Hercules, Inc. president and CEO Craig Rogerson can easily recall his company’s darkest day.
The Wilmington-based chemicals manufacturer, created in 1912, had just about imploded by 2001.
“The company was paying out $300 million in interest payments alone,” Rogerson says. “We were operating right at the edge of the debt covenants we had made with the banks, which brought us to the doorstep of foreclosure. We had significant legacy liabilities due to pension obligations that were underfunded. To top it all off, we had been drawn into the then-current wave of asbestos litigation, as a result of earlier acquisitions.
“At that 2001 annual meeting, the board was considering just shuttering our doors.”
The company did not close. It instead restored fiscal viability, paid up its pension and reduced its debt. It was a remarkable comeback, but more important for Delaware, it is an example of good corporate citizenship in an environment of slash-and-burn capitalism.
Unfortunately, the story of Hercules came to an end in July, when the 96-year-old company announced its planned acquisition by Ashland Chemical.
Industry watchers were not surprised.
“A $2.5 billion dollar chemical company simply cannot exist independently in a market accustomed to explosive growth,” says former Hercules CEO Werner Brown.
Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, believes it simply made sense for Hercules to become part of a larger operation. “The company was not a consolidator itself, but one destined to become a consolidation,” Elson says. “Hercules has not been a player for a long time.”
Yet there was a time.
DuPont acquired the trade name Hercules during a consolidation of regional explosives manufacturers after the Civil War. In 1906 a former employee complained to the U.S. Department of Justice that DuPont had acquired a monopoly in the making of military smokeless explosives. In 1911 DuPont was forced to split its powder holdings. One became Hercules Powder Company in 1912.
World War I in 1914 proved to be lucrative for Hercules and drove its research into new areas of chemistry. Between the world wars, the company grew through development of cellulose-based formulations. After World War II, it expanded into manufacturing pesticides, synthetics, paper chemicals, petrochemicals and plastics.
At its peak, Hercules grew to 8,000 employees and $3.2 billion in annual sales. Yet during the merger and acquisition frenzy of the 1980s and ’90s, Hercules found its Achilles heel.
“The company had gone through a period of divesting various businesses in an effort to improve its shareholder value,” Rogerson says. “But we had reduced the company’s size to a critical mass, where we had to begin to get bigger through acquisition.”
Hercules bid unsuccessfully on a couple entities. By the time a Pennsylvania-based water treatment company, BetzDearborn, went on the market, Hercules was determined not to be outbid again.
“We actually got emotional over the deal, bid against ourselves and overpaid for Betz by 100 percent,” Rogerson says.
The company paid for Betz in cash, believing its own stock to be undervalued. Yet over the next couple of years, Hercules saw just how undervalued its stock could become when it plunged from a high of $55 to a low of $7. Then an investor and corporate raider initiated a proxy battle for control. Efforts to sell the company to a more sympathetic suitor failed. A succession of six CEOs during the period led to a showdown with the raider.
“One of those six, Bill Joyce, came in and immediately took the company off the market,” Rogerson says. “Then came the pain. In a redesign of the company’s work-process structure, he reduced the workforce by about 20 percent. Then Joyce began looking at the business units that could be sold off to generate sufficient cash to maintain operations.”
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The biggest of those units was Betz, which Hercules sold to GE in 2001—at the cost of almost 4,000 jobs. Yet from the sale, the company began making steady progress back into black. Debt that had reached $3 billion in 2001 as a result of the Betz purchase was reduced to about $800 million through the first quarter of 2008. Most important for the legacy and future of the 30,000 Hercules pensioners, the pension fund is now fully funded and secure.
“Bankruptcy would have meant abandoning our commitment to our pensioners,” Rogerson says. “That was one of the big reasons we chose not to declare it.”
That decision is a reflection of the company’s culture and commitment to its employees, Rogerson says.
“The average age of our current employees is 48, with most having 25 years or more of service,” says Rogerson, whose own 29-year career with Hercules began right out of college in 1979. “There was a feeling among us all that we could dig ourselves out.”
In accepting the fate of acquisition, Hercules pensioners remain cautiously optimistic about their security. As for Ashland, it will take over a compact and efficient facility.
There are 700 employees in Delaware: 225 at the headquarters on Market Street in Wilmington, and 475 at the Research Center off Lancaster Pike. Having begun its life in 1931 as the Experiment Station (the site was discovered by an executive riding horseback), the Research Center was renamed in 1956. It has been revitalized since 2004.
“We reduced the original footprint, which housed some 1,200 employees, to just over 450,” says Steve Prescott, head of the research unit. “With a $15 million capital investment program, we’ve reduced the number of buildings here from 50 down to 15, even as we have added some 60 new research jobs.”
Some of those jobs resulted from a consolidation of Hercules’ research facilities in Jacksonville, Florida. That action was subsidized by a $2.5 million grant from the Delaware Office of Economic Development. “Delaware made it clear they wanted us to remain, and the area is a great hub for chemical research talent,” Rogerson says.
we did to make ourselves more attractive to an Ashland were
the things we had to do anyway just to survive.”
The question is how much of that hub will remain of interest to Kentucky-based Ashland. Though spokesman Jim Vitak says the company plans to maintain a “significant presence” in Wilmington, how much of a presence is no longer under Hercules’ or Delaware’s control.
Ashland’s interest in Hercules dates to 1996, according to Vitak. “We’ve always prized Hercules’ research capabilities, as well as its international footprint in specialty chemicals.” Interest declined during the BetzDearborn debacle. It returned when Rogerson turned things around.
The irony is that a company that had so gallantly raised itself by its own bootstraps only made itself attractive to a larger enterprise. “Ashland had been looking to establish a stronger presence in specialty chemicals, which Hercules will help us achieve,” Vitak says.
Hercules operates in two major business categories. Paper Technologies supplies chemicals to the paper industry. (Developments emerge out of the company paper mill at the Research Center.) Aqualon supplies industrial and consumer specialty products, including pharmaceuticals and cosmetics.
With a new $3.8 million natural gas-fired plant that serves all the Research Center’s steam power needs, Hercules is primed to make Ashland a major player in the global specialty chemical market.
Former CEO Brown says that making a larger company out of two smaller players in the specialty chemical business just makes good sense. “Ten billion is big enough to be successful now,” says Brown.
Hercules spokesman John Riley says there is little overlap between the two companies, which should help employees and the larger community maintain an optimistic outlook.
“We hate to see our run come to an end,” says Riley, “but what we did to make ourselves more attractive to an Ashland were things we had to do anyway just to survive.”
