Ciba-Geigy ltd.

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Ciba-Geigy ltd.

Klybecstrasse 141
Basle, Baslestadt 4002
Switzerland

Public Company
Incorporated: 1884
Employees: 81,012
Sales: SFr 14.434 billion (US$8.869 billion)
Market Value: SFr1 1.503 billion (US$7.079 billion)
Stock Index: Geneva Zurich Basle

Ciba-Geigy is the largest chemical company in Switzerland. But since the country offers only a limited market and lacks many essential raw materials, Swiss chemical companies have been forced to enter foreign markets; and in order to compete successfully, they have had to lead the world in certain technologies.

In the early years of this century, the world’s strongest chemical industries were in Germany, the United States, and Switzerland. German companies, fearful of losing their leading position to rapidly advancing American firms, openly colluded and coordinated business strategies. After World War I the German companies formed a cartel, the notorious IG Farben. In order to maintain competitiveness with the Germans, the three largest Swiss chemical companies, Ciba Ltd, J.R. Geigy S.A., and Sandoz Ltd., formed a similar cartel called the Basle A.G. This trust lasted from 1918 to 1951. By 1970, however, market conditions led Ciba and Geigy to merge, forming one of the world’s leading pharmaceutical and specialty chemical companies.

Geigy is the older of the two companies—one family member was in the drug business as early as 1758. Through several generations, the Geigy family had married into the prosperous silk manufacturing establishment in Basle and then became established in the dye trade in 1883. Only a few years later, the Geigy family set itself apart from other dyers in Basle by embracing newly discovered synthetic dying processes.

A few years earlier, in 1859, a French silk weaver named Alexander Clavel moved to Basle, where he established a dyeworks called the Gesellschaft für Chemische Industrie im Basle, or “CIBA.” In 1884 Clavel abandoned silk dying for a more lucrative trade in dyestuff manufacturing. Ciba gained a reputation for Fuchsine, a reddish purple dye, and Martius yellow.

By 1900 Ciba was the largest chemical company in Switzerland. With a major alkali works located at Monthey, it was one of the only Swiss manufacturers of inorganic dyes. Ciba, however, started a limited diversification into the pharmaceutical business with the introduction of an antiseptic called Vioform. Between 1900 and 1913 net assets quadrupled while profits nearly tripled. Geigy, during this period, remained steadfastly committed to organic dye production, some of which were still derived from coal tar.

Early in the century both Ciba and Geigy established factories in Germany, due in part to a labor shortage in Switzerland, but also to avoid enforcement of environmental laws designed to reduce pollution in the River Rhine.

Until World War I, German chemical companies dominated the world dye trade with a 90% market share. Those companies, including BASF, Hoechst and Bayer, could easily have run Swiss competitors out of business through price competition; they had proven their ability to hold back the American chemical industry in its infancy. Instead, Ciba and Geigy developed practices that would permit international expansion while not provoking the Germans. Central to this strategy was the abandonment of bulk dye production (the German specialty) in favor of more expensive specialty dyes.

In time, the German companies developed a vested interest in the survival of their Swiss counterparts. Eighty percent of the raw materials used by the Swiss companies came from Germany. In eliminating Swiss competitors, the German companies would eliminate customers whose capacity they could not economically absorb. Furthermore, competition among German companies to fill a sudden void left by the Swiss could have destabilized the careful balance maintained by the cartel. As Swiss companies became acclimated to the German system, they were accorded certain privileges, such as an exclusive right to export to Germany. Cooperation between Swiss and German companies also took the form of an occasional profit sharing pool, as existed between Geigy, Bayer and BASF for black dye.

The hostilities that began in Europe in 1914 severely upset the equilibrium that had existed between Ciba, Geigy, and their German counterparts. Unable to secure raw materials and chemical intermediaries from German suppliers, factories in Basle were forced to suspend dye production. The Swiss later negotiated an agreement with the British, who had been dependent on German dyes and were unprepared for their trade embargo. The British agreed to supply the Swiss with raw materials on the condition that Swiss dyes would be sold preferentially to Britain. While Swiss factories in Baden were seized by the German government, The Swiss were free to export to the lucrative (and formerly German) markets in Britain and the United States and to establish factories in France and Russia.

Ciba’s profits increased dramatically, from SFr3 million in 1913 to SFr15 million in 1917. The end of the war, however, reopened world markets, but left the industry in a severe state of overcapacity. By 1921 Ciba’s profits had fallen to SFr1 million. At this time the German companies decided to reform their cartel, this time under the aegis of a large holding company called the IG Farben. Ciba, Sandoz and Geigy were invited to join the IG Farben but, true to Swiss neutrality, elected instead to form their own cartel, the Basle AG.

The Basle AG, founded in 1918, was fashioned after the IG Farben. The group consisted of Ciba, Geigy, and Sandoz—virtually the entire Swiss chemical industry. The agreement mandated that all competition between the three companies would cease, technical knowledge would be freely shared, and all profits would be pooled. Ciba would receive 52% of the group’s profits, while Geigy and Sandoz would each be entitled to 24%. Any sales between the companies were to be invoiced at cost, raw materials would be purchased jointly, and the manufacture of any product would be assigned to whichever company could produce it at the lowest cost.

From the cartel’s inception, Geigy’s weak market position was a source of tension for its partners. It still produced vegetable dyes, which were gradually losing market share to organic dyestuffs. Despite Sandoz’s contention that it was being forced to subsidize Geigy, the Basle AG remained stable. In fact, it was considered more successful than the larger and more powerful IG Farben. All three firms invested their profits into a broader range of chemical interests, including chemicals and pharmaceuticals. By 1930, these divisions contributed over one quarter of the group’s profits. A joint venture between Sandoz and Geigy led to the establishment of the Cincinnati Chemical Works, a subsidiary which gave the Basle AG a tariff-free foothold in the American market.

In 1929, placing profit before independence, the Basle AG joined with the IG Farben to create the Dual Cartel. French dyemakers joined the group shortly afterwards, forming the Tripartite Cartel. In 1932, with the addition of the British cartel Imperial Chemical Industries, the group was again renamed the Quadrapartite Cartel. This pan-European cartel existed until 1939 when World War II forced its dissolution.

Due to the secrecy characteristic of Swiss firms, little is known about the Basle AG’s activities during the war; the company had subsidiaries in both Allied and Axis nations. At one point, Ciba angered its partners by placing its shares in Cincinnati Chemical Works under the custody of an American trust. Apparently fearing the eventual seizure of those shares by the alien property custodian, Geigy and Sandoz protested in American courts, but were unable to retrieve Ciba’s shares.

In 1940 Dr. Paul Mueller, a researcher with Geigy, discovered the insecticidal properties of DDT. Originally thought safe enough to be sprayed directly on refugees to eradicate lice, DDT was considered a “wonder chemical.” Research during the war led to the development of several ethical drugs, including Privine, a treatment for hay fever, and Nupercaine, a spinal anesthetic used in childbirth. The companies also developed drugs for treatment of high blood pressure and heart disease.

After the war Ciba notified Geigy and Sandoz that as a result of American antitrust laws, the 1918 agreement could not be respected among subsidiaries in the United States. Geigy made a similar declaration in 1947, regarding American assets. Two years later Sandoz again raised the issue of cross-subsidization and proposed that the cartel be dissolved. Geigy opposed the motion, but Ciba, unwilling to abandon its lucrative markets in the United States, eventually sided with Sandoz; the postwar environment no longer justified cartelization for self-protection. The Basle AG was finally dissolved in 1951.

Geigy’s poor financial performance called into question its survivability outside the cartel. During the 1950’s, however, the full market potential of DDT was realized. Suddenly profitable, Geigy expanded its market in agri-chemicals by introducing a corn herbicide called triazine.

Both Ciba and Geigy grew steadily during the 1950’s. Between 1950 and 1959, Ciba’s sales grew from SFr531 million to SFr1026 million, and Geigy’s grew from SFr260 million to SFr738 million. By 1960 both Ciba and Geigy were diversified manufacturers, competing directly in pharmaceuticals, dyes, plastics, textile auxiliaries, and agricultural and specialty chemicals. Each year Geigy’s sales grew stronger, until in 1967 the company overtook Ciba.

Although older than Ciba by 25 years, Geigy maintained a more youthful image. While Ciba sold itself as the company “where research is the tradition.” Geigy recruited engineers with the slogan, “future with Geigy.” But in 1970, while Ciba and Geigy personnel were quibbling over their respective talents, the leaders of both companies were discussing a possible merger.

The idea to merge was first raised when the two companies jointly established a factory at Toms River, New Jersey. With increasingly difficult conditions in export markets— particularly the United States—officials of the two companies began to explore the benefits of combining their textile and pharmaceutical research; Geigy’s strength in agricultural chemicals complemented Ciba’s leading position in synthetic resins and petrochemicals.

Ciba and Geigy were both in excellent financial condition. However, some of the same market conditions that had led them to form the Basle AG in 1918 were once again prevalent. Competition against German companies in export markets had intensified. But it was as a defense against emerging petrochemical industries in oil-rich Persian Gulf states that the merger was most attractive.

The largest obstacle to a merger between Ciba and Geigy was American antitrust legislation. Antitrust sentiment in the United States was so strong that federal prosecutors vowed to block the merger in Switzerland if it threatened to restrain American trade in any way. In order to win approval in the United States, Ciba agreed to sell its American dyeworks to Crompton and Knowles and Geigy its American pharmaceutical holdings to Revlon. Despite further challenges, including one from the consumer advocate Ralph Nader, the merger was approved.

Mechanically, the merger consisted of a takeover of Ciba by Geigy. This was done to minimize tax penalties amounting to SFr55 million. Geigy’s chairman, Dr. van Planta, assumed the chairmanship of the new company, with Ciba’s chairman, Dr. Kappeli, serving as honorary chairman.

As promised, the Ciba-Geigy merger has proven “synergistic.” The more profitable, but less diversified, Geigy has benefited from Ciba’s research capabilities. Ciba, on the other hand, has profited from Geigy’s more modern approach to marketing and management. In the United States, the company’s American subsidiary passed the one billion dollar sales mark in 1978, and doubled that figure only six years later. The company’s worldwide sales that year were SFr17.5 billion, 30% of which came from U.S. operations. Despite a 14% drop in profits between 1978 and 1980, Ciba-Geigy has maintained strong annual sales growth since 1981; profits as a percentage of sales was 8.1% in 1985.

In contrast to its impressive performance on the balance sheet, Ciba-Geigy has suffered a few problems with its public image. In the mid-1970’s a Ciba-Geigy product marketed in Africa as an ordinary analgesic produced a horrifying side-effect: the loss of large pieces of flesh. More recently, the plant at Toms River recently discontinued production of Posgene in response to a Greenpeace campaign which warned the community of a possible accident similar in magnitude to the tragedy in Bhopal, India.

Ciba-Geigy is one of the five largest chemical companies in the world. And, while it is widely diversified within the industry, it has maintained a steady emphasis on sophisticated chemicals—whether they are pharmaceuticals, plastics, pigments, or pesticides. (Until it was sold, Airwick, which made air fresheners and other consumer products, was one of Ciba-Geigy’s very few low-tech ventures.) The company plans to strengthen existing product lines and limit diversification to compatible high-technology operations in biotechnology, laser applications, and diagnostics.