Two of the country's largest plastics compounders announced a merger this month, and Wall Street yawned. On its face, the planned combination of M.A. Hanna Co. of Cleveland and Geon Co. of Avon Lake, Ohio, contains all the elements Wall Street investment firms want in a merger — size, promised cost savings and little production overlap. At a May 8 news conference, executives with the two companies used all the right language of the New Economy, peppering their speeches with promises of "synergies" and "cross-selling opportunities."
Still, the merger barely caught the market's attention, with shares of Hanna and Geon essentially unmoved from their prices before the deal was announced. So, is this another example of traders' disregard for Old Economy companies amid their continued preoccupation with technology issues, or are there questions about the deal itself?
The answer appears to be "yes" to both questions.
"Perhaps the only people that care about the plastics industry right now are us plastics analysts," mused Richard O'Reilly, an analyst who follows both companies for New York-based credit rating agency Standard & Poor's Equity Group.
"I don't mean to sound like Rodney Dangerfield, but what do these plastics companies have to do to earn some respect?" O'Reilly asked. "I mean, this merger is a big, big deal, one of the largest we've seen in this industry for years."
Denis Amato agrees — to a point.
"You've got little Internet companies out there going public that are generating more interest than a billion-dollar plastics merger," said Amato, chief investment officer at Maxus Investment Group of Cleveland, which owns shares in both companies.
Amato said the market's ho-hum reaction to the merger so far has more to do with the companies' industry, specialty chemicals, than with the deal itself. Still, he noted that questions regarding the deal's implementation remained unanswered. For example, the two companies promised to achieve $50 million in "synergies" through 2002, but weren't specific about how those cost savings would be derived.
"These companies need to tell the Street where they're going to get these `synergies,' " Amato said. "Until they do, you won't see much movement in their stocks."
The lack of details frustrated Timothy Killeen, a director at Preferred Rubber Compounding Corp. in Barberton and former president of Hanna's rubber compounding division.
"I kept looking for something that would indicate where they would generate new [revenue] growth," said Killeen, who is a longtime shareholder of Hanna. "I'm still looking."
Saul Ludwig, an analyst with McDonald Investments Inc. in Cleveland, said enthusiasm for the deal also was dampened when investors learned it was a stock swap rather than a cash purchase.
Ludwig said rumors had been circulating for more than two years that Hanna might be the subject of a takeover by a better-managed competitor.
"You had some investors who were holding [Hanna] stock with the hope that someone would come in and offer a premium" to buy the company above its current stock price, he said. "To the extent that didn't happen, then this was a disappointment to those shareholders."
Under the deal's terms, shareholders of Geon and Hanna will exchange their current holdings for stock in a new, as-yet- unnamed company. Officials with Geon and Hanna say the combination will create a company with an estimated market value of $1.1 billion, $3.5 billion in annual revenues, 10,000 employees and 80 plants worldwide.
Despite the deal's size, it got scant national media attention.
The Wall Street Journal ran eight paragraphs on the merger May 9, on Page C22 of its Money & Investing section, tucked well behind a similar-size story about a $104 million auction of Impressionist art at a New York department store. The New York Times expended just 120 words on the deal on Page 4 of its Business Day section.
Even the news conference, held at the Cleveland Marriott Downtown at KeyCenter on May 8, was a low-key affair. According to one count, the number of public relations staff representing the two companies outnumbered reporters by a ratio of 8-to-6. A television crew did show, but flicked off the cameras and left after the companies disclosed that the merger would not result in any major layoffs or plant closings.
Still, Scott Chaikin, chief executive officer of Dix & Eaton Inc., the Cleveland-based public relations firm that handled the merger announcement, insisted that interest in the merger should not be measured by one day's media coverage.
Chaikin noted that both Hanna Chairman and CEO Phillip Ashkettle and Geon Chairman and CEO Thomas Waltermire hit the road immediately after the news conference, meeting with institutional shareholders and analysts in New York and Boston. It probably will take several days, if not weeks, before analysts adjust their earnings models and recommendations on the stocks, Chaikin said.
"You've got to give the market some time to digest this merger before you draw any conclusions about whether or not this was well-received," he said.
McDonald's Ludwig said he believes the announcement is "by and large, positive." He noted that the two companies will have a combined market share of about 14 percent of the plastics compounding business in North America, twice as large as their nearest competitor.
That large size will give the two companies added leverage in dealing with suppliers and in expanding into foreign markets, Ludwig said.
"Size is certainly working in their favor," he said.