Hanson, like ICI before it, was to demerge in the 1990s. In September 1996 it was announced
that the conglomerate, with a turnover of £12 billion, was to split into four companies covering
energy, Imperial Tobacco, chemicals and building materials.
Unlike ICI, Hanson operated via a relatively simple organisational structure, in which the
headquarters involved itself very little in the formation of each business’s individual strategy.
Businesses within Hanson were run very much as ‘stand-alone’ business units. The headquarters
was more decisive when it came to finance and investment, where strict controls were imposed
over expenditure decisions. The reasons for such a policy were clearly identified in what Lord
Hanson saw as the corporation’s principle aim:
To invest in good quality basic businesses providing essential goods and services for the
consumer and industry, and to obtain an improving return for shareholders by maximising
earnings per share and dividend growth. 2
Predictably, tight financial controls over investment and growth were put in place, as investment
and growth tended to depress profitability and shareholder value in the short run. As a
consequence, the favoured means of business growth for Hanson was via further acquisitions,
rather than through strengthening existing business interests.
In total, it is estimated that Hanson bought 35 companies in agreed takeovers and a further
six via hostile takeovers. It made 15 unsuccessful bids and took significant share holdings in a
further 22 companies for a significant period of time.3 Hanson’s acquisition strategy was to buy
companies he thought were undervalued. The purchase of the Imperial Group in 1986 is one
such example. Hanson purchased it at three times the book value. He subsequently sold many of
Imperial’s assets to make a sizeable profit.
Things began to go wrong for Hanson in the 1980s, as growth began to slow and Hanson
attempted to maintain high share dividends. In the past, the problem was easily overcome by
acquiring new businesses. But now Hanson plc had become a victim of its own success. The
size of the necessary acquisitions to meet the dividend requirements of shareholders was
growing ever larger. This raised the problem not only of finding large potential acquisitions to
meet the company’s requirements, but also of funding them.
As a result of Hanson’s acquisition strategy, it had become reliant on natural resource
companies which operated with weak cash flows. As a consequence, funds for further
acquisitions could only be raised by selling existing business assets, usually the most profitable
ones. The difficulty was that Hanson’s portfolio of businesses was steadily weakening over
time, as the best-performing stock was sold to purchase low-performing assets. In addition,
many market analysts came to question the wisdom of Hanson’s acquisitions, and the degree of
diversification it was creating.
JP Morgan and Company has developed a UK ‘Corporate Clarity Index’ which quantifies
a company’s corporate clarity or degree of focus in its business portfolio, by identifying
the different industries in which the firm operates, relative size of sales in each segment,
and operating similarities among the firm’s different businesses. Firms are assigned a
score on a 100-point scale: single segment firms score 100; widely-diversified firms
typically score around 30. Applied to 133 UK firms between 1990 and 1994, the stock
market rewarded clarifying firms in a two-year period following a major business shift as
follows: clarifying firms outperformed the stock market by 8.5 per cent annually and
3
outperformed diversifying firms by 14.5 per cent annually. In a two-year period, firms with
increasing diversification and reducing clarity scores experienced a 6.0 per cent marketadjusted decline. Thus, investors penalised conglomerates for unrelated diversification
and rewarded firms with improved corporate clarity and sharper focus.4
Hanson plc clearly fell into the category of diversified businesses that had a reducing level of
clarity, and by 1996, with share prices falling, Hanson announced the conglomerate’s demerger.
Questions
1. Identify the different types of diseconomy of scale? How might these be relevant in
explaining the fortunes of ICI and Hanson?
2. What advantages and disadvantages are there with a growth strategy of diversification?
Relate this to the experiences of ICI and Hanson.
3. Using company reports and other financial market sources consider what has happened to
ICI and Hanson shares prior to and following demerger. Using share value as a guide to
performance, do the various companies created from demerger appear to have been
successful?
1
G Owen and T Harrison, ‘Why ICI Chose to Demerge’, Harvard Business Review (April 1995)
G Redmayne, ‘Demerger of the Hanson Conglomerate’, Company Accountant (April 1996)
3
M Lynn, ‘The Hanson Inheritance’, Management Today (June 1996)
4
P Stonham, ‘Demergers and the Hanson Experience’, European Management Journal (June 1997)
2
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