Chemicals E-Markets to Blend
The two companies have had discussions about combining since as early as 2000 and more recently realized that a single company would have a greater chance of gaining a large enough volume of transactions to turn a profit, said ChemConnect CEO John Robinson. Neither ChemConnect nor CheMatch have earned a profit. But as a result of the deal, ChemConnect has moved its target date for profitable from 2003 to the end of this year.
"It always made sense," Robinson said. "The realization of both companies that drove this transaction was the appreciation that it was a lot more important to drive adoption of e-commerce in the chemical industry than to fight each other for market share."
Leif Eriksen, an analyst at AMR Research Inc., in Boston, praised the companies decision to merge. Long term, he said, two separate chemicals trading exchanges couldnt survive in the market. Even though both remained financially sound for now, the decision to join together prevented the disruption that a future collapse would have caused.
"This is probably the ideal scenario for the chemical industry and for investors," Eriksen said. "ChemConnect had always been one of the most viable and strongest e-marketplaces out there. This really does make it irrefutable."
Acquisitions are nothing new for ChemConnect, of San Francisco, which was formed in 1995. In June 2001, ChemConnect merged with industry consortia-backed exchange Envera LLC. The deal helped ChemConnect expand its offering since Envera had concentrated on facilitating system-to-system fulfillment of orders among buyers and sellers. ChemConnect had been concentrating on combining those fulfillment services with its chemicals and plastics commodities online trading floor, hosted auction capabilities, and general exchange connecting buyers and sellers.
Once completed, the CheMatch purchase will make ChemConnect the only major online exchange for trading commodity chemicals. Its nearest competitor, industry-backed consortia Elemica Inc., focuses on facilitating integration among back-end systems of member companies for ongoing buying and selling of chemicals.
The demise of energy giant Enron Corp., which filed for bankruptcy protection in December, also further consolidates online trading exchanges. Enron operates EnronOnline, which conducts trading of chemicals and plastics.
The purchase of CheMatch, of Houston, should most directly bolster ChemConnects commodity trading since that was CheMatchs focus. CheMatch also has an agreement for futures trading with the Chicago Mercantile Exchange. In 2001, the two companies combined handled $4 billion in transaction.
Robinson expects the deal to significantly boost trading of commodity chemicals and plastics overall because, prior to the combination, buyers and sellers often were dispersed among many exchanges, which could reduce the chances of a successful transaction.
"With EnronOnline being out of the picture and us pulling CheMatch and ChemConnect together, those buyers and sellers will have only one electronic platform worldwide to go to, to find trading partners, and that improved liquidity is going to increase the chance of a successful transaction," Robinson said.
As part of the purchase, ChemConnect plans to move its headquarters from San Francisco to Houston, where CheMatch is based, and to cut the number of combined employees in half. ChemConnect has 120 employees while CheMatch has 40, Robinson said. The purchase still requires shareholder and regulatory approval and is expected to be completed by the end of February. Neither company disclosed terms of the deal.