Cytec Industries Inc.
Cytec Industries Inc.
Sales: $1.29 billion (1997)
Stock Exchanges: New York
Ticker Symbol: CYT
SICs: 2899 Chemical Preparations, Not Elsewhere Classified
A leading chemicals company, Cytec Industries Inc. develops, manufactures, and markets specialty chemicals, specialty materials, and building block chemicals. Cytec’s products were sold to end users involved in a variety of industries, including water treatment, paper, mining, coatings, plastics, aerospace, textile, and automotive. The company’s distinctive quality was its vertically integrated operations, which manufactured the raw materials—the building block chemicals—used in Cytec’s finished chemical products. During the mid-1990s Cytec divested a number of businesses, notably its acrylic fibers business, and concentrated on specialty chemicals and specialty materials. By the late 1990s the company’s global operations included sales, laboratory, and manufacturing facilities in 36 countries.
New Jersey-based American Cyanamid formed Cytec Industries as a separate business unit in 1991, grouping its chemicals business within the new company. When Cytec was created, it joined a number of other separately run companies operating under American Cyanamid’s vast, life sciences corporate umbrella. These other companies included Lederle Pharmaceuticals; Davis & Geck, a medical device company; Storz, an ophthalmic and pharmaceutical company; and Praxis, a medical supply firm. Along with these companies and other concerns involved in agricultural products businesses, Cytec had to compete for American Cyanamid’s resources. It was a struggle for the parent company’s attention, a struggle that Cytec’s new leader, Darryl D. Fry, had little hope of winning. Among Pharmaceuticals, agricultural products, and chemicals, chemicals “ranked a low third,” according to Fry, in the minds of American Cyanamid’s senior executives, putting the new company and its new manager in an unenviable position. Further, it soon became apparent to Fry that American Cyanamid had Cytec slated for divestiture, reinforcing his opinion that Cytec’s chemicals business occupied the lowest rung of its parent company’s priorities. By the following year—one year after Cytec’s formation—the business press realized American Cyanamid’s intentions for its recently formed company. Cytec was to be spun off as an independent company, but the process of separation could not be completed overnight. Cytec, by itself, represented a nearly $1 billion a year business; its separation from American Cyanamid would require a substantial amount of time to complete. During this interim period spanning Cytec’s formation and its spin-off from American Cyanamid, Fry devoted his energies to shaping the company into an enterprise that could stand on its own.
Early on, Fry began to make fundamental changes in the way Cytec operated. His goal was to implement as many of the changes as possible before Cytec’s spin-off, or, in his words, to take “all the psychological and morale hits before the spin.” Toward this end, there was much to be done. Cytec physically separated itself from American Cyanamid before the spin-off, moving its headquarters to West Paterson, New Jersey, away from its parent company’s campus in Wayne, New Jersey. Before and after the move, Cytec had to be restructured, layers of management needed to be stripped, and costs had to be cut drastically. Further, and perhaps most difficult, a new mentality among all employees had to be instilled, one that replaced the ingrained habits and practices existing under the American Cyanamid regime. Fry intentionally established what he described as a period of “discontinuity,” a period of purposeful, noticeable disruption that let everyone know nothing would be as it once had been. Austerity measures were implemented to create what Fry envisioned as a “classless” corporate culture, a company without executive dining rooms, without corporate jets, and without executive parking lots. Part of the reason for the sweeping changes was the burdensome inheritance Cytec was slated to receive as part of the spin-off. Upon gaining its independence, the company was to assume roughly $400 million in employee retirement, health, and insurance liabilities, as well as approximately $225 million in environmental clean-up liabilities. “Things couldn’t get any worse,” Fry remarked, recalling the ominous future the company faced during the early 1990s. Cytec, an industry analyst noted, echoing Fry’s assessment, “has to dig its way out of a deep ditch.”
The various businesses Fry was struggling to shape into an efficient, cohesive whole comprised American Cyanamid’s global chemicals business, which in 1992 generated $951 million in revenue. The scope of the business included American Cyanamid’s process chemicals, commodities chemicals, coating resins, water treating and mining chemicals, and paper chemicals assets. In December 1992 Cytec received another business from American Cyanamid, the company’s acrylic fibers segment, which manufactured fibers for apparel and industrial uses. With the addition of the acrylic fibers segment, which was organized as the Fibers division, the major components of Cytec’s business were in place and the company was ready for the much-awaited spin-off date. The spin-off occurred on December 17, 1993, but its arrival did not evoke any sense of a new beginning. According to Fry, Cytec’s employees felt “kicked out by Cyanamid.” Investors, who were presented with the opportunity to invest in Cytec for the first time, were generally apathetic. Fry conceded “expectations were very low,” but he remained positive, declaring “we’ve exceeded expectations since day one.” Despite Fry’s optimism, there was not much hope that Cytec could be fashioned into a vibrant, financial success. There were, however, several factors working in the company’s favor. Cut free from American Cyanamid, Cytec no longer had to clamor for resources from a parent company with priorities that did not always mesh with its own needs. Second, Cytec’s operations were unique, giving the company an advantage that not all of its competitors enjoyed. The company manufactured a handful of its own raw materials, including ammonia, methanol, acrylonitrile, acrylamide, and melamine, positioning the company as a “back integrated” specialty chemicals producer, a rarity among the industry’s participants. The addition of the acrylic fibers business made Cytec one of only two acrylic fibers producers in the United States, which gave the company a solid position in a market expected to grow during the mid-1990s.
As Cytec headed out on its own, its businesses were divided into three categories: building block chemicals, specialty materials, and specialty chemicals. The building block chemicals segment comprised the manufacturing operations that distinguished Cytec as a vertically integrated chemicals producer. The specialty materials group was led by the company’s acrylic fibers business, but also included the production of aerospace film adhesives and advanced composites, as well as specialized sealants, molding compounds, and metal-coated fibers. Cytec’s third business segment—its specialty chemicals operations—consisted of water treating, mining, and paper chemicals, as well as coating resins and polymer additives. In the years following the spin-off, much of the company’s growth occurred in the specialty materials segment.
As expected, Cytec’s first few months as an independent company proved difficult. The company recorded an operating loss of $89 million in 1993, yet Fry remained positive, realizing that the early 1990s were years of preparation. “In the next three years,” Fry declared, projecting Cytec’s course between 1994 and 1997, “we’re going after top-line growth and developing a passion for the customer.” The budget for capital expenditures was increased to $120 million for 1994, as the company realized its first opportunity to develop momentum, while Fry turned his attention to strengthening customer relations. “If you track my time,” Fry remarked, recalling American Cyanamid’s tenure of control, “the proportion that I have spent with customers has been deplorable. I plan to pick that up heavily.” Fry planned to diversify the geographic composition of the company’s customer base as well, hoping to increase Cytec’s business outside the United States and Canada. During the mid-1990s Cytec derived 75 percent of its sales from the United States and Canada, but Fry envisioned an even split between business outside North America and business within North America. Accordingly, the company began exploring business opportunities in Western Europe, Latin America, and the Far East, with a particular emphasis on China and Southeast Asia as high-growth regions.
Cytec’s diverse portfolio of products and technologies is supported by vertical integration, which distinguishes us from most other specialty chemical companies. We produce the major building block chemicals used as intermediates in manufacturing many of our specialty chemicals and specialty materials. This provides us with a better balance through economic cycles.
To the outside observer, Cytec’s most noticeable activity took place on the acquisition and divestiture fronts, away from the behind-the-scenes efforts to improve customer relations and expand geographically. First, the company began to shed businesses and properties, discarding assets that no longer matched its priorities. The first hint of the divestitures to follow arrived in early May 1996, when the company announced its decision “to explore all strategic options available to enhance the value of its acrylic fibers business including the possible sale of the business.” Although the Cytec was one of only two acrylic fibers manufacturers in North America, the business no longer fit the company’s strategic plans. Cytec’s vice-president of corporate development explained: “We feel that fibers are not our key strength. Chemicals are our key strength as a company. Fibers require a different priority.” A week later, Cytec announced similar plans for its aluminum sulfate business, a producer of chemicals used by paper mills to improve paper quality and used by municipalities to purify drinking and waste water. The aluminum sulfate business was the first to go, sold to GEO Specialty Chemicals, Inc. in mid-December 1996. The divestiture stripped Cytec of seven manufacturing plants in the southeastern United States and an additional plant in Georgia. One week later Cytec reached an agreement with Sterling Chemicals, Inc. for the sale of the company’s acrylic fibers business, a $140-million-revenue producer in 1996. The transaction, which included a plant in Pensacola, Florida, was completed at the end of January 1997 for approximately $100 million. Fry explained, “The divestiture is consistent with Cytec’s strategy to concentrate on value-added, technology-intensive specialty chemicals.”
Late 1990s Acquisitions
At the same time of the sale of the acrylic fibers business, Cytec underwent a change in management. As had been announced in the early 1990s, Fry intended to retire in January 1999 at age 60, but the leadership transition began at the beginning of 1997, when David Lilley took over as president and assumed control of operations. Fry stayed on as chief executive officer and chairman, but it was Lilley who oversaw Cytec’s first major acquisition, the purchase of Fiberite, Inc. In September 1997 Cytec purchased Fiberite from Stamford FHI Acquisition Corp. for an estimated $344 million, completing a move aimed toward strengthening its aerospace business. Fiberite, which was expected to generate $250 million in revenues in 1997, manufactured epoxy and resin systems for the interiors and exteriors of commercial and military aircraft at factories in Texas, California, Minnesota, Pennsylvania, and Delaware. Internationally, the company operated facilities in France and in Germany. Fiberite’s operations were merged subsequently with a Cytec subsidiary named Cytec Engineered Materials Inc., which was renamed Cytec Fiberite Inc.
With the acquisition of Fiberite, Cytec’s specialty materials segment accounted for approximately 40 percent of total operating profits for 1997. Of this total, 80 percent was derived from sales to the commercial and military aerospace industry, which was becoming the central focus of the company’s plans as the late 1990s progressed. In this business area, Cytec stood well positioned, despite the reverberating effects of the Asian economic crises. The collapse of Asian economies was important to Cytec because the financial catastrophe touched off a rash of aerospace order cancellations, impacting the customers who were becoming increasingly important to Cy tec’s financial well being. At first blush, Cytec appeared dangerously exposed to the market downturn, but the company’s focus on advanced composites provided substantial protection from the crises. The majority of the aerospace cancellations were for Boeing 747s, which used less than 2.5 percent of their structural weight in advanced composites. Boeing 777s, by comparison, used a greater percentage of the type of advanced composites made by Cytec, roughly eight percent more than the Boeing 747s. To Cytec’s fortune, Asian cancellations of Boeing 777s were replaced by orders from non-Asian airlines.
Evidence of the confidence in the future of aerospace business was found in Cytec’s next big move on the acquisition front. In October 1998 the company acquired The American Materials & Technologies Corporation (AMT) for roughly $30 million. Lilley, who had been named chief executive officer in May 1998, announced, “AMT provides us the opportunity to enhance our existing aerospace product portfolio as well as realize significant cost synergies.” Wall Street, which initially had been indifferent to Cytec’s existence, applauded the company’s increasing penetration of the aerospace market. Said one specialty chemicals analyst, “I would be hard pressed to find any negatives for Cytec right now.” Fry, in his last weeks as chairman of the company following the AMT acquisition, could rightly claim to have completed a remarkable turnaround, but further adjustments to Cytec’s structure and operations were in the offing as the late 1990s drew to a close. The specialty chemicals market was rapidly consolidating, and Cytec was expected to take advantage of the acquisition candidates created by the consolidation. In a potential prelude to a future acquisition, Cytec sold its bulk molding compounds business in November 1998, which included a manufacturing, sales, and laboratory facility in Ohio. Looking ahead, the company was expected to increase its international business, as the era of Lilley’s management succeeded Cytec’s formative years under the guidance of Fry.
Cytec Fiberite Inc.
“All Cyanamid Chemicals in Cytec Unit,” WWD, December 22, 1992, p. 6.
“AmCy To Spin Off Cytec to Public,” Daily News Record, September 17, 1993, p. 9.
Chang, Joseph, “Cytec Industries Is Attractive as Potential Takeover Candidate,” Chemical Market Reporter, March 9, 1998, p. 1.
Hunter, David, “Lessons Learned,” Chemical Week, February 1, 1995, p. 4.
Kiesche, Elizabeth S., “Cytec Industries Gets Down to Business,” Chemical Week, March 30, 1994, p. 26.
McCurry, John, “Cytec Sells Acrylic Fiber Biz,” Textile World, February 1997, p. 23.
Simon, Ellen, “Cytec Industries of West Paterson, N.J., To Buy Aerospace Materials Firm,” Knight-Ridder/Tribune Business News, August 26, 1997, p. 82.
Wood, Andrew, “Cytec Builds Confidence; Pleasing Investors—and Employees,” Chemical Week, January 15, 1997, p. 24.
—Jeffrey L. Covell