BASF SE can escape the hangover of a post-takeover revamp with its purchase of Cognis GmbH after a decade of private-equity ownership left the German maker of cosmetics ingredients with about 3,500 fewer workers.
BASF, the world’s No. 1 chemical maker, today agreed to pay Goldman Sachs Group Inc. and Permira Advisers Ltd. 3.1 billion euros ($3.8 billion) for the Monheim, Germany-based company. The two buyout firms purchased Cognis from Henkel AG in 2001 and spent the following years selling leather processing and fatty-acids units, helping cut 39 percent of the workforce.
“Cognis is in a much better shape than two or three years before, it’s much more streamlined,” BASF Chief Executive Officer Juergen Hambrecht told reporters on a call today.
BASF’s last major takeover, Ciba Holding AG, saddled the company with the task of 3,800 job cuts and closing 14 factories and 58 non-production sites, in what Hambrecht today called a “restructuring case.” At Cognis, the sale of units accounted for the bulk of the workforce reduction and helped narrow the business focus, prompting the BASF executive to return with an offer after abandoning the plan several years earlier.
Goldman and Permira sold two of five business units at Cognis, and are poised to exit the company with 5,515 workers, down from 9,000 when they bought it. The overhaul marked a change in culture for workers, who ended up feeling distanced from owners, supervisory board member Thomas Hergarten, who heads Cognis’s works council, said in an interview.
‘A Lot of Tears’
“When the financial investors presented themselves at Cognis, they introduced themselves as white knights and said they would need all staff to take the company forward,” said Hergarten. “Then, restructuring programs were introduced, which brought a lot of tears and did a lot of damage.”
Having the unpopular work already completed by private equity removes a burden for BASF, still occupied with absorbing the 2008 purchase of Ciba for about $5 billion.
About 500 jobs were eliminated at Cognis in Germany alone. The company is “not a case for restructuring,” Hergarten said in the interview before BASF announced a deal.
“It is a totally different company today,” Cognis Chief Financial Officer Marco Panichi said in an interview. “We took a proactive approach to explain the private equity business model and discussed it with our employees.”
While painful for workers, private equity ownership can also help take a company forward by reenergizing management, according to Bain & Co. consultant Norbert Hueltenschmidt.
For Sued-Chemie AG, the arrival of One Equity Partners as a majority shareholder in 2007 provided a fresh edge to decision making at the 153-year-old German maker of catalysts and additives, said Guenter von Au, a chemistry graduate promoted to chief executive in 2004.
“They brought in some more financially driven views, and this has been good for us,” von Au said. “We learnt a lot. And in the meantime, I’ve become a little bit of an expert in private equity. It’s a good experience.”
The move of high-profile experienced chemical executives to buyout firms is further enhancing their credibility. Utz-Hellmuth Felcht, the former CEO of Degussa AG, is now a managing director at One Equity Partners as well as chairman of Sued-Chemie. AEA Investors employs Gary Cappeline, the former chief operating officer of Ashland Inc., and Glenn Fischer, who held the same position at Airgas Inc.
“There is stronger interaction between private equity and the chemical industry which allows both sides to learn from each other,” said Ronald Ayles, Advent International’s manager in Frankfurt overseeing chemical investments. “We see ourselves as catalysts for changes, for example, to increase a company’s competitiveness in a changing environment.”
It was in 2005 that the then German vice chancellor, Franz Muentefering, lambasted buyout firms for descending on companies like “swarms of locusts” seeking quick returns at the expense of workers and a company’s health.
BASF’s involvement with private equity has not always gone smoothly, and at least two deals with buyout firms involving former BASF units have soured. A plastics joint-venture sold by BASF and Royal Dutch Shell Plc to Access Industries helped form the foundation of LyondellBasell, which filed for bankruptcy protection last year.
The insolvency of DyStar in 2009 came five years after its takeover by Platinum Equity. That business included a former BASF textile-dye operation.
“There are financial investors who want to develop a company, and those that are interested in nothing but profit,” said Heinz Schaus, who heads of DyStar’s works council in Frankfurt. “Platinum Equity was only looking at making a profit. They let DyStar crash into the wall at full speed.”
BASF shows little sign of wholeheartedly embracing private equity. Chief Financial Officer Kurt Bock, set to become CEO next year, on May 25 criticized U.S. chemical makers and their financial advisers for taking on too much risk, calling over-leveraging “a dangerous poison.”
Hambrecht said today he will wait to complete the Cognis deal before detailing savings plans. BASF has highlighted integration costs of as much as 250 million euros through 2012. As a start, it expects to strip at least 129 million euros a year in costs, based on past takeover experience.
For Cognis workers, selling to another financial investor as opposed to a strategic buyer or taking the company public would have been the “the worst case” scenario, Hergarten said.
“The employees are highly interested in getting rid of financial investors,” he said.