W.R. Grace & Company

W.R. Grace & Company

1114 Avenue of the Americas
New York, New York 10036
U.S.A.
(212) 819-5500

Public Company
Incorporated: June 20, 1899
Employees: 78,523
Sales: $3.726 billion
Market Value: $2.617 billion
Stock Index: New York Amsterdam Basle Hamburg
Geneva Lausanne Zurich London Paris Frankfurt

J. Peter Grace, W.R. Grace & Company’s chairman and grandson of the founder, has a habit of buying companies on a whim. On a trip to Washington, D.C., he purchased 80% of The American Cafe after eating one meal there. However, it’s doubtful that anyone at the company was surprised by Grace’s action. He had previously purchased Far West Restaurants after eating at a branch in Phoenix and Coco’s restaurants after eating at an outlet in Newport Beach. Over the past 41 years Grace, the longest reigning chief executive officer at any major company, has bought and sold 150 companies. At one time or another the company, in addition to its current role as fifth largest chemical company, has been the world’s largest distributor of spaghetti, a cowboy apparel retailer, and owner of an airline. It may be hard to believe that W.R. Grace & Company started out shipping guano, or bird droppings, from South America.

In 1854 William Russell Grace and his father James Grace travelled to Callao, Peru. James, a prosperous Irish landowner, wanted to establish an Irish agricultural community. He hoped to rebuild the family fortune which had been depleted during the Irish famine of 1847-48 when he provided employment to a large number of people from the countryside around his estate. Not finding the prospects he had hoped for in Peru, James soon returned to Ireland.

William, however, remained in Peru and became a clerk in the trading firm of Bryce & Company. His value to the company was recognized after a few years when he was made a partner in the firm, which was then renamed Bryce, Grace & Company. Under William’s direction the commercial house soon became the largest in the country.

Poor health forced William to retire from the Peruvian business in 1865. He returned to New York City where he had spent a year during his youth. His brother, Michael P. Grace, who had joined him earlier in South America, remained behind to manage the growing family business in Peru which was soon named Grace Brothers & Company.

With his health fully recovered, William established W.R. Grace & Company in New York. William had long been a confidant of the Peruvian president, and through this connection the company became the Peruvian government’s agent for the sale of nitrate of soda.

The Chile-Peruvian war of 1887-81 severely weakened Peru’s economy, and the government had difficulty repaying its foreign debt. In 1887 a group of foreign bondholders in the Peruvian government, mostly British, called on Grace Brothers & Co. to attempt a settlement of the debt. Michael accepted the offer and in the settlement he negotiated, known as the Grace-Donoughmore Contract, two Peruvian bond issues amounting to $250 million were cancelled in exchange for equally valuable concessions to the bondholders. Bondholders received shares in a newlyestablished company, The Peruvian Corporation, which received the rights to two state-owned railroads for 66 years, all Peruvian guano output up to 3 million tons (except for that on Chincha Island), a government promise to pay shareholders 80,000 pounds sterling annually for thirty years, and ownership of the lucrative Cerro de Pasco silver mines. In return, the shareholders agreed to finish uncompleted railroads and repair existing ones within certain time limits. (Most of the contracts for supplying the railroad building program went to the Grace company).

At the time of the company’s incorporation in Connecticut in 1899, Grace listed capital of $6 million. The amount, however, undervalued the company’s worth since it did not include Grace Brothers & Co. Limited in London and its branches in San Francisco, Lima, and Callo, Peru as well as Valparaiso, Santiago, and Concepción Chile.

When William Grace died in 1904 control of the company passed to Michael who became chairman. In 1907 he negotiated a new agreement with the Peruvian government anulling the terms of the previous agreements and extending the Peruvian Corporation’s lease for 17 years. The government agreed to continue paying £80,000 annually to shareholders for 30 years, but made claims to one half of the company’s net proceeds.

William’s son Joseph, who started working for the company’s corporate offices in New York in 1894 when he graduated from Columbia University, became President in 1909. The company underwent a period of rapid growth during Joseph’s presidency and in the process greatly expanded South American production and trade.

In 1929, the year Joseph became chairman of the board, W.R. Grace and Pan American Airways together established the first international air service down the west coast of South America, Pan American Grace Airways otherwise known as Panagra.

After suffering from a stroke in 1946 Joseph retired. A feud subsequently broke put among family members over who should run the company. Eventually Joseph prevailed and his son J. Peter, after some misgivings of his own, became president.

At the age of 32 Peter inherited a company with $93 million in assets and whose primary interests were in Grace Steamship Lines, Grace National Bank, Panagra, sugar plantations and cotton mills in Peru and Chile. The company also produced paper and biscuits, mined tin, and grew coffee.

From the very beginning Peter was concerned about the political and economic instability of South American nations that he believed threatened Grace’s operations. In particular, many companies had shown resistance to U.S. domination of their economies. With what proved to be remarkable foresight, Peter embarked on a plan of diversifying into U.S. and European investments, seeking to reduce South American investments from 100% to 5%. To raise the capital necessary for his expansion the company went public in 1953. The board of directors resisted his plan of broadening investment and, though the Grace family owned more than one half of the company’s stock, he nearly lost his position as chief executive officer.

Attracted by profits achieved by Dupont, Peter began searching for investments in the chemical industry. He purchased two major chemical companies which made Grace the nation’s fifth largest chemical producer. In 1954 Grace completed a merger with Davison Chemical Corporation, a manufacturer of agricultural and industrial chemicals. Later that year Grace purchased Dewey & Almy Chemical Company, an investment one industry analyst later called “among the greatest acquisitions of all time.” A producer of sealing compounds and batteries, Dewey and Almy grew rapidly and earnings quickly surpassed the $35 million purchase price. This became the foundation for one of the world’s largest specialty chemical operations. Over the next 11 years Grace acquired 23 more chemical companies for four million shares of stock.

Seeking to enter markets which could compensate for the cyclic nature of the fertilizer industry, Grace set out to build the “General Foods of Europe.” Over the decade Peter Grace purchased a chocolate producer in the Netherlands, a Danish ice cream maker, and an Italian pasta company. Critics charge that he was searching for companies he could shape and manage himself, attempting to prove he was his ancestors’ equal as an entrepreneur.

Peter continued selling the company’s old businesses and using the money to acquire new ones. In August of 1965 he sold Grace National Bank to what is now Marine Midland Bank. The next year he acquired a 53% interest in Miller Brewing Company. And in 1967 Peter sold the company’s 50% interest in Pan American Grace Airways to Braniff Airways for $15 million.

The late 1960’s proved a difficult time for Grace. The fertilizer market became severely depressed, once a source of substantial profit. Facing falling profits Grace attempted to boost efficiency by closing marginal plants, but in the process the company incurred huge losses.

In the meantime, relations between Grace and Miller Brewery’s minority stockholder, an heir to the company’s founder, had turned for the worse. Peter realized he would never be able to buy the rest of the company. Thus, in 1969 Grace sold its holdings in Miller for $130 million, resulting in a net profit of $53.9 million.

In the early 1960’s the company management had reversed its previous policy in regard to South American investment and began pouring funds into paper, food and chemical companies. Later that year, however, Grace’s fears about these investments came true when the Peruvian government seized the company’s sugar mills and a 25,000 acre sugar plantation. Earnings on South American operations tumbled from $12 million the previous year to zero on sales of $256 million. Peter, not discounting the possibility of pulling completely out of the region, said that company investments in future would be made on the attitude of each individual country.

In the early 1970’s, Grace made a move into consumer goods. In 1970 the company purchased Baker & Taylor, a supplier of books to libraries, as well as F.A.O. Schwarz, the New York toy store. And hoping to cash in on America’s love affair with leisure-time activities, the company acquired Herman’s World of Sporting, a landmark in New York’s financial district.

Grace saw a chance for substantial returns in the sporting goods business. Involvement in the market was especially attractive since there were no national sporting goods chain stores. Department stores, preferring the profits and turnover of apparel and other “soft” product lines, had shunned sporting goods. The company sought to expand Herman’s from 3 stores with $10 million in sales into the first national chain. As part of the plan Grace bought Mooney’s of Boston, Atlas of Washington, and Klein’s of Chicago and converted them to Herman’s sporting goods stores.

In 1971, the year Peter became chairman, the company’s profit was at its lowest point in years after hitting a high of $82 million in 1966, and its return on equity was well below that of other conglomerates. Extraordinary (or one time only) writeoffs, became such a regular part of the company’s financial statements (just that year the company wrote off $7.8 million from closing fertilizer plants) that some security analysts had come to consider them a regular part of Grace’s operations. Consequently it was not surprising that in 1972 company executives produced a 700 page memo establishing twenty criteria for acquiring a new business. Most importantly, these executives decided that in order to be purchased a company must have $20 million in sales and $1 million in profits.

In 1974 Peter began to reduce the company’s holdings by selling a grocery products venture, and began to concentrate company investments in three areas: consumer goods, chemicals, and natural resources. Fertilizer profits had rebounded because of low supply and high worldwide demand, but the consumer groups showed lackluster profits even with large sales in sporting goods. In addition, Grace’s final investment in Peru was severed later in the year. The Peruvian government nationalized its paper and chemical operations, leading to a loss of $11.5 million for the company, despite $23.6 million in compensation from the government.

By 1976 the company was ready to continue its move into consumer goods and services. Later in the year, when the company was about to make a public stock offering to raise capital for further expansion, it received an offer from Peter’s old friend Friedrich Karl Flick, who during the 1950’s had worked for Grace National Bank for three years. Flick, head of Friedrich Flick Industrial Corporation, Germany’s largest family owned company, was looking for somewhere to invest the $900 million it had recently made from the sale of its 29% interest in Daimler-Benz to Deutsche Bank.. Wanting to take advantage of German laws that granted tax free capital gains and dividends earned on investments of more than 25% ownership in foreign companies, Flick eventually bought a 30% stake in Grace.

Though the Grace family interest in the company had dwindled to 3%, Peter made it clear that Flick would not run the company. Receiving seats for only 3 of the company’s 35 directors, Flick nonetheless obliged since he was concerned with his own business ventures in Europe.

The consumer divisions’ growth accompanied increasing internal strife at the company. In 1979, after years of watching the company’s stock trading at low earnings multiples, management proposed splitting up the company into seven or eight separate companies which would command higher stock prices. Worried about the company’s increasing reliance on consumer products, they also suggested selling the energy division whose market value could have been as much as $1 billion over book value. Peter, unwilling to give up his control of the company which might also have resulted from these proposals, rejected both ideas.

At the beginning of the 1980’s Grace’s move into natural resources appeared as if it was going to be as profitable as its venture into chemicals. The company’s energy reserves had grown to 73 million barrels of oil, 300 billion cubic feet of natural gas and 239 million tons of coal. Specialty chemicals sales and earnings, meanwhile, rose an average of 15% annually over the last decade. The company had 85 product lines from plastic packaging materials to petroleum cracking catalysts, many of which were market leaders.

However, the company suffered with falling energy prices in 1981. Moreover, in 1982 the combination of a poor natural resources profit and a further decline in the fertilizer business led to a 50% decrease in the company’s profitability. As a result, Grace petroleum was put up for sale in 1984. The retail and consumer goods divisions, which were returning just 14% of profits on 36% of sales, looked like they might be next.

The company’s problems were compounded in 1984 when Flick became the target of a government bribery scandal and was forced to confront a $260 million dollar tax bill. Rumors abounded in West Germany that Flick was looking for someone to buy the family business, putting Grace at risk of a hostile takeover.

The rumors about Flick proved true when Deutsche Bank acquired the company and put its holdings in Grace on the market. The company immediately seized the attention of takeover specialists, since Grace’s assets could be sold at a profit of $20 to $25 more than the market price. GAF Corporation Chairman J. Heyman approached Grace about a friendly takeover, causing Grace’s stock to rise 30%.

Peter, fearing a takeover, was forced to buy Flick’s holdings for $598 million, though already severely strapped for cash. The acquisition put Grace’s debt at $2.6 billion and caused a downgrade of Grace’s credit rating.

Critics, both inside and outside the company, regarded this as an unthinking decision. Complaints about Peter’s domination of the company and an incoherent business strategy put mounting pressure on him to sell the consumer division. Since Grace was desperate for cash, this forced Peter to comply. Energy and fertilizer investments were reduced. Herman’s was sold to Dee Corporation for $227 million, realizing a profit of $144 million. The remaining consumer goods businesses were sold for $500 million, but because of high expansion costs at the 317-store home center operations, Grace barely broke even on the sale. In addition, Peter agreed to selling 51% of the restaurant division to its management in a leveraged buyout. In light of these events, speculation arose that Peter might resign.

For the moment Grace’s days of rapid expansion and wide diversification are at a halt. Management has called for selling all energy and fertilizer investments and concentrating on specialty chemicals, where the company has been losing some of its market lead in recent years. As a result, executives say that the company is undergoing a transformation from being one of the last of the family controlled companies to being a more conventionally-managed corporation.

Principal Subsidiaries

Akapaw Inc.; Ale wife Boston Ltd.; Ale wife Land Corp.; Amargosa Pipeline Corp.; American Carry Products Corp.; Amicon Far East, Ltd.; Annie’s Santa Fe of Kansas, Inc.; Antilles Chemical Co.; Arrow Inter-American Corp.; Axial Basin Coal Corp.; Beckett Golf Club, Inc.; Bermanns Far East Ltd.; Berry Gas Co.; Booker Drilling Co., Inc.; Camillus Acres, Inc.; Caribe Nitrogen Corp.; Carrows Beverages, Inc.; Carrows Restaurants, Inc.; Chomerics, Inc.; Coalgrace, Inc.; Commercial Sites, Inc.; Cox Marketing, Inc.; Cramer Advertising Associates; Creative Food ’N Fun Co.; Creative Restaurant Concepts, Inc.; Darex Puerto Rico, Inc.; Daylin-Summitt, Inc.; Devcoa Inc.; Dewey and Almy Co.; De Zaan, Inc.; Drilling Mid. Inc.; Duncan, Lagnese and Associates, Inc.; Ecarg, Inc.; Ecotrol, Inc.; ELF Aviation, Inc.; E L Liquidating Corp.; Elson T. Killam Associates, Inc.; El Torito/Milwaukee, Inc.; Food Distributing Corp.; F.P. Ott’s/Madison, Inc.; Gilbert/Robinson, Inc.; GPC Marketing Co.; GPC Transporter, Inc.; Gracoal, Inc.; G/R Texas Enterprises, Inc.; F/R of Penn, Inc.; GRC Ice Cream Co.; Hanover Square Corp.; Momeo International, Inc.; HTIG Interiors Inc.; Hungry Tiger Inc.; J.B. Robinson Jewelers, Inc.; Jet and Go, Inc.; Killam-Dearborn Environmental Engineers, Inc.; Leather Bottle NO. 1, Inc.; Liquor Lounges, Inc.; Lobster House; LKS Enterprises, Inc.; Mar-Ral, Inc.; M-B Food Distributing Co., Inc.; Metaramics; Monolith Enterprises, Inc. (80% owned); Mount Bundey Mining, Inc.; New American Restaurant Corp.; NRG Eastern Coal Development, Inc.; Ochoa Fertilizer Co., Inc.; Offshore Fisheries, Inc.; Ole’s, Inc.; Ole’s Nevada, Inc.; One Hundred West of St. Louis, Inc.; Panana Inc.; Process Evaluation and Development Corp.; Red Steer, Inc.; Restaurant Supply, Inc.; Ridge wood Chemical Corp.; Ridge wood Phosphate Corp.; Sam Wilson’s/Kansas, Inc.; Seriglif, Inc.; Seven Hanover Square Corp.; Sheplers Catalogue Sales, Inc.; Sourgasco II Corp.; Southern Oil, Resin & Fiberglass, Inc.; Standard TransPipe Corp.; Stantrans, Inc.; Stopover Restaurants, Inc.; Support Terminal Services, Inc.; Toco Villa, Inc. (83.5% owned); Tia Marie-Washington, Inc.; TVS Merger Corp.; 2701 Corp.; Ven-Tech One, Inc.; Water Street Corp.; Woodward Chemicals Corp.; Woolwich Sewer Co., Inc.; Woolwich Water Co., Inc.; W.R.C. Technical Ventures, Inc. W.R. Grace also has subsidiaries in many European countries.

Further Reading

”Arms, Guano, and Shipping: The W.R. Grace Interests in Peru, 1865-1885” by C. Alexander G. de Secada, in Business History Review (Boston), 59,1985.