Solutia Inc.

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Solutia Inc.

575 Maryville Centre Drive
St. Louis, Missouri 63166-6760
U.S.A.
Telephone: (314) 674-1000
Fax: (314) 694-8686
Web site: http://www.solutia.com

Public Company
Incorporated: 1997
Employees: 9,170
Sales: $2.8 billion (2001)
Stock Exchanges: New York
Ticker Symbol: SOI
NAIC: 325211 Plastics Material and Resin Manufacturing

Solutia Inc. is the former applied chemical and fiber operations of Monsanto Corporation, spun off as an independent company in 1997. After some changes to its business mix, the St. Louis-based company is focused on three strategic platforms: performance films, integrated nylon, and specialty products. The performance films platform is centered around polyvinyl butyral, a plastic interlayer used in laminated glass, which because of its increased strength has a number of applications, from windows made to withstand hurricanes to automobile windows reinforced to prevent break-ins. Integrated nylon is comprised of five business segments: carpet fibers (Solutia is North America’s largest manufacturer of nylon staple fiber to the carpet industry); nylon plastics and polymers, used to enhance such qualities as strength and fire resistance in critical components used in the auto industry and elsewhere; industrial nylon fibers, which are extremely robust with a wide range of applications, from cargo slings to dental floss; acrilan acrylic fiber, widely used in apparel, craft yarns, upholstery fabrics, as well as brake fibers; and intermediate, “building block” chemicals essential to the manufacture of pigments, herbicides, solvents, resins, detergents, fertilizers, and animal feed supplements. Specialty products is Solutia’s final business platform and includes three diverse segments: resins and additives, used in thermoset paints and coatings; industrial products, which includes high performance industrial fluids and lubricants; and pharmaceutical services, which help drug companies to develop manufacturing processes for new drug candidates.

Formation of Monsanto: 1901

Monsanto’s founder, John Francisco Queeny, worked as a purchaser for wholesale drug house Meyer Brothers Drug Co. for 30 years before establishing his own business in St. Louis, Missouri, in 1901. Alluding to his wife’s maiden name, Olga Méndez Monsanto, he formed Monsanto Chemical Works and began to manufacture the artificial sweetener saccharin, soon followed by caffeine and vanillin. Because of World War I, Monsanto became more heavily involved in the chemical industry, which had long been dominated by Germany and other European combatants, who could no longer supply U.S. needs. The company was able to successfully find a way to produce the antiseptic phenol as well as the vital ingredient in aspirin, acetylsalicyclic acid. In the years after the war, Monsanto changed its name to Monsanto Chemical Company and went public to fuel expansion, then in 1928 Queeny’s son Edgar took over the business and by way of acquisitions moved the company into the manufacture of phosphorus and plastics. Nonetheless, it became the largest aspirin manufacturer in the country, a distinction held until the 1980s. In the 1930s Monsanto bought into detergent manufacturing as well as resin production. Monsanto’s ability to make further gains on European competitors was again aided by another world war. In addition to producing such important wartime materials as phosphates and inorganic chemicals, Monsanto made a vital contribution to the war effort by developing styrene monomer, used to produce a synthetic form of rubber.

Expansion After World War II

In the post-World War II economic boom, Monsanto became involved in grass fertilizer, helping to maintain the rising number of suburban lawns, then in the 1950s it began to produce urethane foam, used in the interiors of the automobiles so eagerly bought by American consumers. Monsanto also produced its first herbicide, Randox. Edgar Queeny retired in 1960, and under new leadership the company established an agricultural chemicals division. By the time it shortened its name to Monsanto Company in 1964 the company encompassed eight divisions. With the rise of environmental concerns in the 1960s, Monsanto and its chemical products began to come under fire. The legacy of one of the company’s oldest products, polychlorinated biphenyls, better known as PCBs, would one day haunt Solutia.

Monsanto had a 40-year monopoly on PCBs, which had a number of applications, found in such products as paints and adhesives, and used to lubricate machinery as well as insulate transformers, capacitors, and electrical equipment. Monsanto began manufacturing PCBs in 1935 in an Anniston, Alabama plant. Although later scientific studies would reveal that high concentrations of PCBs might cause cancer, birth defects, and nerve disorders, by 1951, according to court documents, the company was aware that PCBs were a toxic substance. Later in the decade the U.S. Navy rejected the use of PCBs in hydraulic fluids in submarines because government tests using rabbits indicated toxicity. The fact that in 1955 Monsanto took steps to protect the workers at the Anniston plant was a tacit admission that PCBs were dangerous. Nevertheless, no one communicated that threat to the people who lived nearby. Other company memos indicated that Monsanto executives appeared more concerned with the potential of lost sales than the health of its neighbors. In 1966 a company researcher deposited 25 healthy fish into a local Anniston creek: within 10 seconds none could swim, and after four minutes all were dead, many absent their skins. Nonetheless, it would be another six years before the Anniston plant was closed, and more than ten years before Monsanto halted PCB production entirely—two years before a national ban took effect in 1979. While General Electric would be forced to dredge the Hudson River in a $500 million effort to clean up PCBs in New York, Monsanto managed to avoid a major cleanup of Anniston, due to Alabama’s minimal environmental protection laws.

Monsanto was caught up in other controversies in the 1970s and 1980s. Along with other companies it was sued over its manufacture of agent orange, a defoliant used in the Vietnam War, which allegedly caused permanent damage to a high number of soldiers. The matter was settled out of court in 1984 when Monsanto and seven other defendants agreed to pay $180 million. Although Congress had created a Superfund during the Carter administration to clean up polluted sites in the United States, several years passed before President Reagan was pressured into signing an $8.5 billion reauthorization act, funded by a surcharge on the chemical industry. Monsanto now began to shift its focus to biotechnology, a far less regulated industry in which the company had already scored some positive research results. In 1982, for instance, Monsanto scientists were the first to genetically modify a plant cell. The company then demonstrated its commitment to the development of biotech products by investing $150 million to construct a genetic engineering lab in Chesterfield, Missouri. By 1990 Monsanto was very much committed to biotechnology, but it was the Monsanto Chemical Co., a $4 billion business, that was generating the cash needed to support the research & development required in the life sciences, as much as 8 percent of the company’s operating budget.

Spinoff of Chemical Business: 1997

Monsanto’s chief executive, Richard J. Mahoney, was instrumental in shifting the company’s focus to the life sciences, but his successor, Robert B. Shapiro, who took charge in March 1995, was even more committed to the biotech side of the business. In 1996 Monsanto acquired interests in biotech companies Calgene, Ecogen, and DeKalb Genetics, as well as a pair of biotech research firms. Also, in early 1996 Monsanto began to market its first biotech products, a herbicide-tolerant soybean and insect resistant cotton. Several months later, as the first crops were ready to be harvested, it was clear that the genetically engineered strains had outperformed expectations. It was in October 1996 that Shapiro surprised employees as well as outside observers when he announced that Monsanto might sell off its core business, the chemical operations, in order to refashion itself as a pure life-sciences company. By the end of the year, he indicated that Monsanto would spin off the chemical side as a separate public company. According to trade publication Chemistry and Industry, “The rationale for the split was familiar: chemical margins are too low and they depress the share price. Life sciences deliver higher returns and increase shareholder value. Monsanto wanted to become a global leader in agricultural biotechnology and healthcare.”

Named to head the spinoff was the longtime executive vice-president in charge of chemicals at Monsanto, Robert Potter. To name the new company he formed an employee team, which also canvassed input from customers and investors. The word “Solutia” was coined in order to convey that the company was committed to “transforming the ordinary into the indispensable through chemistry.” While Potter assembled his management team he was also involved in the process of determining the makeup of the spinoff. In order to maximize value for Monsanto shareholders, the composition of Solutia was skewed in favor of the parent corporation. The spinoff inherited ten business units, with annual revenues in the $3 billion range, instantly ranking Solutia among the nation’s top 25 chemical companies. Excluding joint ventures, it would operate 24 manufacturing facilities in five countries, with a worldwide workforce of 8,800. But Solutia also assumed more than $1 billion in debt, another $900 million by taking on 70 percent of Monsanto’s retirement liabilities, and another $200 million in environmental liability. As a result, Solutia was slated to open with a $300 million negative book value. Because it was imperative that Potter and his team take charge on day one, they prepared a 30-month plan. Although they were given a challenging balance sheet to manage, they hoped to take advantage of a friendly rivalry with the parent corporation and encourage their workers to show their ex-colleagues that the wrong part of Monsanto had been spun off. Moreover, after many years of watching their profits used to support the life science operations, veterans of the chemical division were pleased to see that the profits they earned were finally reinvested in their businesses.

Company Perspectives:

Solutia uses its world-class skills in applied chemistry to create solutions for customers whose products are used by consumers every day.

In September 1997 Solutia was spun off from Monsanto, with Monsanto shareholders receiving one share of Solutia for every five shares of Monsanto. Potter immediately initiated a cost-cutting program, including the elimination of some 600 jobs, and took steps to shed some of the company’s heavy debt load. He also instituted a research and development strategy that differed from the biotech-oriented Monsanto: All resources would target specific customer needs. In general his 30-month plan proceeded smoothly and ahead of schedule, but by June 1998 Potter was frustrated by the company’s lagging stock price. In early 1999 he considered a merger with Eastman Chemical and Cytec Industries, but Solutia’s low-priced stock made it a poor currency and the deals were ultimately scuttled. In April 1999 Potter stepped down as CEO, replaced by John Hunter, the 30-month plan essentially completed a year ahead of schedule. Debt was reduced by nearly $500 million, employment trimmed by 1,000, and the company was able to buy back 7 percent of its outstanding stock. Although revenues in 1998 declined by 4 percent over 1997, net income improved by 57 percent, or nearly $250 million, the result of cost-cutting measures. Despite the strong results, investors remained skeptical about Solutia, questioning how long it could sustain earnings by merely controlling expenses. The company needed to generate organic growth, but it was clear to management that external expansion would also be necessary in order to achieve a goal of becoming a $5 billion company within five years.

After operating within Monsanto, which in recent years had been selling off chemical interests rather than buying them, Solutia’s management had to reacquaint itself with the merger and acquisitions process. In April 1999 it made its first deal, the $200 million purchase of CPFilms, Inc. a leading maker of window film and other high-tech film products used in the automotive and construction industries. Solutia then lost out on acquiring NSC Technologies, Monsanto’s fine chemical unit. Later in the year Solutia acquired Vianova Resins, makers of coating ingredients for the automotive and industrial sectors, paying $640 million. Although eager to grow the company, Solutia’s management also demonstrated that it was not willing to overpay and lapse into a high debt position. Ideally the company was looking for a “fourth leg,” a new area of business to complement its existing operations. At the same time, it was taking steps to move some of its lower-growth businesses, such as rubber chemicals and phosphorus, into joint ventures.

As Solutia entered 2000, its management team was becoming increasingly frustrated with the performance of its stock, which was selling at just seven times earnings. On the heels of the Vianova Resins acquisition, in fact, the price of Solutia shares dropped 15 percent. Partially explaining investor skepticism was the uncertainty caused by Potter unexpectedly stepping aside as chairman in September 1999, Hunter assuming that role as well as chief executive. Whatever the reasons for the lack of investor confidence, Hunter made it clear that he was more than willing to sell the company or take it private in order to increase shareholder value. In the meantime, Solutia continued to divest itself of non-core assets and looked to add new businesses. In February 2000 it established a Pharmaceutical Services Division by acquiring CarboGen Laboratories, followed by the March purchase of AMCIS AG. While Solutia was able to increase net sales in 2000 to nearly $3.2 billion, net income fell to $49 million. The following year saw revenues drop to $2.8 billion and the company posted a $59 million loss.

Despite poor results in 2001, Solutia’s stock price maintained its value in the second half of the year. In early 2002, however, litigation involving the decades-old manufacture of PCBs in Anniston, Alabama, would have a debilitating effect on the company’s stock. Even before the trial began, the price fell by 28 percent on the strength of a Washington Post article that summarized the case, despite management’s insistence that it had reserves in place to deal with the matter, but the situation would grow even worse. With the law firm of high-profile attorney Johnnie Cochran, famous from the O.J. Simpson murder case, representing the mostly poor black plaintiffs, the upcoming trial was sure to attract media attention. In February an Alabama jury found Monsanto and Solutia guilty of property damage for 17 plaintiffs, which opened the door to the next phase of litigation, which would take at least a year to complete. The price of Solutia stock continued to drop, so that by the autumn of 2002 the company had shed $800 million in its market capitalization. Although Solutia’s fundamental strengths did not appear to warrant such a valuation, the market was clearly uncomfortable with uncertainty surrounding the company. With litigation continuing indefinitely, Solutia faced many more months of challenges and was unlikely to regain investor confidence in the near term.