How protracted mismanagement reduced the pesticides maker touted as the second coming of Teva to heavy layoffs and, possibly, its sale to a Chinese firm.
By Yoram Gabison

Just four years ago, tycoon Nochi Dankner put his chips on Makhteshim-Agan Industries, the biggest maker of generic pesticides in the world. Today the company is in crisis, facing layoffs and a possible sale. What went wrong?

“There is opportunity, and the desire of the owners to do something huge with Makhteshim-Agan,” said Erez Vigodman, when taking over as CEO in May 2009. Seventeen months later, his opportunity has shriveled into a thankless task. His job now is to help Dankner, owner of the parent IDB group, sell the company to ChemChina and send home hundreds of Makhteshim-Agan’s 1,400 workers.

Makhteshim-Agan specializes in making generic agrochemicals – pesticides on which patents have expired. It is the biggest IDB group company operating in a purely competitive environment. Unlike other group companies such as Cellcom and Super-Sol, Makhteshim-Agan couldn’t rely on weak regulators to secure its market share: It had no inherent advantage in manufacturing raw materials like Israel Chemicals did.

To stay the world leader in generic herbicides, insecticides and fungicides, Makhteshim-Agan has to constantly beat the great multinationals in the international marketplace. Success required clever management and strategy, not contacts in government.

The fact that it’s for sale and that hundreds of jobs are being lost attests that it failed.

All that remains is to wonder what went wrong. How did the company touted as the next Teva become a burden to be shed for Dankner, one of Israel’s most influential businessmen? How did the company sink to being handled by Ofer Eini, chairman of the Histadrut labor federation, like the lowest textiles sweatshop?

Failure is usually ascribed to the CEO in charge as crisis descends. The crass, arrogant style of Avraham Bigger, Makhteshim-Agan’ chairman and its previous CEO, attracted fire.

Bigger blithely sacked the top managers who had turned Makhteshim-Agan into a multinational, forgoing decades of experience in the chemical industry. He claimed they cost too much, though he and the managers he appointed in their stead didn’t stint themselves and raked in stock options to boot. Succumbing to pressure from workers, Bigger raised pay. He also instituted efficiency measures, but didn’t put much effort into business development, and made some bad mistakes.

Vigodman inherited a company in crisis. Yet the disease took root before Bigger’s time.

Ignoring the China option

Makhteshim-Agan’s deterioration began in the late 1990s as big agrochemical companies engineered crop seeds. Scientists at Monsanto and Syngenta created soybeans, cotton and corn seeds with two sets of characteristics. One was nutrient richness – more fat, more protein.

The other characteristic sowed the seeds of Makhteshim-Agan’s trouble: resistance to nonselective pesticides – chemicals that kill off all weeds, not specific ones.

Monsanto was first to create the resistant crops. It sought to promote sales of Roundup (glyphosate is the active ingredient ). In 2000, glyphosate lost patent protection, after 25 years of being the world’s best-selling weed killer. Seeds resistant to glyphosate, called Roundup Ready, let farmers use the unselective weed killer alone, without buying other herbicides made by Makhteshim-Agan and other companies that targeted specific weeds.

Following Monsanto’s lead, other companies such as Syngenta and DuPont developed resistant seeds, changing the balance in the pesticide market. Companies making generic pesticides had been accustomed to gnawing market share from makers of brand pesticides; now they were on the defensive.

The makers of resistant seeds offered farmers a low-cost package: seeds and unselective herbicides to which the seeds were resistant. The generic agrochemical makers were forced to the only solution left to them – cutting prices and extending credit.

Profitability in agrochemicals passed to the makers of engineered seeds; their sales shot up from $75 million in 1999 to $9 billion in 2009. Meanwhile, in the last five years, the pesticide market increased by just 3%.

Makhteshim-Agan has been grappling with the technological challenge since 1998, when the company was formed by the merger of Agan, an Ashdod company making herbicides, with Makhteshim of Be’er Sheva and Ramat Hovav, which specialized in fungicides and insecticides.

The million-dollar question was strategy; whether Makhteshim-Agan would join the drive to develop engineered seeds, which would involve costs in the hundreds of millions of dollars.

Makhteshim-Agan’s board discussed allying with a strategic partner to contend with the cost and help it morph from a focused chemicals manufacturer to a riskier one oriented toward R&D.

Finally, Ilan Leviteh, CEO of the merged company, ruled against the directors and managers who preferred the cost and risk involved in joining the genetic revolution.

Leviteh stood at the head of a group of young engineers who had saved Makhteshim-Agan from collapse in the 1980s. He feared that the tremendous investment in developing engineered seeds would ruin the company, and settled for a joint investment of NIS 40 million with the Hazera investment firm in a biotechnology fund. The joint venture went nowhere. Shlomo Yanai replaced Leviteh in May 2003, but stuck to his predecessor’s policy.

Leviteh and Yanai also avoided decisive steps to cut production costs, even though the need was clear to management and owners from the start of the decade, as use of engineered seeds spread and prices of Makhteshim-Agan’s veteran products declined.

Leviteh and Yanai put off merging operations between Makhteshim and Agan; for instance, uniting their procurement and R&D, thus precluding optimal exploitation of size advantage. Nor did they fully pursue manufacturing in China, even though profit on the company’s veteran products had eroded, making manufacturing in Israel economically unwise.

These decisions, with the decision to eschew development of engineered seeds, were apparently the main mistakes that led to the company’s present straits.

No. 4 in Europe

Unlike other agrochemical companies that did produce in China, Makhteshim-Agan flirted with the idea no more. It did transfer manufacture of low-profit products to China through outsourcing, but didn’t set up a proper subsidiary or move main production. That would have helped preserve its competitive edge, softening the trauma its workers are about to experience as the market forces efficiency measures.

Instead of becoming technologically advanced and improving efficiency, Leviteh and then Yanai made moves to reduce the growing influence of Makhteshim-Agan’s technological inferiority, while taking advantage of the company’s relative advantages, which included know-how in developing and producing high-quality, efficacious and safe chemicals; expertise in meeting regulatory demands concerning the environment; and fast-tracking licensing. Makhteshim-Agan was typically first to launch generic versions of brand pesticides and could offer a basket of products that met farmers’ needs.

Generally, the moves worked well. Some were targeted responses, well timed and performed, to challenges in the business environment such as Brazil’s financial crisis in the late 1990s. Others were inconsistently managed and insufficiently invested in, and didn’t begin to touch the company’s true growth potential.

Their was one common feature: Makhteshim-Agan bought growth with money and put off the evil hour without tackling the main problem – its technology was becoming irrelevant in the long run. The end result was that the company has difficulty offering innovative products with high added value.

The company did begin to diversify its activities, taking advantage of its great chemical know-how to enter new markets characterized by little competition and high profits. It set up Lycored, which makes natural lycophene (a chemical compound that makes tomatoes red ) for the food and food-coloring industries. Lycored reached sales of $83 million a year and was more profitable than its parent company, yet its business development has been on low burn for years.

Another flop in the diversification drive, to reduce Makhteshim-Agan’s dependence on the agrochemical market, was revealed when the Tel Aviv District Court allowed publication of Makhteshim-Agan’s lawsuit against Teva Pharmaceutical Industries for $107 million.

Makhteshim-Agan claimed theft of a trade secret and violation of confidentiality. The claim revealed that the company Karma Pharm, which Lycored bought in 2004 for $2 million, had valuable knowledge. According to the claim, Yoram Sela, a former Teva executive, developed a generic version of the active ingredient in delayed-release antidepressant Effexor for Karma Pharm. But the arbitrator rejected Karma Pharm’s claim that Teva copied a formula. More interesting is that Karma Pharm had knowledge about making a drug with sales of $2.75 billion a year.

Generic Effexor was one of the biggest-ever launches by Teva, the world’s largest maker of generic drugs and the most successful Israeli company of all time. Makhteshim-Agan, meanwhile, failed to profit from Karma Pharm and Sela’s valuable knowledge.

Among Makhteshim-Agan’s best moves, which bought it valuable time, were acquisitions expanding its reach to new territories including Brazil, western and eastern Europe, and to a lesser degree Australia and the United States. That geographic dispersion is one of the things ChemChina covets.

Its geographic spread enabled Makhteshim-Agan to exploit the wave of patent expirations in the first half of the decade, covering $5 billion a year in brand pesticides.

Indeed, Makhteshim-Agan well exploited the commercial potential in the industry’s wave of consolidation. Novartis Agribusiness’ merger with Zeneca Aggrochemicals, creating Syngenta, forced the merged company to sell Makhteshim-Agan distribution rights to profitable products. Under similar circumstances, in 2001, Aventis sold Makhteshim-Agan the rights to two products with sales of $70 million a year.

Two years later, Bayer sold Makhteshim-Agan 11 products with sales of $125 million a year, for 200 million euros. These deals wrapped up Leviteh’s time as leader of the company. In 2002, Makhteshim-Agan bought the German company Feinchemie-Schwebda, enriching its product range with herbicides and fungicides for some of Europe’s biggest crops – grains and beet sugar. Makhteshim-Agan became Europe’s fourth-biggest generic seller of pesticides.

The business model becomes irrelevant

The process of acquiring companies and products gave Yanai a good basis for growth in the first half of the decade. But he and Makhteshim-Agan also had a lot of luck.

A year after his appointment, a crop disease called Asian rust erupted in Brazil. It was a fungus that attacked soybean plant leaves. The starved plants barely produced beans, and the result was leaping sales of fungicides in the world’s second-biggest agrochemical market. Makhteshim-Agan, luckily, was the only generic manufacturer with an efficient solution for rust, which boosted its sales and profits in 2004 and 2005.

In 2005, Makhteshim-Agan’s gross profit margin hit 39%, a peak never reached again. These were the facts Dankner faced when contending against Yitzhak Tshuva in May 2006 to buy Koor Industries, Makhteshim-Agan’s direct parent company, from the Bronfman family.

Dankner wanted to diversify IDB beyond Israel with a multinational like Makhteshim-Agan. He noted its short-term profit but missed the point: its vanishing business model, a problem with which Makhteshim-Agan’s managers had been wrestling for years.

Possibly the contest with Tshuva is what led Dankner to pay NIS 2.3 billion for the controlling stake in Koor, whose main asset, Makhteshim-Agan, was itself trading at a market cap of NIS 10.8 billion.

Surging commodity prices in 2007 and 2008 also did well by Makhteshim-Agan, sending agrochemical shares soaring. Makhteshim-Agan stock peaked at NIS 32, almost double its price today.

The increase in company valuations deterred Dankner from his idea of buying other agrochemical companies, too, such as Arista of Japan and Nufarm of Australia. Moreover, he didn’t take advantage of the circumstances to sell Makhteshim-Agan, even though Chinese and Indian companies were showing interest.

The boom in commodities collapsed in summer 2008. Prices turned out to be mainly a figment of speculation, not real demand. Makhteshim-Agan stock imploded, falling 68% in five months.

Then it turned out that Bigger, who had thought to handle the profitability problem through painful cutbacks, misread the market like a novice. Makhteshim-Agan stocked up on glyphosate, assuming that rising demand would lift its price. What actually happened is that the demand spurred rivals to make the chemical in China, and then the global economic crisis killed demand among farmers, who were hurting badly and cutting back on fertilizer and pest killers.

The upshot was that Makhteshim-Agan crammed its warehouses with glyphosate, which it bought dearly and had to sell at a loss. It had to write down the value of its inventory. A series of profit warnings and disappointing financial statements led Dankner to recruit Vigodman to replace Bigger in May 2009.

Poor chance of survival

Vigodman tried to address the rapid spread of engineered seeds and Makhteshim-Agan’s vanishing margins. In June 2010 he signed an agreement to buy Albaugh for a billion dollars.

Albaugh is the biggest manufacturer of glyphosate in the West. It also makes other unselective agrochemicals. That would have linked Makhteshim-Agan to the market of pesticides for engineered crops. Albaugh had plants in the United States and Argentina that would have helped Makhteshim-Agan resolve the problem of costly production in Israel and opened new segments for it in the U.S. and Brazil.

Two months of due diligence sufficed for Dankner and Vigodman. They realized that the truth at Albaugh was very different from the picture presented during negotiations and killed the deal.

Given the protracted mismanagement at Makhteshim-Agan, ChemChina’s offer to buy the firm at a company value of $2.7 billion, 60% above its market value, may be Dankner’s only chance to exit this investment that disappointed.

Makhteshim-Agan’s workers fear for their future after a sale to China. But even if it doesn’t come off, the price of the mistakes in strategy and execution will be paid by several hundred of them. Four years after IDB bought Makhteshim-Agan, its managers are out of time. There is no wave of patents expiring on the horizon. Its luck is out. After all that, it seems its chance of surviving as an independent company is very small.