Anyone who says you can't have it all obviously didn't have lunch with Dan Smith or Bill Landuyt in July 1997.
That's when Smith, president and chief executive officer of Lyondell Chemical Co., and Landuyt, chairman and CEO of Millennium Chemicals Inc., joined their firms' petrochemical operations to create Equistar Chemicals LP, a North American behemoth with the ability to produce more than 6 billion pounds of polyethylene each year.
The pair still was thinking big seven months later when they brought Occidental Chemical Corp.'s feedstocks businesses, including more than 5 billion pounds of ethylene and propylene, into the mix.
When that deal closed in mid-1998, Houston-based Equistar was North America's largest PE maker, ranking first in both high and low density PE production and holding the No. 5 spot in linear LDPE. The firm also stood as the world's second-largest ethylene producer and third-largest propylene maker.
Equistar produces PE at six Texas plants — Alvin, La Porte, Matagorda, Pasadena, Port Arthur and Victoria — as well as at plants in Clinton, Iowa, and Morris, Ill. In polypropylene, Equistar plants in Pasadena and Morris produce almost 700 million pounds of material annually.
Lyondell, of Houston, now owns 41 percent of Equistar with Iselin, N.J.-based Millennium and Dallas-based Occidental each owning 29.5 percent.
``Each of the three owners had good assets and good positions, but each also had some strategic gaps,'' said W. Norman Phillips, Equistar's senior vice president, polymers. ``More importantly, they had the skill and financial wherewithal to structure the company in a way that doesn't leverage it in terms of high debt.''
Equistar expects to save $200 million in 1999 and $275 million in 2000 by combining the resources of the three firms. Phillips said the $50 million in savings seen in 1998 would have been more than $100 million without significant one-time costs associated with the merger.
Equistar, which employs 5,300, had sales of about $4.5 billion in 1998.
The initial Lyondell/Millennium deal won praise from industry analysts and consultants, as it combined Millennium's massive PE volume base with Lyondell's HDPE and olefin capacities. Lyondell's reputation for ``running lean'' also gave market watchers optimism that the new firm could weather the approaching downturn in the industry's profitability cycle. The addition of the Oxy holdings further strengthened the new firm's raw materials base.
``It's a unique opportunity to take hand in glove and create a very powerful combination,'' Smith said when the merger was announced.
The deal also has allowed Equistar to enjoy low-cost production and efficiencies of scale resulting from its tremendous volume. In ethylene, for example, Equistar and its related businesses consume more than half of the firm's output, thereby reducing its exposure to the ups and downs of the open market.
Equistar also has been able to align its plants more efficiently — such as its Chocolate Bayou facility in Alvin. The plant is tightly focused on making HDPE for blow molding markets.
Equistar also hoped the combined firms would be able to increase the variety of products offered to its customers. Phillips said this goal already has been achieved in the film market.
``Films is a classic example,'' he said. ``At Lyondell, the forte was high-molecular-weight and medium-molecular-weight HDPE film. At Millennium, they had a huge position in LDPE and LLDPE film. The businesses fit right in with each other and now we provide the entire gamut of film [resin] to our customers.''
Many industry observers expected Equistar to sell off some holdings, particularly some older Millennium plants, but it has yet to take such a step.
``There are opportunities across our production sites,'' Phillips said of the decision not to sell. ``In some cases, if Lyondell was running part-time on one reactor and Millennium was doing the same with another reactor, we've combined it into a single reactor and eliminated transition costs.''
Equistar's formation was prompted by a global move toward consolidations in major industries, said Don Bari, an industry consultant with ChemSystems Inc. in Tarrytown, N.Y. ``Millennium had a lot of different technologies and reactors. Forming Equistar forced both companies to align their plants better and tighten up,'' he said.
In a December 1998 report on Lyondell, investment firm Salomon Smith Barney labeled Equistar an ``industry trendsetter,'' citing it as a model for the PVC merger between OxyChem and Geon Corp.
Phillips doubts Equistar gave Oxy and Geon the idea for their merger, but he believes it helped them make their decision, particularly once Oxy joined the Equistar alliance.
Approaching economic conditions, including major overcapacity in PE, also fueled the deal, Bari said. ``The deal was made when the industry was in good shape but [Lyondell and Millennium] realized it was going into a downturn,'' he said. ``They acted ahead of it so they'd be prepared to go into poorer times. They were forced to try to be more cost-conscious.''
Equistar has been successful in taking a streamlined approach to petrochemical sales, according to consultant Balaji Singh, president of Chemical Market Resources of Houston. ``Equistar doesn't want to be the next Dow or Exxon,'' he said. ``They want to run a commodity plastics business and make money at it, and, so far, they've been successful.''