SAUDI TAKEOVER OF GE PLASTICS FLIES UNDER RADAR

By Diane M. Grassi

The announcement on May 21, 2007 that the largest public company in the Middle East, by market value, would be acquiring a division of the world’s second-largest corporation, by market value, and based in the United States, could not have been any less publicized. But in the world of corporate governance, the largest transaction ever completed in the Persian Gulf, seemingly trumps all laws of reason.

However, there is little precedence established for a foreign owned totalitarian government controlled corporation acquiring a corporate entity in the U.S. Such brings us to the General Electric Co. and the sale of its GE Plastics, based in Pittsfield, MA. It has been one of its most successful divisions for over half a century. It includes numerous U.S.-based manufacturing plants and research and development offices, with additional locations spanning 20 countries. Employees total nearly 11,000 worldwide, with several thousand located in the U.S. New operational control, however, will be via offices in Saudi Arabia.

The Saudi Basic Industries Corporation, known in the Middle East as SABIC, is one of the world’s 10 largest petrochemical manufacturers and is 70% owned by the Saudi Arabian government, controlled by the Royal Saudi Kingdom and 5 other states of the Gulf Cooperation Council, including private Middle Eastern investors.
It employs approximately 17,000, worldwide, and shortly expects to be the new owner of GE Plastics in the U.S.

After GE Plastics was put on the market in January 2007, it got bids from Apollo Management, Inc., a U.S.-based private equity firm as well as Bassell, a Netherlands-based Access Industries plastics maker. Both proposed bids of GE Plastics were upwards of $10 billion. But it was the Saudi Arabian’s offer of $11.6 billion in cash and the promise of future energy ventures with its parent company, GE, which gave SABIC the upper hand in the acquisition of GE Plastics.

Wall Street portfolio managers will liken those opposed to this deal, still pending approval by the U.S. government through the Committee on Foreign Investments in the U.S. (CFIUS), as protectionist, nativist and alarmist. And the U.S. has seen propositions like this before recently, such as the Bush Administration’s desire in 2005 to allow foreign ownership of U.S. airlines; the proposal by the People’s Republic of China’s state-owned CNOOC in the summer of 2005 to acquire UNOCAL of California, the ninth largest oil company in the U.S.; Dubai Ports World, of Dubai Holding, a United Arab Emirates (UAE) government-owned corporation, and its buyout of the United Kingdom corporation, Peninsular and Oriental Steam Navigation Co. (P&O), for its port operations of six major U.S. East Coast ports in early 2006.

All of the aforementioned never came to pass, after much Congressional and public opposition, although the Bush Administration promises to revisit foreign airline ownership. However, Dubai Holding, the same UAE controlled company yearning to takeover U.S. ports was successful just months later in 2006 in acquiring the U.S. operations of Doncasters Group Ltd., a UK company based in Connecticut, and a manufacturer of precision aircraft engine parts for U.S. military and commercial aircraft engine parts manufacturers, like its competitor, GE Aviation.

GE claims that the prohibitive cost of petroleum, especially over the past year, has necessitated its sale if its plastics division, as it requires petrol for the manufacture of plastics and its various composites and resins. And although GE made a fair profit in 2006, it fell short of its 10% projected goal.

Less important to GE Plastics, however, is that there has been nothing firmly documented by SABIC, other than through verbal overtures, that they will continue to maintain GE plants in the U.S. According to SABIC CEO, Mohamed Al Mady, “We have no other plans at this time.” On the other hand he notes, “SABIC’s intention is to grow globally.” At least one of the U.S. plants is non-union, that being the one located in Selkirk, NY and over the long haul questions remain as to whether or not SABIC will move all operations to Saudi Arabia, closer in proximity to its oil fields, or to China where it currently has petrochemical operations.

Questions must also be asked when it comes to the rights and wages of American workers, who will take directives not just from a Chairman of the Board but from the Saudi Royal Kingdom, which presently restricts the rights of women in the workplace in Saudi Arabia. They are only allowed to work, and in limited industries, provided permission is granted by a male relative. And although technically Saudi Arabia must obey U.S. laws pertinent to ownership of a corporation located in the U.S., cultural differences steeped in a totalitarian regime practicing Shariah law may not properly translate to the American way of life.

Additionally, SABIC would have to adhere to the regulations of the Environmental Protection Agency (EPA), such as the 1980 Superfund Law, holding corporate toxic waste polluters accountable. Such requirement is non-existent in Saudi Arabia or China. GE Plastics was mandated to clean up the PCB’s in the Housatonic River in Massachusetts and GE the Hudson River years ago, both fighting the federal government for years until a settlement was reached with the EPA and the U.S. Department of Justice in 2005. Ongoing completion and monitoring of said cleanup still remains in both bodies of water. But will SABIC fulfill GE Plastics’ obligations?

Founded in 1930 as a division of GE, GE Plastics arose from the initial results of Thomas Edison’s experiments with the use of plastic filaments in the electric light bulb as early as 1893, followed by the success of its Bakelite® synthetic plastic created in 1909. The plastics industry, however, primarily blossomed after former GE CEO, Jack Welch, assumed control of the plastics division in 1960 and with the birth of its world famous patent Lexan ® polycarbonate.

GE Plastics specializes in plastic polymers, plastic composites and insulating resin polycarbonates, among others, used in both government and commercial sectors in nearly every industry including building and construction, transportation, aviation, auto body manufacture, defense, law enforcement, healthcare, telecommunications and computer and semi-conductor technologies. And it is doing business in such lucrative and specialized areas which SABIC opines. While its consumer product contracts are extensive, they are but part of GE’s vast plastics’ business portfolio.

SABIC was established by Royal Decree in 1976 as instituted by King Khalid Bin Abdulaziz, and the present Saudi Kingdom or government claims it has a hands-off approach to the business operations it owns. SABIC was originally set up to operate the hydrocarbon and mineral-based industry in the Kingdom of Saudi Arabia. It has had an operation named SABIC Americas in Houston, TX, for many years, which employs 200 and where it houses the SABIC Technology Center. Details on its exact business operations in the U.S. presently, however, remain scant.

Although the polycarbonate and plastic resin composites industry has been gaining steam over the past 10 years, in light of continual rising oil costs in the U.S. and continued U.S. dependence upon oil, primarily in the Middle East, it has quickened the pace of growth over just the past two years. And with less U.S. oil refineries expected to come online in the near future, in order to mitigate high fuel costs, lighter weight components are desired for automobiles, and commercial, transport and military aircraft in their manufacture.

GE commercial and military aircraft engines have long utilized polycarbonate composites for fan blades and fan cases, since 1995 with the GE90 engine, and the soon to be released GENX engine for commercial wide-bodied jets. Composites are not only light in weight, but corrosion resistant, heat resistant and their longevity and reduced maintenance, as opposed to metal parts, are preferable. Semi-conductor technology as well as use in watercraft, such as submarines, are other examples of the use of plastic composites. The historical integration of composites used in both military and commercial aircraft engines however, originally stemmed from military aircraft engine use of polycarbonate components.

Nevertheless, financial market experts as well as political prognosticators have already decided that CFIUS will give the SABIC-GE Plastics deal its seal of approval with no national security issues at all to arise. Therefore, the deal is expected to close in the 3rd quarter of 2007. And while GE Plastics may not be a direct contractor or supplier to either government or commercial entities, it still could have national security implications.

And it does not completely dismiss the fact that the U.S. government will be dealing with the Saudi Royal Kingdom-state government as it assumes the laws and regulations of the U.S. Any contracts which GE Plastics previously had and which remain active, with either its parent company GE or directly with other corporations or government agencies, would supposedly transfer to SABIC. Such government agencies for which GE Plastics could have existing contracts with are the Department of Transportation (DOT), the Department of Defense (DOD), the Department of Homeland Security (DHS), the Federal Emergency Management Agency, (FEMA), the Federal Aviation Agency (FAA) and the National Aeronautics and Space Administration (NASA), to name but a few.

And based upon the lack of underlying history of this more than unusual corporate arrangement, a more thorough review might be warranted by CFIUS, which is an inter-agency committee chaired by the Secretary of Treasury. Rather than its routine 30-day investigative period, it could self-impose the more thorough 45-day review process. For as much as the U.S. government as well as the government’s industrial complex wishes to favor the promotion of global trade above that of national security, in an age of political correctness, the fact is, the U.S. military is engaged in two simultaneous wars in the Middle East. And it would perhaps be better to use more deliberation and discretion rather than to rubber-stamp such an acquisition.

The Exon-Florio Amendment, which emerged in 1988, amended Section 721 of the Defense Protection Act of 1950, as part of the 1988 Omnibus Trade and Competitiveness Act of 1988. The statute authorized the President of the U.S. to block or suspend a merger, acquisition or takeover by a foreign entity if there is credible evidence that a “foreign interest exercising control might take action that threatens to impair the national security” in the event existing law does not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President.”

Equally deceptive in the process, whereby foreign governments or foreign owned corporations purchase a U.S. owned entity is that they then become indirect stakeholders in U.S. public policy as well. They not only access capital gains but gain political clout on Capitol Hill too. Such opportune objectives of a foreign nation do not just begin during the corporate bidding process, however, but requires a methodology of lobbying dealmakers otherwise known on Capitol Hill as the U.S. Congress. To wit, the Saudi Arabian government spends $20 million annually to lobbying organizations and law firms representing them in order to gain exclusive access to lawmakers in advancing such financial interests or specific foreign trade policy agendas.

For example, former Secretary of State, James Baker, a senior partner in the law firm, Baker Botts, LLC, of Houston, TX, is legal representative to Saudi Prince Sultan bin Abdul Aziz, one of several Saudi persons, entities, Islamic foundations and financial institutions named as defendants in a pending lawsuit brought by the 9/11 Families to Bankrupt Terrorism.

And lastly, but no less important, in the last frontier of U.S. fire sale economics, concerns the type of financial instruments which will be used for the SABIC-GE Plastics transaction promising GE $9 million in cash, after taxes. In mid-2006, SABIC set up an Islamic finance arm to oversee its domestic Islamic bond issues. Since the United Kingdom is home to two Islamic banks, sukuks, or asset-based Islamic bonds, are readily marketed to international investors. SABIC plans to finance $2.2 billion of the GE Plastics deal by issuing bonds. The finance group and underwriters for the SABIC-GE transaction are the combined CitiGroup, Inc., HSBC Holdings Plc, Amro Holding NV and GE Capital, a division of GE, GE Plastics’ parent company. Bonds are expected to be sold in Europe and in the U.S.

Of note, is that in April 2006, Dow Jones and CitiGroup launched the first Islamic Bond Index, created specifically to assess global bonds’ compliance with Shariah investment guidelines. Shariah law dictates that such money be used for only those purposes compatible with Islam. But there are potential difficulties with such transactions in that they are specifically Shariah law compliant instruments and may conflict with U.S. law.

Presently, it has not yet been decided by SABIC if in fact it will exclusively issue Islamic bonds for the purchase. But the complexities involved in the GE Plastics sale is anything but straight forward and for that very reason is deserved of more scrutiny, analysis and caution from not only CFIUS but from the U.S. Congress.

And U.S. Congressional representatives should be far less mindful about critics’ scorn and far more concerned with their dutiful obligation to govern in the best interest of the American people and their responsibility to use foresight in order to best preserve America’s future and its assets.



Copyright © 2007 Diane M. Grassi
Contact: dgrassi@cox.net

MLB Bats Whittled Down to Uneven Playing Field

By Diane M. Grassi

As Barry Bonds comes ever closer to breaking the National Pastime’s hallowed home run record, currently held by Hank Aaron at 755, the controversy regarding illicit performance enhancing drug use, which may forever taint Bond’s entire career, does accomplish taking the focus off of Major League Baseball (MLB) and its own shortcomings.

The scrutiny which has been paid, in only just the past two years, over drug use among MLB players, while having been a black eye for MLB, is also convenient as Commissioner Bud Selig need not address myriad other issues which also play their part in preserving the integrity of the game.

For example, MLB has done little exploration into the variations in equipment over just the past 10 years or so and more specifically the wooden bat itself. A number of questions come to mind. Is it just coincidence that Barry Bonds hit 73 home runs in 2001 after he switched his bat’s wood from that of ash to a hand-lathed maple? Is the accelerated breakage of bats over the past 5 plus years due to an acutely thinning bat handle with a larger barrel and lighter weight or is it the non-discriminate MLB approval process of the making and even storage of bats that makes them more vulnerable?

Is it a coincidence that prior to 2003, MLB welcomed smaller bat makers as suppliers to MLB players but suddenly instituted an exorbitant certification fee with nearly impossible to acquire insurance liability policies for smaller operations, costing thousands upon thousands of dollars? And is it not worth taking a look at why there is such a difference in the quality of bats Hillerich & Bradsby Co., the manufacturer of Louisville Sluggers, provides only specific big leaguers, but does not do so for others? In fact, the company proudly admits it.

Preserving the sanctity of the game is multi-faceted. Although technology and safety standards over time have essentially been a beneficial reward for players, it is hard to measure the consistency of the game of MLB if issues such as bat manufacture and its own baseball operations are done on a selective and arbitrary basis. And when it ultimately impacts the way the game is played and its future records, it should be routinely examined.

Hillerich & Bradsby, although deemed the official bat of MLB, is not the exclusive supplier of bats for its players. However, it is still the number one provider to MLB with about a 60% share of its bats supply and curries favor and power, due to its longevity and stature in the history of the game, not to mention the power which is bestowed upon it by MLB, which few other manufacturers enjoy.

In 2002, there were 48 MLB bat manufacturers, and surprisingly little thought was put into the verification process in order to become a bat maker supplier of MLB bats other than for the supplier to provide a sample bat made out of a single piece of wood. But in 2003, MLB went to the other extreme. In a form letter sent to all bat makers in December 2002, MLB stated it would start requiring that they carry $10 million worth of liability insurance, and indemnify MLB, its shareholders, directors, officers, employees and agents attached to various product liability issues.

In addition, the certification fee was increased to $10,000.00 per year, necessary to provide bat makers with the privilege of selling their bats to MLB players. Since that time, although the liability coverage has been reduced to $5 million per year, it still remains prohibitively expensive for boutique manufacturers, or most other domestic suppliers other than Hillerich and Bradsby, to do business with MLB.

MLB also requires that the insurance carrier providing coverage to bat makers must have a “best rating of A-8 or better.” Carolina Clubs, a MLB certified bat maker from Florida, was nearly denied doing business with MLB, as to find a guaranteed insurance carrier of any kind in the hurricane-ridden state of Florida in the post-Katrina era is nearly impossible. However, virtually overnight in 2003, bat suppliers were whittled down to a mere 14 for that season. In 2007, there are supposedly 20-25 suppliers, although MLB makes it difficult to even corroborate such information.

According to the head of MLB Baseball Operations at the time in 2003, Sandy Alderson, “The administrative fee was originally intended to help us defray the costs of inspecting bats, approving bats and for all administrative work and testing.” MLB needed $140,000.00 to approve the bats of 14 companies?

In 1862, MLB first restricted the diameter of the barrel, requiring it not exceed 2.5 inches. It was increased in 1895 to 2.75 inches in diameter, as it remains today. 1868 saw the limit put on a length of 42 inches, as it also remains today. No weight requirements, either minimum or maximum have ever been required. With those parameters, combined with improvements in technology and players’ bat speeds, it could be argued that it is a far different game than even Babe Ruth played. For example, the Babe used a 42-ounce bat as opposed to the average weight of 32 ounces used by today’s MLB players.

Ash bats were exclusively used for decades, after hickory was phased out, until 1997 when Sam Holman of Ottawa, Canada and his Sam Bat caught the attention of then Blue Jays star player, Joe Carter. He then supposedly talked up Holman’s bats which eventually in 1999 found their way into the hands of Barry Bonds. Bonds went on a tear hitting 374 of his total home runs with the sugar maple bats from Sam Holman and broke Mark McGuire’s 1998 home run season record of 70 by besting him with his 73 in 2001.

Holman’s bats have been used by over 500 MLB players and he is expected to furnish Bonds with the bat used for his number 756. Given the proximity of Holman to some of the best maple tree forests in North America in Ottawa, Holman’s business has thrived over the past ten years, although he is selling his business in order to retire. Ash trees also hail from a northern climate, and are harvested primarily from the New York-Pennsylvania area.

The arguments over the consistency and flight of the ball with either wood are never-ending, but there are distinct differences between the two woods. Ash supposedly has more flex, but is not as heavy a wood as maple, producing a bit less flight of the ball upon impact. Additionally, ash bats have less longevity than maple bats and break more frequently and are more apt to shatter, flake and splinter upon breaking.

Sugar or rock maple, considered the finest maple for bats, are more expensive, and range in price from $70.00 -$130.00 while ash bats range between $50.00 and $75.00, yet need to be replaced more frequently than maple. Most players using maple claim that the ball travels farther off of the barrel’s “sweet spot” as opposed to ash. But because the wood itself is a heavier grade, the barrels are made slightly narrower than the ash bats in order to accommodate a lighter weight comparable to ash. And when maple bats do eventually break, they do so in large pieces as opposed to splinters.

The lack of restrictions on weight or the lack of prescribed storage care of bats by MLB, could have a profound impact on whether or not a bat breaks or explodes upon impact. Such endangers its players and spectators. Players go through an average of 60-70 bats a season. But the moisture content of the wood upon manufacture as well as in storage, whether the bat is hand-lathed or completely machine made, as well as the bat’s weight and handle diameter, could all alter the bat’s ultimate performance and longevity. Seattle Mariner, Ichiro Suzuki, for example, has his own humidor for his entire bat supply.

And why should a bat maker, such as Sam Holman, who produces several thousand bats each season to MLB as opposed to Hillerich and Bradsby's 750,000, foot a bill of $65,000.00 per year for liability insurance? The supposed interest in increasing liability insurance fees by MLB for bat makers is an easy way for MLB not to address the incessant breakage of its bats. Perhaps it is the quality of MLB bat inspectors, or a lack of a minimum quality standard of wood or the non-requirement of prescribed weight ratio of bat barrels to handles. But instead of MLB looking for a better standardization process for its bats, it would rather thrust the responsibility onto the bat makers, and thereby still leaving players and spectators at risk.

Also of note, according to Hillerich and Bradsby’s Chuck Schupp, head of its professional division, “We have a priority list of players. A lot of it is based on a personal relationship. If someone is loyal to us, we’ll take care of them.” And although players are not required to sign exclusivity contracts with bat makers, as individual teams assume all costs for players’ bats, Schupp says there is a “Louisville Slugger ‘A’ list.” It includes Alex Rodriguez, Derek Jeter, Jason Giambi, Carlos Delgado and Ken Griffey, Jr., among select others.

If star players are treated preferably by Schupp for their Louisville Slugger bats, does that mean that average or up and coming players are at a distinct disadvantage while not getting the best product from the same manufacturer? Should not MLB perhaps look into that?

And finally, unless MLB and its Commissioner is willing to look at all matters of inequity in its sport, whether it be an issue between players, between equipment manufacturers and its players, between baseball operations and its suppliers or a lack of standardization when it comes to equipment, MLB should not be permitted to point the finger exclusively at the use of performance enhancing drugs as the sole threat to the sanctity of the game. For that is far from the only difference-maker in varying performance results in the game of MLB today.

And if MLB wants to be taken seriously in preserving the integrity of the game, it must do a far better job of it rather than its present lethargic effort. For certainly, they are not fooling the fans and the fans and the players deserve better.


Copyright © 2007 Diane M. Grassi
Contact: dgrassi@cox.net