Ethyl Corporation

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Ethyl Corporation

330 S. Fourth Street
Richmond, Virginia 23217
U.S.A.
(804) 788-5000

Public Company
Incorporated: February 1887 as Albermarle
Paper Mfg. Co.
Employees: 10,500
Sales: $1.579 billion
Market value: $3.755 billion
Stock Index: New York Toronto

In 1962 when the Albermarle Paper Company purchased the Ethyl Corporation, a chemical company five times Albermarle’s size, the headline in the Wall Street Journal read “Jonah Swallows the Whale.” There is a consensus among the business press that Albermarle’s acquisition of Ethyl, the largest producer of anti-knock compounds for fuel, was the business coup of the decade. At the present time, Albermarle, which adopted the name of its most famous acquisition, may have another triumph with its acquisition of First Colony, a life insurance company.

The Albermarle Paper Company was founded in 1887 by a group of businessmen in Richmond, Virginia who were convinced that paper was a growth area for the 19th century. Situated by the James River, the company’s mill produced both kraft and blotter paper. The company’s early history was uneventful until 1918 when Floyd Gottwald grew impatient with his job as an assistant paymaster for the Richmond, Fredricksburg and Potomac Railways and went to work for Albermarle. By the 1940’s Gottwald was presiding over the company’s plantation-style Richmond headquarters.

Floyd Gottwald Sr. was described by Forbes magazine as a “curmudgeon” with “a passion for anonymity.” But what Gottwald lacked in congeniality he made up for in business acumen. The market for blotter and kraft paper was frequently depressed, but Gottwald knew exactly what to do in order to improve their situation. In the 1950’s, for instance, polyethylene completely replaced paper as the material of choice for launderers dry-cleaning garment bags. This would have been quite a setback to a kraft paper manufacturer like Albermarle, except for Gottwald’s positive attitude. It is not surprising that Albermarle went into plastics and began to manufacture polyethylene.

In 1962 Albermarle invested even more heavily in plastic manufacturing with its surprise purchase of Ethyl. The Ethyl Corporation was founded after the 1917 discovery that a lead additive would prevent car engines from knocking. General Motors, in partnership with Standard Oil, began to manufacture the patented additive called tetra ethyl. The additive held on to a substantial share of the market for years, even in the 1950’s when the patent expired.

Contradictory stories circulated about Albermarle’s motivation for purchasing the Ethyl Corporation. In one version, Albermarle was interpreted as wanting to buy chemicals for bleaching paper from Ethyl, and the larger company was said to reject any agreement. “That made us mad, so we waited two years and bought Ethyl for ourselves,” Gottwald was quoted as saying. In another version, Albermarle was interpreted as wanting to buy Ethyl for its ethylene, a necessary ingredient in polyethylene garment bags.

Whatever led to the purchase, it is clear that Albermarle benefited from the then prevelant anti-trust laws. The obvious potential buyers for the Ethyl Corporation were large chemical companies like Dow Chemical or Du Pont, but they were prevented from buying Ethyl for legal reasons. Standard Oil, although happy to sell its share of Ethyl, had never put its shares up for sale for just this very reason. When Standard Oil was approached by Albermarle an agreement was quickly decided upon for 200 million dollars.

Wall Street was surprised that Albermarle, a paper company with 1961 earnings of 1.8 million dollars, could raise the necessary funds. It did so with the help of four insurance companies (including Prudential), several investment houses, and Chase Manhatten Bank, each of which put up cash in exchange for notes. Albermarle immediately used Ethyl’s depreciation to reduce its 100% debt to 80%. Nonetheless, the new Ethyl Corporation had a high debt to equity ratio.

The new company was reorganized so that Albermarle Paper became a subsidiary of the company it had recently purchased. The new company derived 60% of its sales from tetra ethyl and the rest from paper and plastics. In 1963 Gottwald bought Union Carbide’s VisQueen, a major producer of polyethylene film used for food packaging. In 1966 it developed the capacity to produce plastic bottles and became a leader in the manufacture of PVC. These new acquisitions meant that Ethyl carried a burden of debt that would have been almost unthinkable in the 1970’s or 1980’s. But as one industry analyst pointed out, “In an economy where interest payments are tax-deductible, it makes sense to keep money in business rather than retire debt.”

Ethyl Corporation soon entered the European market selling its lead additives in bulk. In the first four years after Albermarle had purchased Ethyl its profits went up 80%, setting the pace for Ethyl’s subsequent growth. With the exception of an occasional year off, Ethyl has historically grown between 10 and 20% a year.

Ethyl’s acquisitions did not stop at plastics. In 1966 it bought the William Bonnel Company which made shaped aluminium and in 1967 the Oxford Paper Company became part of Ethyl. The old Albermarle Paper Company had always wanted to manufacture bleached paper; rechristened as Ethyl it owned one of the larger makers of fine printing paper and paper for books. Oxford brought with it 195,000 acres of timberland. The old Albermarle division was sold, along with Interstate Bag and Halifax Timber.

For many stock market analysts the radical, albeit successful, diversification policies of Ethyl during this period typified the business climate of the 1960’s. In the period of a few years a paper company of moderate size became a major force in markets as diverse as fuel additives, food wrap and PVC, and had substantial aluminum holdings. In the late 1960’s, however, Ethyl confronted another trend, namely, a growing concern for the environment. This lead to the eventual extinction of Ethyl’s main product—lead additives for gasoline.

In the mid-1960’s a Dr. Clair Patterson was tracing lead isotopes in the Artie and the Pacific in order to discover clues about the formation of the Earth. However, his research led him to some frightening conclusions about the present; he became convinced that air-borne lead was poisoning people. Patterson showed that urban dwellers had 50% more lead in their blood than their counterparts in rural areas. Scientist after scientist blamed leaded gasoline. Ethyl, which derived the bulk of its earnings from the leaded additives which many scientists claimed were polluting the atmosphere, was in a precarious position.

The Ethyl Corporation’s official stance was that the studies of Patterson and other like-minded scientists were incorrect. Unleaded gasoline, the company said, would require expensive changes in automobiles and refineries, resulting in severe economic repercussions. In addition, one Ethyl advertisement claimed that, “Taking the lead out of gasoline can increase more than the price. It can increase the smog.” This claim referred to the theory that inefficient, knocking engines would release more hydrocarbons than smoothly running engines which consumed leaded gas. Congress was not convinced and, in the Clean Air Act, mandated stricter emissions controls for cars. General Motors, Ethyl’s old owner, signed the death warrant for tetra ethylene by opting for a catalytic converter on new cars rather than the lead converter that Ethyl proposed. Catalytic converters, of course, run on lead-free gas.

Some chemical companies have invested in so called “mature” industries, that is, those with little growth potential. Ethyl was in what many analysts regarded as a declining industry. The price of Ethyl stock shares, by its own admission, dropped precipitously. Earnings, however, did not. This was due to the fact that lead-free gas was phased in gradually, so Ethyl had time to withdraw from its dependence on tetra ethylene. A sizable European market for its lead additives also did not hurt. Most of all, management at Ethyl had the intelligence to diversify. In 1970, for instance, the year after the decline in its stock, Ethyl bought a company that manufactured instruments to measure auto emissions. In 1971, despite a decline in lead sales, the company had a record year as paper and chemicals surged ahead. In 1975 Oxford Paper was sold because the company was expanding more towards chemicals and away from paper. The push into chemicals intensified in 1975 when Ethyl began to make detergent intermediaries, more plastic products, and dispensers for personal care products. The advent of disposable diapers was a boon—Ethyl makes the plastic lining for Pampers. The demand for anti-knock additives steadily diminished, but even so the company managed to grow, although its growth slowed to 1% during some years.

In 1981 Ethyl bought First Colony Life Insurance. At the time it made this purchase Ethyl was deriving its income primarily from specialty chemicals and fuel additives. Ostensibly, the decision to purchase a life insurance company seemed a bit odd, but in retrospect it was a wise one. First Colony was making a large amount of money by breaking all the traditional rules for selling insurance. For instance, it sold special policies to individuals in high risk groups, including diabetics and people with heart problems. Another innovation on the part of First Colony was to convince salespeople from other companies to sell First Colony life insurance when their own companies didn’t have a comparable policy. This means that First Colony didn’t have to train career agents, which was an expensive project.

Floyd Gottwald Jr., who had taken over the company from his father, defended the purchase by pointing out that it is good for a specialty chemical company to have some products that do not require expensive research and development. First Colony flourished under its new ownership; its earnings quadrupled between 1982 and 1984 from $10.8 to $39.4 million. With the addition of the newly acquired insurance company, Ethyl had a record year in 1984 as its earnings rose 25%. The company’s chemical product mix was well balanced between bromides, semiconductor chemicals, herbicides, anti-oxidents, paper chemicals and fuel additives.

Not to be defeated in its old market, Ethyl persists in selling a manganese substitute for lead as a fuel additive and has small investments in coal and oil. These last investments are referred to in the industry as “Ethyl’s revenge.”

By 1985 Ethyl’s product line had gone through a complete metamorphosis. Lead additives counted for only 10% of profits and were easily eclipsed by the company’s plastic and aluminum divisions. This former manufacturer of anti-knock compounds is now a major supplier of reusable bottle caps. It is also one of the U.S. manufacturers of ibuprofen, a pain killer now approved for over-the counter sales. Recently, Ethyl shares have out-performed almost all other chemical company shares. In the last four years the value of Ethyl stock shares have risen 364%.

In 1985 Ethyl made $117 million against a profit of $132 million the year before. This was a good showing considering that the company had an extraordinary loss of $20 million for the closing of a major fuel additive plant. Insurance was, after specialty chemicals, the company’s most lucrative division followed by plastics, aluminium and energy. In fact, the company has been so pleased with First Colony that it purchased another life insurance company named the Barclay Group, a leader in life insurance policies paid for through payroll deductions.

Ethyl has seen its major products of anti-knock additives and paper falter, yet it has managed to remain a vibrant and profitable company. It has protected itself by diversification into unfamiliar markets such as insurance, although the same radical diversification strategies pursued by Ethyl have proven disasterous for other companies. Ethyl’s success is a tribute to the way the company is run, namely, as a family business. The Gottwald family owns 17% of the stock shares, and the directors and employees own another 15%. Says one insider, “They treat the company like it is their very own, and it is.” In a 1986 feature story on executive salaries Business Week singled out president Floyd Gottwald Jr. as the most economical chairman of the board of an American company. With a $1.7 million salary his personal financial future is bound up with that of his company; he is not a corporate so to speak, who will begin a diversification strategy and not see it through to completion. This sort of personal commitment to a company has paid off handsomely for shareholders. With the chemical industry as a whole facing a quickly changing, ever-more competitive marketplace, Ethyl’s creativity and ability to adhere to long-term plans bode well for the company’s future.

Principal Subsidiaries

Capitol Products Corp.; Interamerica Terminal Corp.; William L. Bonnel Co., Inc.; Hardwicke Chemical Co.; Massie Tool and Mold, Inc.; Libby G. Corp.; Joy Corp.; Justine Shipping Corp.; First Colony Life Insurance Co.; Morgan Semiconductor, Inc.; Fiberlux Products, Inc.; Transcontinental, Coal Processing, Inc.