Compounding giants Geon Co. and M.A. Hanna Co. collided in their northeast Ohio backyards May 8, agreeing to merge and create North America's largest compounding venture. Geon's market-leading PVC compounding expertise now will be combined with Hanna's strengths in polyolefin compounds and color concentrates in a new firm with annual sales of $3.5 billion — $2.3 billion from Cleveland-based Hanna and $1.2 billion from Geon of Avon Lake. The new, unnamed company will operate 80 plants and employ 10,000 worldwide.
Officials said the firm will remain headquartered in the Cleveland area at an undetermined new site. Geon's compounding and research and development assets in Avon Lake will remain intact.
The new firm expects to save $50 million a year beginning in 2002 through savings on consolidated raw material buying and through an unspecified amount of staff consolidation. No major layoffs or plant closings are planned, according to the firms.
"This deal is right in the sweet spot for both of our strategies," said Geon Chairman and Chief Executive Officer Thomas Waltermire. "It will accelerate and expand the performance of both companies."
"Tom and I are both Ohioans, so it's neat to do something here in the Polymer Valley to lead the polymer industry," Hanna President and CEO Phillip Ashkettle said.
The deal, which could be finalized by late August, will be a cashless stock swap in which Geon shareholders will receive two shares in the new company for each existing Geon share they own, while Hanna shareholders will receive one new share for each current share. That ratio was determined by the number of shares each firm currently has outstanding, according to Dennis Cocco, Geon's vice president of investor relations.
Ashkettle, who joined Hanna in June 1999, will be chairman and CEO of the new firm. Waltermire — a 26-year veteran of Geon and its former parent BFGoodrich Co. who assumed the top spot last year — will be president and chief operating officer.
Waltermire then will replace Ashkettle as CEO in 2002 and will replace him as chairman in 2004.
The new firm will hold a market share of almost 15 percent in the U.S. compounding market, according to industry research.
Hanna has been mentioned as a merger or acquisition target since it began to encounter operating problems in late 1997. Geon has been mentioned less frequently, but the company made a major move to improve its margins in 1998 when it spun off its PVC resin assets into the Oxy Vinyls LP partnership with Occidental Chemical Co.
Geon received Oxy's PVC compounding business in that deal while retaining a 20 percent stake in Oxy Vinyls, which became North America's largest PVC maker.
Stockwise, both companies had struggled recently. Since peaking at $37 per share in mid-1999, Geon's stock retreated below $20 before rebounding, closing May 9 at $24.875. Hanna shares peaked at $30 in mid-1997, dropped below $10 in late 1999 and closed May 9 at $11.875.
The new Geon/Hanna now will be able to offer plastics processors a selection ranging from PVC to polyolefins to engineering resins.
"If you want a combination that defines the word `complementary,' this is it," Waltermire said. "There's no real overlap where we were selling competing products."
Waltermire added that Geon can gain business from Hanna's base of injection molding customers, while Hanna can do the same with Geon's extrusion-heavy customer list.
There are no immediate plans to change the combined manufacturing setup, but officials said PVC products could be made at polyolefin sites, or vice versa, to capitalize on regional market trends or proximity to customers.
Acquisitions will continue to be important in the new firm's strategy, Ashkettle said. Since the mid-1980s, Hanna made the switch from iron-ore mining to plastics compounding by making more than two dozen acquisitions.
Geon similarly built a 40 percent market share in North American PVC compounding through a series of acquisitions that followed its 1993 spinoff from BFGoodrich.
Geon's 20 percent ownership of Oxy Vinyls will be looked at after the deal is approved, as will Geon's distribution agreement with General Polymers, the Dublin, Ohio-based distributor that competes with Hanna's resin distribution unit.
"Owning part of Oxy Vinyls is less important now, but they're still our biggest raw materials supplier and technology provider, and there's a benefit in having a seat at their board table," Waltermire said.
On the distribution question, Waltermire said the new firm "isn't going to do anything overnight."
"General Polymers is still going to have an opportunity to participate with us," he said. "We're not automatically severing our ties with them."
Officials at Geon and Hanna began discussing the merger in late 1998. Ashkettle was aware of these talks when he interviewed for the Hanna job in early 1999, but talks had cooled off by the time he accepted the job and settled in.
Talks resumed after Ashkettle and Geon officials reviewed the potential of a partnership.
"My opinion as an outsider was that [a Geon/Hanna merger] didn't make sense and that Hanna needed to look at other things to do," Ashkettle said. "But when I started to analyze the situation, I realized the combined companies would have a really strong balance sheet. It started to look more attractive."
The deal's impact on Geon's and Hanna's competitors, as well as on the overall compounding industry, will be substantial, Ashkettle said.
"I think [the merger] will create some significant concern and interest in our industry about size and who you want to be aligned with," he said. "There's been a lot written by analysts about the need for consolidation. Something's got to be the catalyst and I certainly hope [the merger] is."
Stock analyst Richard O'Reilly of Standard & Poor's in New York said he "understands the rationale" for the Geon/Hanna deal and added that it could give the new firm an edge in the marketplace.
"If the logic is now that Geon and Hanna will be handling a broader product offering, that puts [other compounders] at a disadvantage," O'Reilly said.
O'Reilly added he believes the new company will hold on to its Oxy Vinyls share, but may debate keeping Hanna's "low-margin, high-product-turnover" resin distribution unit.
Although he supports the merger overall, O'Reilly pointed out that some challenges still lie ahead.
"I'm sure the average sell-side analyst is raving about this," he said. "But Hanna clearly has had some operating problems, while Geon had been running well.
"Geon must think it can straighten out those problems and Hanna needs to get away from the holding-company mentality it's had in the past."
Stock-market reaction to the deal was lukewarm in the days after the announcement. Geon's share price gained 25 cents — a jump of only 1 percent — May 8, while Hanna was flat. Geon then fell $0.325 May 9, while Hanna gained $0.0625