FEATURES: By David Firn and Haig Simonian
Financial Times; London, UK, Thursday, Feb 19, 2004, p. 10

Now 57 and nursing a mug of camomile tea in a comfortable corner of his minimalist office in Basel, the chief executive of the world's largest crop protection business describes the creation of Syngenta as a military campaign. The birth of the company from the agrochemicals businesses of Novartis and AstraZeneca is widely regarded as a successful deal for the chemicals industry, where creating shareholder value via acquisitions has proved un-common.

Shares in the company have risen by 5.3 per cent since the merger was completed in November 2000 - outwardly modest but ahead of its sector at a time when the crop protection market is shrinking, and outperforming the FTSE Eurotop 300 index of leading European companies by 62 per cent. Syngenta last week announced a doubling of its annual dividend, while other chemical groups are cutting theirs.

But, in spite of these positive signs, some observers argue that questions remain. Campbell Gillies, analyst at Deutsche Bank, says the company "is delivering on a very aggressive cost-cutting programme, but the underlying business is struggling to make headway because of a market that is declining".

Syngenta was conceived in early 1999 when Novartis, the Swiss life sciences group, and AstraZeneca, its Anglo-Swedish rival, each concluded there was little real synergy between their pharmaceuticals and agrochemicals businesses.

But dreaming up the idea of spinning off the agricultural activities was one thing; successfully doing so was another.

The birth of Syngenta was unusually complicated, involving two big demergers as AstraZeneca and Novartis carved out their crop science businesses, then the cross-border amalgamation of the spin-offs to create the new Anglo-Swiss company. Further complicating matters was an 11-month antitrust investigation that forced the two sides to divest products with sales of about $340m a year, or 4.7 per cent of their combined turnover, to gain approval. With the benefit of hindsight, the delay may even have helped, says Mr Pragnell today. The regulatory barrier prevented the managements sharing commercially sensitive data. But it gave them time to get to know each other and thrash out the new company's vision and principles before getting down to running it.

The transaction created an industry leader from businesses that had been the poor relations in their previous homes. "It is better not to be in the shadow of a much larger enterprise," Mr Pragnell believes.

The crucial lesson in each case was the need for meticulous planning and intense, incessant consultation, he stresses.

McKinsey, the strategy consultancy, was engaged at Syngenta to filter commercially sensitive facts from strategic information out of what Mr Pragnell calls a "black box" of data, while the executive board focused on long-term strategy and organisational guidelines.

"We got to know each other much better than if it had gone quicker," Mr Pragnell says. A clear vision was critical. "The hardest thing is building the culture. When people understand the rules of engagement they say 'fine', because they know how it will work."

To emphasise that sense of a new start, Syngenta abandoned most of Novartis's and AstraZeneca's national headquarters in favour of fresh premises. "Where they didn't do it the merger was sticky. Simply changing the name over the door makes not a scrap of difference," Mr Pragnell says. The name itself is a mix of syn, Greek for "with", and genta, Latin for "people", created by Interbrand, the branding consultancy.

With integration now largely behind it and Syngenta on track to hit its target of SFr625m (?267m) in annual savings by 2005, Mr Pragnell can take the credit for creating a cash-generative chemicals group while some of the sector's biggest names have been downgraded to junk bond status and ICI has just cut its dividend for the third time in three years.

But, as critics charge, Mr Pragnell may find that producing real organic growth to sustain the company's earnings momentum is tough.

Syngenta can expect no help from the $25bn crop protection market. After growing rapidly in the 1960s and 1970s - thanks to the introduction of synthetic pesticides - the industry has shrunk by an average of 3.7 per cent a year since 1998. The shrinking market has forced Syngenta to backtrack on its commitment to achieving margins on its earnings before interest, tax, depreciation and amortisation of 25 per cent. So far it is struggling to earn 20 per cent and no analyst thinks it will get above 22 per cent.

After culling $300m worth of ageing products from the portfolio, Syngenta is focusing development and marketing on new, higher-margin combinations of AstraZeneca and Novartis ingredients to create what John Atkin, head of crop protection, calls his "children of the merger".

"We have 20 per cent market share and 60 per cent of the solutions," he says. The most important new products are Callisto/Lumax, a maize herbicide that garnered $200m of sales in its first six months of 2003, and Actara/Cruiser, an insecticide that analysts say also has blockbuster potential.

Syngenta's image is designed to evoke abundant, affordable and healthy food. But the company is also aiming for niche markets such as mosquito, cockroach and termite control, as well as golf courses and other sports pitches, which may have little to do with feeding the world but promise higher margins.

Antitrust authorities are unlikely to allow Syngenta to acquire one of its rivals in crop protection. That is one reason the company is planning to return $800m to investors via a combination of higher payouts and share buy-backs. But Mr Pragnell says the company is also looking at bolt-on acquisitions for its smaller seeds business. He is keen on vegetables and flowers, a market growing at 5 per cent a year.

Gene technology is not entirely off the agenda, either. The company is working on "next generation" traits, such as longer-lasting bananas, that may be more likely to win customer acceptance than pesticide- resistant crops.

Taking the science further last month, the company sold its first batch of phytase, an enzyme that helps animals break down the nutrients in grain-based feed and reduces the amount of pollution in their waste. In the long term, Syngenta plans to insert the phytase gene into the fodder-crops themselves; but for now it is fermenting phytase in genetically modified bacteria and spraying it on conventional grain. Phytase is the first product from a pipeline of industrial enzymes and catalysts for industrial processes based on genes found in extremophiles, organisms that live in extreme heat, cold or chemical stress.

David Jones, head of business development, has ambitious plans to grow complex biological medicines in genetically modified plants. He says development will cost a fraction of the $300m it costs to build the mammalian cell culture facilities currently used to make drugs such as growth hormone and fertility treatments. A team of researchers has selected six clinical projects to be started soon.

"If you think of the last century as the silicon age, the next century will be the carbon age. Just think of the things plants can make free with just sunlight," Mr Jones says. The challenge for Mr Pragnell will be to show he can sell them for a profit.