Over the past two years, big chemicals corporations seeking to improve shareholder returns by running more focused businesses have sold assets worth almost $20 billion to leveraged-buyout (LBO) firms and similar private companies.¹ Indeed, in 1999 and 2000 the value of public-to-private chemicals deals ran at about twice the total for the previous ten years.

Many people in the industry are bemused by this trend. How, they wonder, can investment bankers with no knowledge of engineering or chemicals, and with plans that seem to ignore industrial logic and strategic synergies, succeed as owners of these operations? But succeed they do. For 20 years, the total shareholder returns of publicly traded US chemicals companies have been lower than those of the S&P 500 (Exhibit 1). Meanwhile, chemicals companies owned by LBO firms delivered substantially higher returns than did their traditional counterparts—even when those returns are corrected for the LBO firms’ higher leverage.

This fact poses real threats to chemicals corporations. First, institutional investors are questioning the ability of traditional managers—the engineers and chemists who built those huge tangles of pipes and vessels in the 1960s and 1970s—to run a maturing industry. The collapse of share prices over the past...