Advisory opinion letter to Mr. Sachs

(File No. 733 7002).
Opinion Letter
February 12, 1973

Dear Mr. Sachs:

This is in response to your request for an advisory opinion re­ garding the proposed acquisition of Picco by Hercules. Although the informatioil " submitted to the Commission is not wholly adequate for the Commission to render an advisory opin­ ion, the Commission wishes to inform you that it is of the present view that an investigation would not be warranted if the acquisi­ tion were consummated.

You are cautioned , however, that the Commission may initiate an investigation in the future if it has reason to believe that sub­ stantial adverse competitive effects attributable to the acquisition have resulted , or that they probably will result. By direction of the Commission.

Fourth Supplemental Letter Relative to Request

October 31, 1972
Attention .Joseph P. Dufresne , Esquire
Attorney, Offce of General Counsel

Re: Request for advisory opinion-Acquisition by Hercules Incorporated of Pennsylvania Industrial Chemical Cor­ poration (Picco) (;entlemen:

Here is the information which Joseph P. Dufresne , Esquire, in a letter dated September 26 , 1972 , requested Herbert B. Sachs, Esquire, to have Hercules submit.

Previously, we completed the "Acquiring Company Special Re­ port" (Form OMB No. 56-R0026 which we furnished to Mr. Sachs, who has delivered it to the Federal Trade Commission. We believe the information is clear , but if it isn t we shall be glad to explain it or answer any question that you may have.

*The material not classified as confidential is available fOI" inspection and copying at the Division of Legal and Public Records , 6th and Pennsylvania Avenue, Washington, D. , ,

ADVISORY OPINIONS AND REQUESTS THEREFOR 1891

As discussed at a conference with Staff Members Charles Koch Esquire , and Norman Smith, Economist, and Herbert B. Sachs Esquire, Ralph Thompson , Vice President of Picco, and George Gregory and Gerard P. Kavanaugh, Esquire , of Hercules, on October 10, 1972, we have prepared a statement as an introduc­ tion to the answers which appear below.

INTRODUCTION In consideration of the supplementary questions posed by the Federal Trade Commission relative to the acquisition of PICCO by Hercules , a com­ mon understanding of the definitions of several terms is essential to a proper interpretation of the answers to the questions. In particular, the terms resins polymer hydrocarbon , and "rosin" must be defined. Historically, a "resin " has been defined as an amorphous organic solid or semisolid of relatively low molecular weight, usually of natural origin, usually somewhat lusterous and often transparent or translucent. These natural resins can be of plant origin or animal origin. Examples of the former are "rosin " (from the pine tree), copal (from various tropical trees), dammar (from trees in Malaya), etc. A common example of a resin of animal origin is shellac, a substance secreted by the lac insect. In recent years, man-made or "synthetic" resins have been produced from a variety of raw materials. Resins are relatively low in molecular weight, usually in the 400-3000 range, melt to syrupy liquids, are brittle and low in strength, and are soluble in a variety of solvents.

Polymers " are relatively high molecular weight substances (50,000 to several milion in molecular weight) which contain repeating units , like th(, links in a chain. Each link is one molecule of the "monomer , or starting material from which the polymer is produced by chemical reaction. Hence polymers like polyethylene are made from ethylene as the monomer, poly­ styrene from styrene, etc. Since resins may also contain repeating units the molecular weight distinction is more basic. In marked contrast to resins, most polymers soften upon heating to give a molten immobile mass rather than a liquid , are generally insoluble in solM vents, and are tough with high strength, rather than brittle and weak like the resins.

Polymers are used as the source of strength in fabricated products like plastic bottles, plastic film, boxes, luggage, tubes, pipes, toys , textile fibers etc. Resins are used to modify, or to impart special properties to , the poly­ mers used in paints and protective coatings , adhesives, chewing gum , inks etc.

Despite the rather clearcut distinctions between resins and polymers in their fundamental properties and behavior , some industrial vocabulary docs confuse the issue. In the plastics industry, where polymers are molded or extruded or otherwise fabricated to finished products, the polymer molding powder or flake , prior to fabrication, is usually termed a "resin . Another confusing use of the tcrm "resin " is in describing the common phenolformaldehyde "resins" which are really pre-polymers or lower molecular weight polymers. Upon heating, these phenol formaldehyde " resins" are converted irreversibly to high melting r infusible solids. 1892 FEDERAL TRADE COMMISSIO DECISIONS

Thus , the term "resins " must be defined and differentiated from "poly­ mer , In answering the FTC questions, we are defining "resins " to mean natural or synthetic substances, either weak brittle solids or liquid products in the molecular weight range 400-3000 , which are used to modify polymers to obtain specific properties. Generally speaking, resins and polymers do not perform the same functions , hence are not fully substitutable fOT each other. The term "hydrocarbon " classically is defined as a substance containing , thereforeonly the elements carbon and hydrogen. A "hydrocarbon resin is a resin which contains only carbon and hydrogen and no other elements. (Traces of contaminants or catalyst residues do not influence this nomen­ clature.

We believe the definitions given above to be accurate and consistent with accepted terminology in the field of organic chemistry. Specific refpreJlce is made to:

a) The Condensed Che7ltl:cal DicUnnnr!j. 6 Edition, Reinhold Puhlishing Company, 1961.

b) O?' ganic Chemistry, Fieser & Fieser, D. C. Heath & Co. , 1944 and sub­ sequent editions.

c) "Rosin and Rosin Derivatives F:ncyclolH3din of Chemicnl Technology, Vol. 17, p. 475, 1968. \Vritten by H. 1. Enos and G. C. Harris of Hercules and G. \V. Hedrick, U. S. Department of Agriculture. See Attachment 1. PICCO is a producer of hydrocarbon resins by the above definitions. To the best of our kno\vledge only a few of PICCO' s products are producerl from compom nts containing significant amounts of other elements, such as oxygen. PICCO's raw materials are essentially hydrocarbons of petroleum or coal tar origin. Although these raw materials may contain components in which other elements occur, the presence of these components is normally incidental to the production of the desired final product. In addition , we believe that PICCO also purchases pure hydrocarbons , like styrene, alphamethyl styrene and vinyl toluene, which may be produced synthetically, rather than isolated from petro1eum or coal tar sources. Hercules is a major producer of rosin as a basic raw material. Rosin is an example of a natural resin which can be isolated from the Jiving pine tree (gum rosin), from pine stumps (wood rosin), or from crude tall oil (tall oil rosin), a by-product of paper production. The chief chemical constituents of rosin, regardless of source, are abietic acid and its common isomers (Figure I), all of which ure monobasic acids. As a result of the presence of the re­ active acid group, as wen as the double bond system present in many of the isomers, rosin can be chemically modified in many ways. By this means Hercules produces a line of resins termed "modified rosins , obtained by various reactions involving the double bond system present in the resin acid molecules. By catalytic dehydrogenation, Resin 731 is produced. By dimerization , Poly- pale, H.esin 8Al and Dymerex are produceel. By hydrot!­ enation , Staybelite and Foral arc produced. By reaction \vjth maleic anhydride or fumaric acid , in the classical Diel" Alder reaction, Hercules produces still other resins wJ1ich arc tri-carboxylie acids , rather than mono. carboxy1ic acids , like abietic acid and its isomers. ADVISORY OPINIONS AND REQUESTS THEREFOR 1893

The modified rosins can be further chemically converted to metal resinates by noaction with metallic oxides to yield the Pexate resins , or by esterifica­ tion 'with alcohols to yield ester resins. These products, produced by the chemical conversion of the modified rosins, are termed " synthetic resins in Hercules and industry nomenclature. (See Figure II). The term "resins/rosins , used by the Federal Trade Commission , we interpret to mean the modified rosins and synthetic resins produced by the cl,emical conversion of rosin as the basic raw material. Since rosin is itself not a hydrocarbon, neither the modified rosins nor the synthetic resins produced by Hercules aTe hydrocarbon resins as defined. Although Hercules does produce hydrocarbon polymers, such as polyethyl­ ene and polypropylene, Hercules docs not now produce a hydrocarbon resin on a commercial scale. A limited number of hydrocarbon resins are under development, for reasons to be given later.

During the period October 1961-1970, Hercules produced for sale mixed alpha, beta-pinene resins whjch would conform to the above classical defini­ tion of a hydrocarbon resin. Due to the small scale of this operation, having an annual production of 2-3::fM lbs., unit costs were high and the project was judged to be unprofitable. Production vms discontinued in 1970. Since that time , any occasional sale of these poly terpene resins by Hercules has been merely the disposal of old inventories. These resins were reported in previously submitted Federal Trade Commission Acquiring Company Special Report Form OMB No. tG-R0026 in the answer to Question 6(a) under Product Code 2861l98-0ther Derivatives of Softwood Distillation. They are not included in this report since they do not meet the definition of resins/rosins as used herein.

HERCULES' UTILIZATION OF ROSIN

To satisfy its requirements for rosin as a basic raw material , Hercules produces both wood rosin and tall oil rosin and, in addition , purchases annuaJly quantities of gum rosin , wood rosin and tall oil rosin. Of tho total rosin of all types available to Hercules in 1971, 42% was converted to resins/rosins for domestic markets. About 7.8% was sold as such mostly to Hercules' foreign affliates for production of resins/rosins, with PICCO purchasing only O.007 of the total Hercules rosin. The remaining 50';-;' of Hercules ' rosin moved to the paper industry as paper size , to mis cellancous industrial uses , and , in the form of Resin 731, to the rubber industry as an emulsifier for use in the production of synthetic rubber. The costs of the resins/rosins virtually preclude their use in paper size and in most miscellaneous industrial applications. Only the special proper­ ties of Resin ?HI, primarily its stability under polymerization conditions render it suitable on a cost/performance basis for the production of synthetic rubber.

The " resins/rosins" are sold to diverse markets including adhesives printing inks , coatings, tloor covering, food products and chewing gum floor polishes , plastic materials , distributor sales and other miscellaneous uses.

Although In certain of these applications the Hercules resins/rosins are competitive with certain hydrocarbon resins , the area of this competition 1894 FEDERAL TRADE COM MISSION DECISIONS

is relatively restricted technically, by virtue of the greater polarity and reactivity of the rosin-based resins. Hydrocarbon resins are notably non­ polar and unreactive as compared to the greater polarity and reactivity resulting from the carboxyl and ester groups present. in the rosinMbased resins. Hercules' resins/rosins compete with comparable products produced by many other manufacturers WfJO have access to rosin as H raw material (see Question 8. (a)).

PICCO resins compete with those of other producers who rely prjmarily upon the hydrocarbon raw materials available from petroleum, coal tar and other similar feed streams. We believe PICCO's chief competitors in hydro­ carbon resins to be Nevile, Velsicol, Reichhold , Goodyear, Amoco , Schenectady and Eastman and potentially Arco , Enjay, Monsanto, Dow and Union Carbide. Foreign competitors who are currently marketing or could market hydrocarbon resins in the U. S. are Mitsui , Arakawa , Toho, Kippon Petro­ chemical ICI Repalsa , Cledca , CdF Chimie, Faime, and VfT-Rutgers. For a more complete list of names and addresses of companies mentioned , see Attachment 2.

To the best of Hercules knowledge , instances of direct competition be­ tween Hercules resin/rosins and PICCO hydrocarbon resins are infrequent and insignificant.

HERCULES' MARKETING OF RESINS/ROSINS

In the production and sale of the resins/rosins to the Hercules markets mentioned above, areas of application have emerged in which resins/rosins appear superior to hydrocarbon resins and vice versa, As Hercules has learned more about these markets and their growth potential , it has become apparent that a resin which would combine the best features of both the resins/rosins and the hydrocarbon resins would satisfy industry needs for which no existing resins is entirely suitable. As a result of many years of experimentation with the resins/rosins, Hercules has acquired certain unique technology, much of which would be applicable to the upgrading of relatively low-cost, hydrocarbon resins. Y.le believe that this synergistic combination of resins/rosins and hydrocarbon resin technologies is capable of producing new products which would compete both with hydrocarbon resins and with other resins based upon rosin. Such new products could provide cus­ tomers in many industries with equivalent performance at lower cost. or superior performance at no increase in cost. With a broad raw material base in rosin , Hereules is in a strong position to increase competition in many marketing areas , provided that Hercules can obtain technology in the production of hydrocarbon resins. The only technology possessed Hercules in the production of hydrocarbon resins other than acquired from Mitsui (see below), is strictly limited to that required for the production of the poly terpene resins, mentioned previously, which were discontinued be­ cause of the small scale and consequent poor economics of the operation. This Hercules technology is , gencratJy speaking, not adaptable to the pro­ duction of n broad spectrum of hydrocarbon resins. In an effort to acquire the necessary technology for the production of hydrocarbon resins, Hercules has explored several avenues. An agreement with :Ylitsui Petrochemical Industries , Ltd. , dated January 1 , 1971 , granted to Hercules, for a monetary consideration , an option to use certain !imited .

ADVISORY OPINIONS A:-D REQUESTS THEREFOR 1895

Mitsui technology in the production of two types of petroleum-based hydro­ carbon resins. Hercules has exercised this option , for the European Conti nent only, by commencing construction of a plant at Middelburg, The Nether lands , for the production of these two resins. The option to Mitsui technology for the continental United States must be exercised prior to January 1, 1976, by construction of a plant in the U . 8. If Hercules does not commence suel, construction prior to that date, it will Jose all rights to the Mitsui technology for the United States. Because of the limited scope of the Mitsui technology (it pertains to only two hydrocarbon resins), Hercules at the present time has no definite plans to exercise tJle option for the U. S. (See Question fi (d) (1) below.

The acquisition of broader hydrocarbon resin technology for the United States would be of much greater potential value to Hercules. PICCO is a broad base producer of hydrocarbon resins in the U. , having been engaged in this business since the early 1930's. PICCO's proprietary technology, generated internally, is judged to be of much greater value to Hercules and to the American market than the relatively limited technology available from ::itsui. The acquisition of PICCO by Hercules would present the opportunity for a synergistic combination of t\VO technologies to produce new products which would compete both with other hydrocarbon resins and other resins/rosins, thus increasing competition in several marketing areas. TJle numbered paragraphs which follow con espond to the numbered para­ graphs in the FTC letter dated September 26 , 1972, to Herbert B. Sachs, Esquire, Baskin , Boreman , Sachs, Gondelman & Craig. 1. The state and date of incorporation and a complete description of the business and geographic area of operations of Hercules. Hercules Incorporated was incorporated in Delaware on October 18 , 1912. Its principal activity is the manufacture and sale of a widely diversified line of chemicals, allied products and morlular structures. See Exhibit 1 for a complete description.

2. A description of each class of stock of Hercules, the total number of hares of each class authorized and outstanding on December 1 , 1971. A list of all owners of record on December 1, 1971 , who owned 1( or more of each :;uch class of stock.

i) For a description of each class of capital stock of Hercules, see Exhibit 2(i).

ii) The total number of shares of each class authorized and outstanding " of December 1 , 1971:

Class A utho?'izerl Outstanding Common 000,000 192,857 Cumulative Convertible Class A 401 840 Convertible Preferrecl 000,000 Kane. iii) Rather than submit a list of owners of record on December 1, 1971 who own 1 or more oi' each class of stock, the Company is furnishing a list of stockholders owning 20,000 shares or more as of February 11 , 1972. This list covers only the holders of the Common Stock of the Company. None of the autl,orized Convertible PrefelTed has been issued. All of the outstand­

ing Cumulative Convertible Class A Stock has heen redeemed or converted as of March 15, 1972 , and none of it is currently outstanding. 3. The names and address of all offcers and directors of Hercules , and the location of all the firms' offces, plants and distribution terminals. i) For the name:- and address of all offcers and directors of Hercu!es see Exhibit 3 (0.

ii) For the location of all the firms' offces and plants , see Exhibit S(ii). jii) For the location of 348 distribution terminals, see Exhibit 3 (iii). These terminals include 13 Bulk Storage Locations, 113 Toxaphene (Insecti­ cide) Storage Tank Locations, 81 Public Warehouses, 132 Explosive Maga­ zine Locations and 9 Smokeless Powder Dealers. 4. Copies of contracts, options and agreements relating to the acquisi­ tion. Please include letters of intent, correspondence, internal memoranda summaries , minutes of meetings , reports , surveys , analyses , studies , or writings by or for Hercules, referring in any way to the purchase of assets or stock, commitment to buy stock, or the purchase of stock voting right. from Picco.

See Exhibits 4.

Prior to the September 22, 1972, conference with members of the Staff of the Federal Trade Commission , Herbert B. Sachs , Esquire , Baskin. Boreman, Sachs, Gondelman & Craig, Counsel for Picco, Mr. Robert Ostermayer Jr. , President of Picco, and Gerard P. Kavanaugh , Esquire , Assistant Gen­ eral Counsel of Hercules Incorporated , no contracts, options or agreements relabng to the acquisition of Picco by Hercules had been entered into. At the conference the representatives of Picco and HercuJes were advised in accordance with the FTC practice that an announcement of the request for an advisory opinion as described in the caption of this letter would be made public during the week of September 24. In view of this , Picco and Hercules entered into a letter of intent on September 22 , 1972. Risk analysi:­ studies of the Picco acquisition daied ,July 17 , 1972, and a memorandum dated July 26 , 1972, describing the factors affecting the outcome of the Picco risk analysis prepared by Hercules can be made available in STRICT CONFIDEXCE.

5. Original or photocopies of:

(a) All annual, quarterly and other reports mane by Hercules and its affliates to its stockholders sinc!: .January 1 , 1969. See Exhibits 5 (a).

(b) All prospectuses, solicitations or proxy statements, and statements listing securities filed by Hercules , or its affliates with any stRte corpora­ tion and/or stock exchange sinee ,January 1 , 1969. See Exhibits 5 (b).

(c) All reports and prospectuses submitted by Hercules and its affliates to the SeCl1rities and Exchange Commission since January 1, 1969. In response to this question are the following reports and prospectuses: (1) Hercule Incorporated Stock Option Plan Definitive Prospectuses dated May 5, 1969-May 8 , 1970-June 11 , 1971. and ,Tune 5, 1972. The Prospectus given each option holder is the same for the 1956 , 1962 and 1967 Stock Option Plan so we have furnished only one copy for all Plans for each year.

ADVISORY OPINIONS AND REQUESTS THEREFOR 1897

(2) Hercules Incorporated Employe Savings Plan Definitive Prospectuses dated April 30 , 1969-May 1, I970-May 27, 1971- lay 15, 1972 , and October 12, 1972.

(3) The Prospectuses included in two 8-16 Registrations. One Prospectus is dated October 25, 1971; the other July 18, 1972. (4) The following Form 8 K Current Reports for: (b)(a) MarchAugust, 1969 (j)(i) August,Kovcmber 19711971

1972 (d)(c) MarchMay, 1970 (1)(k) March,January, 1972 1972 (e) July, (m) April, (f) September, (n) July, 1972 (g) March, (0) September, 1972 19711971 (h) July, (5) Form 9-K Semi-Annual Reports for the six months ended June 30 1969, and for the six months ended June 30, 1970. (6) The following Form lO- Q Quarterly Reports ior the quarters ended: (d) March 31, 1972 (a) March 31, 1971 (b) June (e) June 30, 1972 (c) September,30, 19711971 (7) Form 10-K Annual Report of Hercules Incorporated to the Securities and Exchange Commission for the years 1968 , 1969 , 1970 and 1971. We have not included the Exhibits in 10-K Filings which are: Report for 1971­

(1) Excerpts of Minutes relating to changes in the membership of the Board of Directors of Hercules.

(2) Computation of Earnings per share of Common Stock. Report for 1970­

(1) Excerpts of Minutes relating to changes in the membership of the Board of Directors of Hercules.

(2) Computation of Earnings per share of Common Stock. (3) Hercules Pension Plan Booklet, approved December 30, 1970. (4) Composite Certificate of Incorporation of Hercules Incorporated. (5) By-Laws of Hercules Incorporated as Revised and Amended dated March 19, 1968.

(6) Specimen of Hercules Incorporated Voting Common Stock Certificate. (7) Specimen of Hercules Incorporated S1.65 Cumulative Class A Stock Certificate.

Report for 1969-­

(1) Excerpts of Minutes relating to changes in the membership of the Board of Directors of Hercules.

(2) Copy of HercuJcs Incentive Compensation Plan which was incor­ porated by reference to the February 10 , 1969 Proxy Statement. (This Plan never became operative and has been abandoned. 1898 FEDERAL TRADE COMMISSION DECTSIO:-S

Report for 1968­ (1) Excerpts of Minutes relating to changes in tJl€membership of the Board of Directors of Hercules.

(2) Copy of Bonus Plan incorporated by reference to Exhibit in 8­ Report flied for October , 1968.

(8) Form l1-K Annual Report of the Hercules Employe Savings Plan to the Securities and Exchange Commission for the years 1968. 1%9 , 1870 and 1971.

(d) All documents, including- correspondence, internal memoranda, sum­ maries , minutes of meetings , press releases, reports , surveys , analyses. "tndies, announcements and writings of any sort, including printed or type­ written matter, made by, made for, or in the possession of Hercules , or any subsidiary, affliate or stockholder, or any agent acting on beha1f (1f any of tIwm , referring in any way to:

(1) entry or expansion by Hercules into new product lines or new mal'JH ing are::3 at ilny time during the past five years, or in the future; In the related area of resins/rosins, Hercules has entered into three new product lines in the past 5 years. The three products, Resin 1977, Permalyn XA resins and the Terpalyn XC resins are shown in Exhibit G (d) (1). The sources of research information are listed under the column headed Source of Information" and can be madc available in STRICT C01'­ FIDE::CE. Resin 1977 is manufactured for internal consumption only for polyolefin fiJm manufacture. The current sales brochures for the Permalyn \ and Terpalyn XC resins are included as part of Exhibit 5 (d) (1). In addition to tIle specific ne\\' product lines/marketing areas shown in Exhibit 5(d) (1), Hercules and l\Iitsui Petrochemical Industries, Ltd. have entered into an agreement, having an effective date of January 1, 1971, under which Hercules acquired an option to certain Mitsui know-ho\v in the production of two types of l ydrocarbon resins. The agreement i marl$er! Exhibit 5(d) (1).

In addition, Hercules has studied the economics of entering the hyrlro­ carbon resin bu iness by construction of its own plant , utilizing Mitsui know-how. A risk analysis of this proposal is contained in a letter from D. A. Palmer to R. G. Fajans , rlated July 14, 1972. Thi;; nocumrnt can bE' made available in STRICT C01\FIDE)JCE.

A letter, Gregory to Leahy, ::lay 2 , 1972, qualitiyely describes the potential synergism obtainable through a combination of resin/rosin and hydrocarbon resin technologies. This document can b9 made available in STRICT CO?\­ FIDENCE.

(2) Hercules' market share , rank , or position with reference to the sale and distribution of the resins/rosins, or components thereof or products derived therefrom , \vhich are a part of its product lil'f. during the /last five yeClrs , or in the futurc:

The information required to 2nwer this question is unavailahle to Hercules. We are aware of the indentities of our competitors in th, production r,f ins/rosins , but have no means of determining Hercules market share rank or position . The resins/rosins from all producers move into a broad spectrum of marketing areas. No single supplier, to the best of our knowledge