Get insight into the proven industrial gas success strategies and failures to avoid
Most would-be industrial gas companies started with the same challenges of market development or penetration and production and delivery.
They will have been aware that like for all small companies “cash is king” or they will have failed.
The most successful companies will have found ways to generate enough cash flow to cover operating expenses including working capital and to invest in new production and distribution facilities.
Innovation and Growth
In the early days, the successful companies will have held a tight rein on expenditure and set rigid financial targets for investment.
The classic example is Leonard Pool who founded Air Products and recognised that selling the output from a dedicated onsite production plant to a blue chip customer by contract for 15 years would allow a bank to offer his company a loan at reasonable rates.
The loan could then be used to build the plant and the cash flow from a well-executed project would reduce the borrowing needs for the next project.
This view of onsites is now commonplace but in the early years of Pool’s company it was essential to survival and growth.
You also need a bit of luck and the US governments need during and after the Second World War certainly helped the US-based company grow rather than “off-shore” companies.
Similar innovative niches helped found and grow the other major industrial gas companies and in their early days they survived by tight control and clear financial objectives.
If we fast forward to the start of the 1990’s we see a much larger group of major companies than today and a period of technology-induced economic growth that appeared to be unstoppable.
Best Performing Companies in the 90ies
At the beginning of the 1990’s the best performing company, in terms of EBIT, was Air Products running at about 18% of revenues and the worst was Nippon Sanso (now Taiyo Nippon Sanso) at around 6% but a conglomerate basically serving the Japanese market and Airgas at around 9% average serving only the US Cylinder gas market.
You will recall that in the early “naughties” there was a minor recession and the effect on the various companies was interesting.
In the early nineties, there was an overoptimistic level of capital expenditure by many companies breaking away from the former conservative view.
The capital required to meet market growth and replace outworn equipment for any company depends on the structure and markets of the company.
Onsites require most CAPEX and package gases least with bulk somewhere in between.
During the high growth period of the early nineties, companies like Airgas required about 7% whilst Air Products which was biased towards onsites required about 14%.
Obviously this does not include the gain in market share, but all companies cannot gain except slightly by converting plants owned by the end user to onsites.
Investment Roller Coaster
What the graph clearly shows is a significant overinvestment generally followed by panic and underinvestment.
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Some are worse than others;
- BOC joined the spree rather late and Messer Griesheim went way over anything reasonable.
- Linde’s peak includes the acquisitions of AGA before falling quickly back.
- The remarkable trendline is Praxair which mean and avoids the serious excesses and quickly drops back to a lower value.
- Air Products has a double hump some of which is legitimate to do with its breakthrough into hydrogen onsites for refineries and some due to overenthusiasm.
- Linde has a sharp peak in 2000 when it acquired AGA after which it drops back rapidly.
- Air Liquide also avoided the worse excesses.
Impact on EBIT
The outcome of these behaviours is shown in the impact on EBIT
- Praxair, with the strongest adherence to financial targets and he most likely to walk away from a poor current deal, improves its EBIT to overtake the previous market leader, Air Products.
- Air Products weathers the economic problems of the early “noughties”, mainly due to its higher onsite share but then gradually worsens as over investment bites into its returns.
- Air Liquide soldiers on with little change except a few cost saving programs and a consistent long-term strategy.
- BOC bounced around and failed to improve its revenues enough so its management implemented strong cost saving as its main strategy. This improved EBIT but with other factors led to its inevitable takeover by Linde in 2006.
- Linde was also inconsistent in its profits but mainly due to the acquisition of AGA, a much more service focused company, which took management time and lead to a hiatus in market strategy.
- Messer Griesheim is the textbook example of poor strategy and inconsistent financial targets that allowed overinvestment in the United States, among other factors, to drive the company into the arms of the private equity takeover by Goldman Sachs and Allianz and its eventual break up into a division of Air Liquide and a new Messer Group owned by the Messer family.
The consequences of the failure to show consistent financial strategy were shown in the share prices and their impact on the durability of the companies as independent entities.
This lesson has been driven home by recent activities such as he corporate raiders ability to change the management of Air Products simply because the company’s financial discipline had been inconsistent
2017 Esprit Associates ©