Specialty chemicals: Bed bugs and fracking are not the only things Ecolab has going for it

Specialty chemicals: Bed bugs and fracking are not the only things Ecolab has going for it

Oct 5th 2013 | ST PAUL |From the print edition


“WE ARE the nerds in the businesses nerds don’t usually bother with,” says Douglas Baker, the boss of Ecolab since 2004. Some companies, Ferrari for example, are household names even though most people have never tried their products. Ecolab, a specialty-chemicals firm, is the opposite, practically unknown to the millions of people who consume the fruits of its labour. Exterminating bedbugs is not a staple of Facebook chatter. Yet Ecolab’s hygiene-oriented nerds now play a crucial role in industries ranging from hotels, hospitals and water supply to fracking, a method of extracting natural gas. Many of these seem set for rapid growth. As a result, its share price has more than doubled since August 2011, adding more than $1 billion to the fortune of its biggest shareholder, Bill Gates.

Merrit Osborn, a former travelling salesman, founded the company in St Paul, Minnesota, in 1923. Its first product was Absorbit, an instant carpet cleaner that spared hotels the disruption of shutting down when carpets got dirty. The firm’s original name, Economics Laboratory, showed that Osborn had a broader mission: to use science to solve customers’ problems and save them money. A year after its founding the company acquired Soilax, a non-sudsing cleaning agent that worked better than soap in the newfangled dishwashers that were catching on in restaurants.

More recently Ecolab has gone global alongside customers like McDonald’s and Marriott hotels. Last year its revenues were nearly $12 billion. Almost from the start an important strategy has been to win entry into a firm, then “circle the customer” by selling additional services. It often charges more than its rivals, but reckons that customers will pay extra for money-saving chemistry and systems design. Indeed, the company’s executives seem torn over whether it is at heart a chemicals firm or a business-to-business services company. Around 25,000 of its 44,000 employees deal directly with customers, providing advice and training their workers how to dispense chemicals properly.

Ecolab’s research labs test deadly microbes from hospitals, plot ways to kill bed bugs more effectively and adjust chemical recipes to suit the water quality at customers’ multiple locations. As hotel chains vie to offer the most comfortable beds, Ecolabbers investigate how to keep sheets soft after repeated washings. Disney has sent in theme-park costumes; Ecolab’s job is to keep Mickey’s and Minnie’s outfits from fading. Redesigning customers’ processes to cut waste is a constant theme.

Yet even as the traditional laundry and washing-up businesses prospered, especially in developing countries, Ecolab abruptly transformed itself in 2011 with two big purchases. In July of that year it paid $8.1 billion for Nalco, a water and energy-services business. In October 2012 it bought Champion Technologies, a specialty-chemicals firm that treats water and wastewater from oil and gas extraction, for $2.2 billion. At first, this went down badly with investors, including Cascade, Mr Gates’s personal investment arm (which owns 11%). Ecolab’s share price fell almost 20% in the month after the Nalco deal.

Mr Baker convinced them that the previous volatility of Nalco’s share price was due to its debt burden, not the state of its underlying business, and that buying it would give Ecolab a global presence in products that its biggest clients increasingly asked for. They are starting to realise that water will no longer be abundant and free; Ecolab wants to help them adjust to a world of scarcity and price. This will involve developing antimicrobials that clean with much less water, more-efficient systems for processing waste and new ways to use non-potable “grey” water, for example in factories.

Investors bought this line to such an extent that the share price jumped on news of the Champion acquisition, even though the difficult process of integrating Nalco was unfinished. Still, it seems to have been completed without serious hiccups. Now, rather than more big purchases, Ecolab is looking for occasional bolt-on acquisitions to build on what it hopes will be organic growth of 6-8% a year.

Investors seem convinced, judging by the soaring share price. There are risks, however, especially since buying Champion significantly increased the firm’s exposure to energy. What if demand for oil is weak, which some forecasters think likely? Even then, says Mr Baker, Ecolab will do well because the use of chemicals per barrel rises as old wells are replaced by more sophisticated new ones.

Green enough?

Ecolab’s prospects will be affected by two other politically sensitive issues. One is environmentalism. The company boasts of its “green chemistry”, yet it has upset environmentalists for sometimes putting cleanliness ahead of greenness. Mr Baker concedes that it was slower to remove phosphates (a big cause of water pollution) from some products than some consumers wanted. He plays down political opposition to fracking. The Obama administration has become “pro-fracking”, at least to the extent that it will allow the industry to “make good money”, he says.

Making money on health care also depends on political goodwill in many markets. Hospitals kill many thousands of patients each year worldwide with poor hygiene. Ecolab’s hospital business has grown steadily, but would grow far faster if hygiene on wards and in operating theatres were taken as seriously as it is in, say, fast-food restaurants. In many hospitals “people aren’t even required to wash their hands,” Mr Baker says. If hospitals clean up, so will Ecolab.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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