Emerged from Bankruptcy, Chemtura Seeks Strategic Alternatives

Case Type: operations strategy; business turnaround
Consulting Firm: Deloitte Consulting final round job interview.
Industry Coverage: chemical.

Case Interview Question #00255: Our client Chemtura Corporation (NYSE: CHMT) is a manufacturer of basic commodity chemicals, specialty chemicals, polymer products and processing equipment for a variety of industries, with a single-digit market share. The company was formed in 2005 from the merger of Great Lakes Chemical and Crompton Corporation. Headquartered in Philadelphia, Chemtura employs about 6,000 people internationally and had sales of USD $3.7 billion in 2007.

Currently Chemtura possesses no other competencies or capabilities other than as a chemicals manufacturer. It recently emerged from bankruptcy reorganization and financial restructuring. Having limited access to capital, the client has asked for our help to evaluate the sustainability of their business and recommend some strategic alternatives to their current business model. How would you go about the case?

Additional Information:

• Prices for client’s chemical products are cyclical and run in seven-year cycles (peak to peak). The client is currently at the top of the pricing cycle.
• The primary chemical produced is Chemical X, of which the client produces 100,000 tons annually.
• A by-product of the production of X is the production of Chemical Y, which is produced at a ratio of 1.5 Y : 1.0 X.
• The current price of X is $150/ton. This will fall to $100/ton in 2008.
• The current price of Y is $175/ton. This will fall to $100/ton in 2008.
• Variable costs are $50 for every combined ton of X & Y. This will rise to $95 in 2008.
• Fixed costs are $20 MM.

Question #1: Keeping in mind that the client will be unable to endure any net losses, can the client survive 2008 (which will be the bottom of the pricing cycle)?

Possible Answer:

• Chemical X Revenue: 100,000 ton * $100/ton = $10 MM.
• Chemical Y Revenue: 100,000 ton * 1.5 = 150,000 ton; 150,000 ton * $100/ton = $15 MM.
• Total Revenue: $10 MM + $15 MM = $25 MM
• Variable Costs: 100,000 ton * $95/ton = $9.5 MM.
• Fixed Costs: $20 MM.
• Total Costs: $20 + $9.5 = $29.5 MM.
• 2008 Net Income = $25 MM – $29.5 MM = – $4.5 MM.

Answer: No, the client has a net loss in 2008 and cannot survive the bottom of the pricing cycle.

Note: Candidates will often be asked to perform some basic calculations during a case interview. In real client situations, consultants are frequently required to process data and make estimates in real time, without the aid of a calculator or spreadsheet. It is important not only to correctly perform the calculation (e.g., net loss of $4.5 MM), but also to understand the business implication (e.g., the client cannot survive the bottom of the pricing cycle).

Question #2: What could be the underlying reasons for the client’s inability (for the first time) to survive the trough of the pricing cycle?

Possible Answer:

It is important to consider what has changed during this cycle that may not have changed (or changed as dramatically) in previous cycles. One way to approach the question is to evaluate the sides of the revenue / cost equation.

Revenue Factors:

• The trough of the pricing cycle is deeper (lower) than ever before.
• Production volume is lower than before, thereby not providing enough income to cover the fixed costs.

Cost Factors:

• Variable costs have increased to a greater percentage of revenue than ever before.
• Fixed costs have increased — perhaps b/c of outside issues (i.e. environmental issues) requiring more expensive equipment to produce the same volumes.

Note: Questions like this help the interviewer assess the candidate’s understanding of profitability. The interviewer can evaluate the candidate’s approach to breaking down the components of profitability and identifying the underlying factors affecting the client. Having a structured approach to thinking through these factors is critical as it demonstrates logical thinking and ensures the candidate has completely thought through the problem.

Question #3: Discuss the opportunity and risks associated with each of the following strategic alternatives:
a. Acquire / move into a counter-cyclical chemicals business.
b. Provide additional products / services relevant to one or more of its key customer segments (i.e. in addition to selling X and Y, sell Products A and B, and perhaps Services C and D).

Possible Answer:

a. Acquire / move into a counter-cyclical chemicals business:

• Potential Opportunity: To balance the existing cyclical nature of the client’s core products, resulting in a potential scenario where one core product is always near the top of its pricing cycle while the other is near the bottom of its own unique cycle.
• Potential Risks: Unlikely to find a chemicals business that is purely countercyclical to the client’s existing business. Industries such as these tend to move in tandem — there may be some lag between various products, but a complete inverse of cycles is unlikely.
• To enter such a business fast enough to avoid bankruptcy in 2008 would require an acquisition in addition to any efforts to enter new markets organically. This may stretch current resource capabilities.
• Such an acquisition would require capital, which would be difficult to obtain given the dire financial situation of the client

b. Provide additional products / services relevant to one or more of its key customer segments.

• Potential Opportunity: Leverage an existing set of relationships to provide a greater share of their chemicals or chemicals-related needs. This would provide the catalyst to enter new businesses that would potentially prop up the client’s income statement while its core business is suffering through the bottom of its price cycle.
• Potential Risks: The organization has no skills or capabilities to leverage beyond its core manufacturing competencies. It is unlikely that its leadership would successfully evolve the business away from a volume focus to a relationship / service focus.
• Once again, the need to move quickly and get this strategy producing results would require a quick acquisition. This is unlikely given the client’s recent emergence from bankruptcy, poor prospects, and limited financial position.

Note: The above-listed question allows the candidate to demonstrate an understanding of strategic alternatives and formulate an approach to identifying the opportunities and risks associated with each. Consulting firms are frequently hired by clients to provide an unbiased assessment of their strategic options — thus the ability to create a logical, clear approach to such issues is a skill we look for in a candidate.

Question #4: If neither of these alternatives is viable, what strategic options would you recommend to the client?

Possible Answer:

Although there could be a number of options, a strong answer would include the following:

• Sell the company.
• Liquidate plants and other fixed assets — essentially, perform a managed bankruptcy.
• Reduced debt, improved cost structure and resolve a considerable amount of environmental and other liabilities.
• Perform some type of profitability analysis and identify plants / assets that could be shut down so that the anticipated net loss in 2008 does not occur.

Note: This question tests a candidate’s ability to develop strategic options with limited information. Consultants are often asked to identify viable options for clients with minimal direction and limited data. A strong candidate must be comfortable offering recommendations under these conditions.