Degussa Ag Hocus Focus

MORGAN STANLEY DEAN WITTER
Comment
Page 1
Equity Research
Europe
Germany
Degussa AG
Chemicals
Reuters: DHAG.FE / SKWG.FE Bloomberg: DHA GR / SKW GR
Robert Clover
(cloverr@ms.com) (020) 7513-6179
Michael Eastwood
(eastwdm@ms.com) (020) 7513-4657
David Phillips (020) 7513-4432
Anja Seyfried (020) 7513-3485
Degussa AG
Price (September 15, 2000)
Price Target
52-Week Range
Degussa-Hls
Price Target
52-Week Range
SKW Trostberg
Price Target
52-Week Range
Hocus Focus!
OUTPERFORM
September 19, 2000
Initiating Coverage
Initiating coverage on the new Degussa AG with an Outperform
Degussa AG is being formed by the agreed merger of SKW

Trostberg and Degussa-Hls.
N/A

N/A
We believe Degussa is a great early-stage restructuring story,

with opportunities to cut costs and reshape the portfolio.

Clear path to focusing product portfolio presented by merger
Three-year CAGR in earnings of 16%, on our estimates
Good earnings-growth story with meagre valuation

restructuring news flow to trigger re-rating, in our view.

Price: Abs. and Rel. to Market and Sector

FY ending Dec 31:
2
1999A1
2000E
2001E
2002E
2.33
2.29
2.86
3.27
7.29
7.74
7.81
DEGUSSA-HULS AG ORD NPV (Left, Euro)

Relative to (DAX) (Germany Benchmarked) (Right)
Relative to MSCI O/AC CHEMICALS (Right)
EPS ( )
Cash EPS ( )
6.88
60
55
50
45
40
35
30
25
Net Income ( PQ)
480
471
588
672
Pretax Profit ( PQ )

P/E2
P/E Rel to MSCI Germany (%)2
P/CE2
Price/Book2
EV/EBITDA2
Yield (%)2
EBITDA/Sales (%)
709
788
947
1,081
13.7
51
4.6
1.7
6.2
3.3
16.6
13.9
65
4.4
1.6
5.6
3.6
16.5
11.2
60
4.1
1.5
4.3
4.0
17.4
9.8
58
4.1
1.4
3.7
4.6
18.2
96
97
98
Data Source: FactSet Research Systems Inc.
160
140
120
100
80
60
40
99
00
Source: FactSet
Company Description
Degussa AG is the new company being formed by
the merger of the E.ON chemical holdings, SKW
Trostberg and Degussa-Hls. Degussa AG should
be among the worlds largest specialty chemicals
companies, with sales of 15 billion on our 2000
estimates and around 80% of its core portfolio in
market-leading positions (based on 1999 pro-forma
sales). The merged company is to be registered in
December 2000, and the new Degussa AG stock
tradeable two to three days following registration,
according to the companies.
Market Cap. ( mn)2

Market Cap. (US$ mn)2
Enterprise Value ( mn)2,3
Debt Capitalisation (12/99) (%)
Return on Equity (12/99) (%)
EPS Growth (99-04E) (%)
P/E to Growth2
Shares Outstanding (mn)
6,559
5,534
11,923
40.4
13.2
11.2
1.2
205.6
Book Value ( mn, 12/99)

Free Float (%)
1.3, 12-mth Rel. Perf (%)
Exchange Rate (US$/ )
Interest Cover (2000E)
3,790
35.5
N/A
0.84
6.3
1. Pro-forma 1999
2. Numbers based on Degussa Hls share price and Degussa AG estimates
3. Includes pension provisions
E = Morgan Stanley Dean Witter Research Estimates.
Please refer to important disclosures at the end of this report.
Page 2
Table of Contents
Summary and Investment Conclusion
Investment Positives and Concerns
Valuation
Definition of Specialty Chemicals
Sector Outlook Slowing Fundamentals
Outlook for Share-Price Performance
The Merger Process
Strategy
Management Board and Incentive Plans
Health & Nutrition
Construction Chemicals
Fine & Industrial Chemicals
Performance Chemicals
Coatings & Advanced Fillers
Specialty Polymers
Disposal Programme
Services and Corporate Centre
Current Trading
Financial Assumptions and Forecasts
Degussa AG September 19, 2000

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Summary and Investment Conclusion

Driven by the merger of the German utilities Viag and
Veba, and as part of the ongoing consolidation of the
chemicals sector, Degussa-Hls and SKW Trostberg have
agreed to merge to form Degussa AG. Veba and Viag own
majority stakes in Degussa-Hls and SKW, respectively.
Degussa AG will continue to be majority owned (64.5%)
by E.ON, according to management, leaving the group
with a 35.5% free float.
The merged company will be registered in December 2000,
and the new Degussa AG stock will be tradeable two to
three days following registration, according to the companies. Until then, investors seeking exposure to the company can do so by buying either Degussa-Hls or SKW
Trostberg shares. At the present time, the market seems to
have effectively arbitraged out any valuation differential
between the two companies, which are trading in line with
the exchange ratio of 4.4 SKW shares for each new
Degussa AG share. Degussa-Hls shares will be converted
into Degussa AG shares on a one-for-one basis, according
to the companies. It therefore seems to make very little
difference which shares investors buy, although DegussaHls is significantly more liquid than SKW Trostberg.
Degussa AG should be one of the worlds largest specialty
chemicals companies, with sales of ELOOLRQLQRQ
our estimates. The company has outlined an ambitious
restructuring programme to focus the portfolio more exclusively on specialty chemicals, which should lead to improved growth and profitability, in our view. Allied to this is
Degussa AGs sizeable M&A/disposal plan, which would
change the size of the company. While Degussa may
shrink (due to planned disposals) before it grows, we expect it will eventually approximate its current size.
We are initiating coverage on SKW Trostberg and
Degussa-Hls with an Outperform rating, as we see
15-20% upside potential to the share prices of both stocks.
industry, higher innovation potential and critical mass,

and greater purchasing power.
The creation of a more devolved business organised

along product lines (rather than legal subsidiaries)
should create a more dynamic business focused on
genuinely profitable growth.
The planned merger should improve considerably the

strategic position of the company and present very
good restructuring opportunities, in our view. We
believe the merger presents a clear path to focusing the
product portfolio.
There appears to be a valuation opportunity: the stock

looks inexpensive, on our estimates.
We estimate Degussa will achieve a three-year CAGR

in earnings of 16% on an underlying basis.
We expect Degussa to be a winner in consolidation.
Investment concerns
Restricted free float: Degussa AG will be 64.5%owned by the E.ON group, according to management,
limiting the free float to 35.5%.
The intentions of the major shareholders remain

unclear. We believe Degussa AG will continue to
command a liquidity/stock overhang discount while
E.ON remains the dominant shareholder. The
markets expectation of a possible stock overhang
may, however, depress the share price.
The management team has no track record in merger

integration.
We are uncertain about the timing and cost of the

planned disposal programme, and the resultant
acquisition strategy.
The level of profitability is low currently, but should

improve, we believe.
Investment positives
We estimate that Degussa AG would be among the

worlds largest specialty chemicals company, with
some 82% of its core portfolio holding leading market
positions (based on 1999 pro-forma sales). We believe
that size matters for specialty chemicals companies, as
this gives them better global reach in a globalising

Valuation
We have looked at the valuation of Degussa AG in a

number of ways, as follows. A valuation relative to the
market and sector; a comparison with historical valuation
trading ranges for Degussa-Hls and SKW and recent
M&A multiples; a sum-of the-parts and discounted cash
Page 4
flow (DCF) valuation; and an examination of the merger

valuations ascribed to SKW and Degussa-Hls.
Our valuations show a fair value for Degussa AG of
per share, which implies 12-month share-price targets of
IRU'HJXVVD+OVDQG IRU6.:7URVWEHUJ
Exhibit 1A
1
Degussa AG: Leading Global Market Positions, 1999

Business Segment
Health & Nutrition
Product
Application
Global Market Position
methionine
lecithin
animal nutrition
food emulsifiers and
health-promoting additives
thickeners, gelling agents for
food & confectionery products
2-3
concrete additives, tile adhesives,

heat insulation, indoor flooring and
systems (new, modernisation, repair)
pectin, carrageenane, gums

galactomannans, blends
chemicals for construction
fine chemical intermediates

alcoholates, esters, NCN chemistry
prussic acid derivatives, cyanides
starting products for agrochemicals

and pharmaceuticals
weed killers, optical brighteners,
precious-metal extraction
paper and textile bleaching
hydrogen peroxide
reactive silicones
surfactants and derivatives
superabsorbers
organic silicones
radiation-cured coatings
fabric softeners, shampoos, gels
hygienic products, diapers
polyurethane foaming agents,
ink & lacquer additives, cosmetics
colorants (pigments)
polyester resins
fumed silicas
precipitated silicas
building & industrial colorants

can & coil coatings
fine-particle filling materials
reinforcement agents for rubber
and various consumer products
rubber & beam waveguides
paints & coatings additives
tyres, rubber products, pigments
light-stable polyurethane coatings
organic silanes
matting agents
carbon black
polyurethane cross-linkers
Specialty Polymers
methacrylates
polyamide 12
special monomers
pharmaceutical polymers
transparent plastic materials (Plexiglas)

high-performance polymers
(used in auto industry, sport medicine)
plastics, lacquers, adhesives
drug coatings, biocatalysis
1. Based on pro-forma 1999 data for Degussa AG

1-2
1-2
2
1
1
1
1-2
1
1
1
1
1-2
2
2
2
2
2
2
2
Source: Company data, Morgan Stanley Dean Witter Research
Page 5
Exhibit 1B
Degussa AG: Planned Core Business Structure (1999 Profound Sales Split)1
Degussa AG
8.7 bn sales (incl. 0.6 bn from others)
Health &
Nutrition
0.8 bn
Construction
Chemicals
1.5 bn
Fine & Industrial

Chemicals
1.4bn
Performance
Chemicals
1.0 bn
Coatings &
Advanced Fillers
2.2bn
Specialty
Polymers
1.2 bn
Feed Additives
0.4bn
Germany
0.4 bn
Fine Chemicals
0.7 bn
Superabsorbents
0.4 bn
Coatings &
Colorants
0.7 bn
Methacrylates
0.3 bn
Texturant Systems
0.2 bn
Europe
0.4 bn
Bleaching &
Water Chemicals
0.4 bn
Care Specialties
0.4 bn
Aerosil &
Silanes
0.5 bn
Specialty
Acrylates
0.4 bn
Bio-Actives
0.1 bn
Americas
0.5 bn
C4 Chemicals
0.2 bn
Oligomers/
Silicones
0.2 bn
Flavors &
Fruit Systems
0.2 bn
Asia/Pacific
0.3 bn
Ex Degussa-Huls
Advanced Fillers
& Pigments
1.0 bn
Plexiglas
0.3 bn
High Performance
Polymers
0.2 bn
Ex SKW
Source: Degussa AG

Ex Degussa-Huls & SKW
Sales figures 1999 pro forma
Page 6
Investment Positives and Concerns

Investment positives
Creation of a pre-eminent global specialty chemicals

company. Degussa AG will be one of the largest specialty
chemicals companies in the world, on our estimates. The
combined SKW Trostberg and Degussa-Hls will have core
sales of over ELOOLRQWRWDOVDOHVRIRYHU ELOOLRQLQ
2000, on our forecasts, which we believe would rank it
number one in terms of size of specialty sales and number
two in terms of market value. As specialty chemicals is an
increasingly consolidating industry with a globalising client
base and a need to have critical mass to drive forward innovation to ensure growth, we think size matters. We estimate
that Degussa AG will have a market capitalisation of
billion (based on our 12-month target price of SODFLQJLW
in the top two in the global specialty chemicals industry on
that measure. We regard a large market capitalisation as a
pre-requisite for investor interest in this sector.
A more dynamic business focused on profitable growth
should result from the creation of a devolved business
organised along product lines (rather than legal subsidiaries).
The Management Board will no longer consist of divisional
heads who may in the past have wielded self-interest in
helping to allocate capital resources at a group level. Instead,
the board will comprise four people who will be further
removed than previously from the day-to-day running of the
business. This should allow any investment/divestment
decisions to be taken much more objectively than before,
driven by profitability and growth, rather than by protected
interests, and should give the business unit managers a
chance to be more entrepreneurial.
An improved cost position should result from the creation
of centralised services units whose business units will have
the ability to outsource their service requirements. Internal
service units will need to become more competitive to ensure
their livelihood.
Profitability should be enhanced by cultural change. The
devolved and decentralised style with strong business-unit
autonomy and a small leadership group of strategic thinkers
may not, on the face of it, seem that revolutionary compared
to the very conservative, strongly centralised school of
German management, which had been experienced
previously at Degussa-Hls. However, we believe the
structure proposed by management for the new Degussa AG
will be much more entrepreneurial and much more
motivating for the employees. We note that similar changes

made at Rhodia when it was floated in 1998 produced very
strong improvements in underlying business profitability.
We expect that the same will take place at the new Degussa.
Committed, clear-thinking and fast-acting management.
We have been impressed by the senior management of the
new Degussa AG. While it has no proven track record in
executing such a merger or managing a company of the size
of the new Degussa, we draw confidence from the clear and
somewhat radical strategic structure that is being proposed by
management, as well as the fast, calm and efficient manner in
which it has gone about implementing the initial stages of the
new group strategy. The key decisions have been made
within three months in order to minimise disruptions.
Degussa AG has a number of leading market positions.
Based on 1999 data, Degussa AG has leading (number one to
three) market positions worldwide in around half of its main
business units. Around 75% of SKWs portfolio is in fields
in which it has a leading position. Degussa-Hls boasts a
similar statistic: we estimate that around 75% of its portfolio
is in fields where it has leading positions. Degussa AGs
new management estimates that the company has leading
positions in 82% of its core businesses.
Exhibit 2
Degussa AG: Leading Positions by Division, 1999

Health and Nutrition
lecithin, methionine, texturant systems
concrete admixtures, underground construction systems, protection and
repair
Fine and Industrial Chemicals
a variety of specialty ingredients, such as malonester or orthoester,
hydrogen peroxide, isononanol, nitril chemistry
superabsorbents, sodium perborate, organo-modified silicones,
amphoteric surfactants
carbon black, precipitated and fumed silicas, silanes, colorant dispersions,
isophorone, derivatives, flatting agents
Specialty Polymers
specialty acrylics, plexiglas, polyamide 12, coating and reactive resins,
pharma polymers, industrial lubricants, speciality monomers
Page 7
Degussa AG should be the number-one global producer of

methionine, superabsorbents, isophorone-based chemicals,
fumed silicas, concrete additives, PU-stabilisers and texturant
systems (Exhibit 1), based on 1999 data. As portfolio
restructuring takes place, we expect the earnings and growth
quality of many of these leading positions will become apparent, helping to enhance positive share-price developments.
from restructuring to drive forward the share price before the

market holds to judge whether the management will deliver
on the new Degussa AG strategy. We expect that the
company will be able to deliver relatively easily in the early
stages of restructuring, which we think should provide
enough positive news flow and profitability uplift to drive the
share price upwards and outperformance.
Merger should improve strategic position of the company

and present very good restructuring opportunities. The
planned merger of SKW with Degussa-Hls may provide the
catalyst to drive portfolio restructuring at both businesses
further forward. Managements stated focus on key specialty
businesses should be a long-term driver of both the portfolio
and, eventually, the underlying business performance. We
believe that certain decisions, which may have been difficult
to make for political or social reasons within both SKW
Trostberg and Degussa-Hls, will be easier to make after the
merger. Degussa AGs CEO Professor Felcht has gone on
record to say that without the merger there would have been
less focus on specialty chemicals at both companies.
Soft benefits. We expect a fairly material soft benefit to

result from the integration of SKW and Degussa-Hls. The
management of Degussa AG is likely to use the merger as a
chance to make fundamental changes to the business and to
reshape the future, according to its stated ideas on leadership,
organisation and strategy. We believe that the management
and staff of Degussa AG will derive considerable commitment and motivation from this process. The preparation of
the company for the merger has engendered the involvement
of a large number of people working on projects to reshape
the company, which we believe released a wave of enthusiasm for the new entity and will give Degussa AG an element
of dynamism. The enlarged Degussa should rank among the
worlds top two to three specialty chemicals companies,
based on 1999 company data. We believe analysts and investors will to come to recognise the merger as a success story.
We believe that the planned process of restructuring and noncore portfolio disposals will provide a constant stream of
positive news flow, which, combined with the attendant
increase in profitability that we expect, should help to drive
share-price performance.
We believe that the eventual independent ownership of
Degussa AG is a further possible outcome of the Viag/Veba
merger, although the company has not stated this explicitly.
The removal of liquidity constraints and majority ownership
would be a very share-price-friendly event.
A clear path to focusing the product portfolio is presented
by the merger, in our view. We believe the planned
accretive disposals of the numerous non-core businesses
should lead to share-price appreciation through the release of
valuation discounts implicit in the share price as a result of
the markets perceived diversity of the combined portfolios.
Degussa AG has said it expects to exit businesses that in
1999 had sales totalling ELOOLRQRUZHOORYHURQHWKLUGRI
the company.
Valuation opportunity. We believe that the creation of the
new company provides an ideal value entry point to a strong
restructuring and growth story. We think our current implied
valuations of Degussa-Hls and SKW Trostberg are modest.
We expect earnings growth from restructuring to be
supported also by organic growth. However, critically, we
expect that there will be enough near-term earnings growth
Well placed to be protected from a slowdown in the US

and to benefit from a strong economy in Europe. Almost
60% of Degussa AGs sales are focused on Europe (split
roughly 50:50 between Germany and other Europe), based on
1999 pro-forma figures, which makes the company highly
geared to strong European economic conditions. The groups
exposure to the US economy remains relatively low at just
over 20% in 1999. Moreover, Degussa AGs exposure to
Asia, although accounting for only a relatively very small
part (less than 15%) of its regional portfolio, was in 1999 in
some of the fastest-growing market areas, such as functional
food and personal care. With a portfolio that contains both
early- and late-cycle recovery businesses, the company looks
well placed to profit from good economic fundamentals over
the next two years.
We estimate Degussa AG will achieve a three-year CAGR
in earnings of 16% on an underlying basis. We believe
that around 30% of Degussa AGs core portfolio is in areas
that we would characterise as having above-average growth
(for the specialty chemicals industry, which is slightly ahead
of GDP). The business units that we think have the best
growth prospects are Flavours, Texturant Systems,
Oligomers/Silicones, Fine Chemicals, Feed Additives,
BioActives and Engineering Plastics.
Of the remaining 70% of the portfolio, we estimate that 35%

of the business units have average growth prospects (Fruit
Systems, Construction Chemicals, Bleaching & Water
Chemicals, C4 Chemicals, Care Specialties, Coatings &
Advanced Fillers, Methacrylics and Specialty Acrylates).
The remaining 35%, for which we estimate below-average
growth or profitability rates, are likely to be divested (or
initially to be put into alliances) according to management.
These include dmc2, Phenolchemie, ASTA Medica,
Metallurgical Chemicals, SKW Piesteritz, Gelatin
(photographic) and Salt. If the companys stated
divestment/joint-venture plans were to go ahead, we estimate
that some 40% of Degussa AGs core portfolio would consist
of businesses with above-average growth rates and 60%
would be businesses with at least average growth rates.
Together with the proposed cost-cutting programme, this
would help underpin significant EPS growth of 67% (CAGR
of 16%) in the first three years of the merged entitys
lifetime, on our estimates.
Winner in consolidation. We believe that the planned
merger of SKW with Degussa-Hls will create a company
with sufficient critical mass not only to survive, but also to
look actively towards leading industry consolidation and
hence to be a long-term survivor in the industry. Recent
share-price underperformance among the small and mid-cap
specialty chemicals companies has created a number of good
acquisition opportunities, in our view. Both SKW Trostberg
and Degussa-Hls have strong records as integrators of
assets. We believe SKW has historically had an excellent
track record of acquiring assets at fair prices and integrating
businesses, which is a key skill for the management of a
consolidator.
Investment concerns
Restricted free float. Degussa AG will be 64.5%-owned by

the E.ON group, according to management, limiting the free
float to 35.5%. Current indications from the E.ON group are
that Chemicals continues to be a core business within its
overall portfolio. We believe that there are no plans for
E.ON to alter materially its participation in the Degussa
group for the time being, although we believe that both E.ON
and Degussa AG recognise the valuation problems associated
with having a restricted free float. In addition, we believe
there may be a risk that Degussa could lose its place in the
DAX (when converted to a free-float-adjusted weighting by
June 2002 see shaded box entitled Conversion of indices
to free-float-adjusted weighting) due to its limited free float,
which would lead to some share-price weakness as indexlinked funds exit the stock.

Page 8
Conversion of indices to free-float-adjusted weighting
On July 3, 2000, Dow Jones STOXX indices announced that

new rules will come into play governing the market index
assessment of companies with relatively low free floats.
Dow Jones STOXX indices (including STOXX50 and
EuroSTOXX50) plan to implement a free-float-capitalisation
weighting system effective September 18, 2001.
The indices will be calculated using the free-float shares of
each security in the index. STOXX has defined free-float
shares as those not held in block ownership, such as
government holdings, cross holdings from other companies
and holdings from individuals and families each more than
5% of the total number of outstanding shares. Hence, only
the most liquid shares will count towards market value as
used in index classification.
Holdings by investment companies and funds as well as
custodian holdings are not counted as block ownership.
Changes in EuroSTOXX50 should affect both Bayer and
BASF positively. According to a study undertaken by our
Quantitative Strategy team on July 7, 2000, Bayers weight
will increase from 1.08% to 1.33% and BASFs weight from
0.95% to 1.12%, given their larger free floats relative to other
constituents of the index.
Deutsche Brse indices, including DAX, will be converted
to a free-float-adjusted weighting starting June 2002. Our
Quantitative Strategy team undertook a study of existing
stocks in the DAX, in which the estimated free-float number
of each company was applied to its respective market
capitalisation. The study indicated that the weighting would
increase by (in percentage points) 1.39 for BASF 1.87 for
Bayer and 0.06 for Linde, whereas Degussa-Hls weighting
would decrease by 0.20 percentage points (from 0.5% to
0.3%), due to its lower free float relative to other constituents
of the index.
However, the free-float methodology would affect the
composition of the DAX as well as its weighting. The study
used the current composition of the DAX and made no
attempt to determine which stocks would drop out of the
index and which ones would enter.
MSCI announced in February 2000 that it would be
studying alternatives to using a full market-capitalisation
weight in its index construction, including adjusting the
weight of companies for low free float. No announcement
has been made as to whether it will modify its index
methodology, nor a timetable for implementing a new
methodology. We expect news by the year-end.
Intentions of major shareholders remain unclear. We

believe Degussa AG will continue to command a
liquidity/stock overhang discount while E.ON remains the
dominant shareholder. While chemicals are flagged as being
core to the E.ON group, we believe that the chemicals
portfolio does not sit easily with the groups energy business,
particularly in the current climate in which investors (rightly
or wrongly) seem to prefer to take their own capitalallocation decisions regarding sectoral investment, rather
than to have company managers take such decisions for
them.
As a result, we believe many diversified companies will
command a conglomerate discount, or seek to unwind such
a discount through focusing business portfolios on core
assets. We expect that in time E.ON may want to exit the
chemical assets it owns for these reasons, although the
groups management has not stated any such intentions.
The markets expectation of a possible stock overhang
would depress the share price. Investors have concerns
regarding the possibility of E.ON selling some or all of its
64.5% holding, and we believe a sale in an uncontrolled
fashion would be highly detrimental to the groups shareprice development. Nevertheless, investors are frequently
reluctant to get involved in a stock where they think there
may be a significant corporate event on the horizon, which,
while unlikely to force a substantial share-price drop, may
see the placing of a sizeable stake at a discount to the market.
However, E.ONs management has given no indication of its
longer-term intentions regarding its Degussa stake.
Management team lacks a proven track record. Degussa
AGs CEO Professor Felcht and his management team have
considerable experience in managing chemicals assets.
However, they do not have a proven track record at managing
an integration of the scale of Degussa AG completing the
transformation of the business into a genuine specialty
chemicals business and growing the resultant core. Initially
we believe investors are not likely to give the management
the benefit of the doubt, as the task of effecting a four-way
merger, managing a proposed ELOOLRQRIGLVSRVDOVDQG
making up to ELOOLRQRISODQQHGDFTXLVLWLRQVLVQRWDQ
easy challenge. We believe initial market scepticism may
lead to a depressed valuation for Degussa AG. However, we
regard this as a good opportunity for the company, as we
expect that management will be able to execute successfully
on its strategy.

Page 9
Uncertainty over timing and cost of planned disposal

programme and resultant acquisition strategy. Degussa
AG has stated publicly that it plans to dispose of businesses,
which in 1999 had total sales of over ELOOLRQDQGWRPDNH
substantial acquisitions of businesses (with sales of up to
8 billion). The planned disposals are expected to be
completed by the exit of 16 different business units, some of
which (such as SKW Piesteritz, zeolites and Phenolchemie)
have challenging operating environments, and are unlikely to
find ready buyers at high prices, in our view. The time-scale
and cost of these disposals are unclear, as is the valuecreation potential.
We have similar concerns regarding the groups stated
acquisition strategy. We are uncertain as to how Degussa
AG will ensure that acquisitions are made at value-enhancing
prices, what areas they will be in, how they will be financed
and within what time-scale they will be made. We estimate
that the planned disposals, if completed in their entirety, will
generate around ELOOLRQDQGZHH[SHFWWKDWWKH
acquisitions will probably require funds substantially in
excess of the disposal proceeds.
The current model within the specialty chemicals industry
seems to be that management overpay for strategic asset
blocks and overestimate the growth potential in these strategic assets, hence destroying shareholder value. We think the
market may worry that Degussa could follow this trend.
Lack of compelling industrial logic for the merger, in our
view. If Degussa-Hls and SKW Trostberg had been left to
their own devices, we do not believe that the merger of the
two companies would have taken place. While both
companies seem to recognise the need for size and
consolidation within the specialty chemicals industry, we
believe that their managements also recognise that portfolio
focus and industrial logic are among the most compelling
drivers in any merger situation.
Although the companys presence in many different
segments and areas may reduce the risk of being too
dependent on one specific market, there appear to be only
limited synergies between the divisions (and, even within the
divisions, synergies between the business units seem to be
limited). In our opinion, there is no obvious reason why
Degussa AG should continue to operate in all the sectors it
has an interest in currently and, while there is some overlap
in cyanide chemistry, we see no compelling industrial logic
for the merger. We believe that few business lines will be
strengthened by the addition of the two companies product
Exhibit 3
Global Specialty Chemicals Sector: Market Capitalisation

(US$ mn), September 18, 2000
8,000
7,593
7,000
5,888
6,000
5,314
5,000
4,639
4,184
4,000
4,082
3,716
Avg.
3,001
3,000
2,095
2,000
1,657
1,340
Both SKW and Degussa-Hls lack critical mass in fine

chemicals, and have stated that they want to expand their
positions in that area. With the recently announced
acquisition of BTP by Clariant, and the announced bids for
ChiRex and Catalytica by Rhodia and DSM, respectively, we
think there is a chance that some of the most attractive
1,295
1,231
1,231
1,118
1,000
He
rc
ul
es
Tr
os
tb
er
g
So
lu
tia
C
yt
ec
La
po
rt
e
SK
W
za
Lo
n
t
ia
n
IC
us
I
sa
-H
ul
s
C
ib
a
SC
De
g
A
G
sa
C
la
r
&
us
D
eg
hm
H
en
ke
l
Ha
as
Ro
Missed opportunities? As low stock-market valuations and

aggressive competition have meant that sector consolidation
is proceeding apace, we believe that the pre-merger period of
uncertainty may have kept the companies away from
exploiting possible opportunities in the M&A market.
di
a
We believe this structure will also provide a workable model

for the potential addition of further divisions/business units.
As both SKW Trostberg and Degussa-Hls are in the throes
of significant mergers, the integration of the two companies
is effectively a four-way merger. We believe that this task
will be challenging for the management of the combined
entity, and that both focus and operational effectiveness
could be held back or lost temporarily.
Investing in industrial cyclical stocks. The current

economic environment does not support a particularly
positive investment case in chemical stocks, and we believe
that overall the sector is unlikely to perform strongly in the
short term. This is a theme we develop in more detail in the
next section of this report.
ke
s
However, we believe that the management of Degussa AG

has substantially overcome these problems by implementing
a diversified culture with a small executive group of strategic
decision-makers with non-operational roles.
Level of profitability low currently. Degussa AG is

currently returning among the lower returns in the industry.
We estimate that the companys EBITDA margin will be in
the region of 14% in 2000, compared with a European
chemical sector average of around 18%. However, we expect
the group EBITDA margin to progress from a low in 1999
towards 17-18% in the medium term as the portfolio mix
continues to improve (through both rationalisation and
planned disposals) and the synergy benefits from the merger
materialise.
La
The current stock market vogue seems to be to reward

focused companies and to penalise diversified companies.
We believe asset managers prefer to take their own capitalallocation decisions regarding sectoral investment, rather
than to have company managers make such decisions for
them. Increasingly, chemical companies and life sciences
companies are becoming more rather than less focused.
We believe that the most successful fine chemicals players

will be those that are able to offer a whole tool set of
products/technologies in order to be potentially interesting
partners for the life science industry. The top players,
including DSM, Rhodia, Lonza and BTP/Clariant, appear to
offer a broad range of life science intermediates and additives
to fulfil the demands of their current partners.
G
re
at
Overly large specialty chemical businesses, which are

essentially collections of niche business units, tend not to
share economies of scale, management synergies or strong
sales synergies. We believe that over-diversification can lead
to problems of management focus. In addition, in a
diversified company it is often difficult to understand where
the true profit generators are and which businesses will drive
organic growth. Companies with poor/difficult visibility are
normally punished by investors, which is usually reflected in
their relatively low ratings.
potential targets in the fine chemicals arena may have been

snapped up already.
R
ho
lines. The main area of synergy (cyanuric chloride) accounts

for around PLOOLRQRIVDOHVDQGZLOOQHHGWREHSDUWO\
divested in order to satisfy the various competition
authorities, in our view.
Page 10
Note: Market capitalisations for ICI and Henkel are adjusted to reflect only the
specialty part of their businesses. Source: FactSet, Morgan Stanley Dean Witter
Research
Page 11
Exhibit 4
Exhibit 5
European Specialty Chemicals: EBIT Margin (%), 2000E
European Specialty Chemicals: EBITDA Margin (%),

2000E
18.00
25.0
16.00
14.00
20.0
12.00
Avg.
Avg.
10.00
15.0
8.00
6.00
10.0
4.00
2.00
5.0

IC
I
Hu
ls
A
G
us
s
De
g
ke
l
us
sa
H
en
SK
W
SC
nt
di
a
Rh
o
Ci
ba
Cl
ar
ia
rte
po
za
La
D
eg
Note: EBIT for ICI and Henkel is adjusted to reflect only the specialty part of
their businesses.
Source: I/B/E/S and FactSet Estimates for Lonza, SKW and Degussa Hls, and
Morgan Stanley Dean Witter Research Estimates
0.0
Lo
n
Hu
ls
AG
us
s
De
g
us
sa
De
g
SK
W
ke
l
He
n
di
a
Rh
o
ib
a
SC
nt
C
la
ria
C
IC
I
za
Lo
n
La
po
rt
e
0.00
Page 12
Valuation
We have looked at the valuation of Degussa AG in a
number of different ways, as follows.
1.
Valuation relative to the market and sector.
2.
(a) Comparison with historical valuation trading

ranges for Degussa-Hls and SKW; and (b) recent
chemical industry M&A multiples.
3.
(a) Sum-of-the-parts; and (b) DCF valuation.
4.
Examination of the merger valuations ascribed to

SKW and Degussa-Hls.
specialty chemicals sectors), and we have found that the

European business model is evolving in a very different
way from that in the US. The spin-off of sizeable specialty
chemicals assets from (typically) life sciences companies,
which have been run traditionally by life sciences
managers with life sciences (rather than specialty
chemicals) strategic goals, has given rise to the emergence
of a new breed of company.
1. Valuation relative to the market and sector
In valuing Degussa AG on a relative basis, we have examined four factors: which region to choose comparables
from; which comparable companies to look at; which
valuation metric to use; and what discount or premium
applies to the rest of the sector. The net result of these
approaches is our 12-month share-price target of IRU
Degussa AG, IRU'HJXVVD+OVDQG IRU6.:
Trostberg.
Region
We believe investors should focus on Europe as the

primary region for Degussa AGs valuation. We have
examined the business models in the US and Europe (the
two principal regions in the world where there are sizeable
Exhibit 6
Global Specialty Chemicals Sector: Sales (US$ mn),

2000E
The European companies are, on the whole, much larger

than their US counterparts (by a factor of two or three), but
have lower levels of profitability, as their asset bases have
not been managed as aggressively as in the past (see
Exhibit 7). Consequently, the European companies have
been actively restructuring and recent earnings growth has
been good, albeit coming from a low base. By contrast, the
US companies, which were in general restructured four to
five years ago, have already seen a consequent period of
strong earnings growth and have been more profitable (on
the whole) than their European counterparts. However,
they are now experiencing lower growth rates.
Stock markets in Europe have tended to reward European
managements for successful restructuring and a return on
(or, in some cases, a commencement of) value creation.
Consequently, the European specialty chemicals sector has
experienced an expansion in multiples, (although markets
have been difficult recently), whereas the US sector has
seen multiples start to decline over the last three years on
Exhibit 7
Global Specialty Chemicals Sector: EBITDA Margins

(%), 2000E
18,000
16,000
30.0
14,000
12,000
25.0
10,000
20.0
8,000
6,000
Avg.
Avg.
15.0
4,000
10.0
2,000
5.0

s
a
IC
H
ul
G
A
gu
ss
gu
ia
ke
De
ss
H
en
De
SK
SC
ho
d
R
ba
Ci
ut
ia
ar
ia
n
So
l
Cl
La
po
rte
es
&
aa
es
ak
Ro
hm
cu
l
tL
re
a
Lo
nz
a
Source: I/B/E/S and FactSet Estimates for Lonza, SKW and Degussa-Hls, and
0.0
He
r
G
A
H
a
sa
us
s
eg
us
eg
ul
s
IC
I
H
R
oh enk
el
m
&
H
aa
s
R
ho
d
C ia
la
r ia
n
C
ib t
a
SC
SK
W
So
lu
ti
H
er a
c
G
re ule
s
at
La
ke
s
C
yt
e
La c
po
rt
e
Lo
nz
a
account of slowing growth rates. Currently, the US

specialty chemicals companies multiples are roughly in
line with those for comparable companies in the European
sector, on our estimates.
In addition, we believe this industry change has taken place
at a time when size is becoming increasingly important in
specialty chemicals. As for pharmaceuticals companies,
post-restructuring top-line growth should be the most
important issue for these companies: we believe that
constant R&D-driven innovation drives top-line growth in
specialty chemicals. As a result, we think that critical mass
will become increasingly important, a factor that we
believe favours the European companies over those in the
US. In addition, the specialty chemicals companies
customer base is increasingly consolidating and
globalising. We believe that, with one or two exceptions
(such as Rhm & Haas in the US), the European specialty
chemicals companies appear better placed to benefit from
these trends. We therefore expect that European specialty
chemicals companies multiples are likely to trend higher
than their comparables in the US.
The focus on strategic priorities and maximising
shareholder-value creation among the European companies
has also given industry consolidation a veritable shot in the
arm. We believe that balance-sheet strength and larger
market capitalisation put the European companies in a
stronger position than their US counterparts. In our
opinion, the latter may be acquisition targets for some of
the larger European specialty chemicals companies. We
also believe that larger market capitalisation is an
important prerequisite for any potential investor interest.
As a result of these discrepancies in the business models
and the differing stages in the industry life cycle between
Europe and the US, we would argue that it makes more
sense to benchmark the European companies primarily
against each other and not globally.
Page 13
Valuation metrics
We have focused on EV/EBITDA as our primary valuation

metric for one principal reason differences in
accounting policies between all the companies mentioned
above. In particular, tax rates and goodwill amortisation
policies differ widely among these companies. Therefore,
looking at valuations based on P/E or P/CE (defined as net
earnings plus depreciation) does not, in our view, make
particular sense for Degussa AG.
These issues are particularly important, as comparable
companies, such as ICI, Ciba SC and Clariant, have all
recently undertaken sizeable acquisitions/mergers, and
have treated the goodwill related to these transactions very
differently in each case.
For instance, SKW capitalised goodwill from acquisitions
and amortised it over a useful life of 15 years on a straightline basis. ICI wrote off the goodwill on the Unilever
Specialty Chemicals acquisition against equity, whereas
Ciba SC chose to amortise goodwill relating to the Allied
Colloids acquisition over a period of 33 years. Clariant, on
the other hand, is writing off the goodwill relating to the
BTP acquisition over 20 years. Therefore, relative to, for
example, ICI and Ciba SC, Clariants and SKW
Trostbergs EPS have been depressed somewhat.
In addition, Degussa AG, as a German company, suffers
from a relatively high corporate tax rate of 38-40%.
Germany currently has one of the highest corporate tax
rates in Europe (Exhibit 8). The German government is
currently working on a tax reform, according to which it is
planning to cut the corporate tax rate on retained earnings
from 40% at present to 25%, and from 30% to 25% on
Exhibit 8
Europe: Corporate Tax Rates on Retained Profits (%),

1999
45
40
Comparable companies
Given our arguments for size, business mix and the

restructuring lifecycle, we have chosen to focus on Ciba
Specialty Chemicals, Rhodia, ICI, Henkel, Clariant and
Laporte as the universe of stocks to benchmark Degussa
AG against. We have also had a close look at the valuation
of other sizeable German and European chemical
conglomerates, especially BASF, Bayer and Akzo Nobel.
40
40
40
37
35
35
35
34
34
32
30
30
28
28
28
28
Ire
Nor Swe Fin
25
20
15
10
5
0
Ger
Fra
Bel
Ita
NL
Spa Aus Por Den UK
Source: Government data, Morgan Stanley Dean Witter Research

distributed profits by 2001 (see shaded box, The German

tax reform). As these changes have to be financed by the
government, the government intends to decrease the
maximum rate of declining-balance depreciation from 30%
currently to 20%.
This proposition has passed through parliament only
recently, but has been incorporated into our forecasts.
Moreover, our impression after talking to several
companies in the sector is that the likely effect on earnings
after tax would be roughly neutral, as the tax rate would
fall, but the taxable profit would rise due to lower
depreciation, hence the net effect would be slight. Degussa
has indicated that its tax rate going forward will be some 23 percentage points lower than the 40% level expected for
2000: that is, 37-38%.
Discount to the sector
In ascribing a target EV/EBITDA multiple to Degussa AG

for our relative sectoral valuation, we believe the group
merits a 15% discount to the European peer group. As a
comparison, on current consensus earnings, Degussa-Hls
and SKW are trading at a 22-25% discount to sector
average P/E. We believe that a 15% discount is
appropriate for the following reasons.
Restricted free float (parent E.ON owns 64.5%).
Ownership structure.
Stock liquidity.
Low levels of profitability relative to the European

specialty chemicals sector, on our estimates.
Relatively poor portfolio quality compared with the

European specialty chemicals sector, in our view.
Companies that we believe have higher-quality portfolios,

such as Ciba SC, Clariant and ICI, are currently trading at a
5-10% premium to the sector, on our estimates.
Companies that we believe have slightly lower-quality
(more commoditised) portfolios, such as Rhodia, trade at a
10-20% discount to the sector average, on our estimates.
Therefore, an estimated 15% discount does not seem
unreasonable to us. Given our current European specialty
chemical sector average EV/EBITDA valuations of 6.9 for
2000 and 6.2 for 2001, this implies target valuations for
Degussa of 5.9 for 2000 and 5.3 for 2001.

Page 14
The German tax reform

In July 2000, the German upper house of parliament, the
Bundesrat, approved the comprehensive reform of
corporate and personal income taxation. The main
elements for corporates of the tax reform bill include the
following.
The corporation tax rate on retained earnings will be

cut from 40% at present to 25%, and from 30% to
25% on distributed profits by the beginning of 2001
(38% taking the German solidarity and trade tax into
account).
Capital gains will become tax-free for German

corporates from the beginning of 2002, provided that
the shares have been held for more than a year.
At first glance, this sounds very good news for German

companies, which suffer from one of the highest tax
burdens in Europe. However, to finance these tax
reductions, tighter tax authority depreciation rules are to
be introduced. The maximum rate of declining-balance
depreciation on machinery and equipment will be reduced
from 30% to 20%, on capital expenditure after January 1,
2001. The average write-down period will be lengthened
by approximately 20%, and the linear depreciation rate for
buildings will be lowered from 4% to 3%.
As a result, the distribution of the corporate tax burden
among the sectors is likely to shift considerably. While all
sectors should benefit from the lower corporation tax rates,
capital-intensive sectors, such as chemicals, will have to
bear a higher proportion of the financing costs. Note that
the official depreciation tables used by the tax authorities
are to be revised effective 2001 to reflect more realistic
estimates of standard asset useful lives (contained in
resolution adopted by the Federal Council). Drafts are
suggesting a cut in standard asset useful lives by up to
50%.
Capital gains, which are made by a corporation when it
sells a stake in another corporation, will be made
completely tax-free from the beginning of 2002, provided
that the shares have been held for more than a year. This
exemption will be irrespective of the ownership percentage
and the nature of the subsidiarys activities. At present,
capital gains are taxed at the corporate tax rate (plus trade
income tax and solidarity tax). In our view, this has been a
major impediment for companies seeking to reduce crossshareholdings. The major beneficiaries are banks and
insurance companies, but the chemicals industry should
also benefit, even though some holdings are strategic.
Page 15
Capital gains are only tax-exempt from 2002 if the shares

sold were not taken in a tax-free reorganisation (contribution generated shares). That means that capital gains are
only tax-exempt after one year if the reorganisation that
led to the current holding was taxed. The restriction does
not apply if the disposal takes place more than seven years
after the time of the acquisition. Tax-free reorganisations
are possible until December 31, 2000, and provide the
possibility of obtaining a tax-free step-up for corporate tax
purposes in the case of a German share deal where the
sellers are subject to German tax.
specialty chemicals M&A transactions have involved

reasonably high-quality assets (such as fine chemicals and
electronic chemicals). Third, there has been a growing
discount between public and M&A multiples, with the
sector trading at over a 30% discount to recent M&A
transactions, we believe.
Tax reform bottom line. The positive impact of the reform

on German chemicals companies is likely to be reduced by
the change in depreciation rules. Nevertheless, we expect
a net positive impact on earnings and we have reduced a
number of our sector tax assumptions following the firsthalf 2000 results.
2a. and 2b. Relative valuations conclusion
This valuation gap is a feature that has been exploited by

financial buyers, who value the kind of cyclical cash flows
of these types of companies more highly than the more
growth and return-driven stock market.
On this basis, we have ascribed to Degussa AG a target

2001 EV/EBITDA multiple of 5.3, compared with a
European specialty chemicals company average of 6.2 for
2001, on our estimates. This gives an implied group EV of
around ELOOLRQIRUDQGKHQFHDPRQWKVKDUH
price target of
2a. Relative valuation historical trading ranges
The target 2000 EV/EBITDA multiple derived above of

around 6.0 is at the low end of the historic EV/EBITDA
trading range defined by Degussa-Hls and SKW
Trostberg of 4-14 (see Exhibit 9). Discounting this range
by around 20%, to reflect the de-rating of industrial
cyclicals that has taken place in recent months due to the
explosion of interest in the TMT sectors, we arrive at an
EV/EBITDA underlying prospective trading range of just
under 4.5-7.5 for 2001. A multiple of around 5 times 2001
EV/EBITDA sits comfortably at the lower end of this
range.
2b. Relative valuation M&A multiple comparisons
As mentioned above, from relative comparisons our target

2000 EV/EBITDA multiple is 5.9 and our target 2001
EV/EBITDA multiple is 5.3. We prefer to focus on the
2001 multiple, as we believe the corporate structure one to
two years out (post some of the planned non-core
disposals), reflects more accurately what sort of company
the market will perceive Degussa to be (or, rather, what
position it should be able to attain). This multiple is at a
significant discount to recent M&A multiples, with most
deals within the last few years being done at around 10
times EBITDA (Exhibit 9). Although this is a significant
discount, we believe it reflects three things.
First, there has been at least a 20% control premium
implicit in most transactions. Second, most recent

3a. Sum-of-the-parts valuation (Exhibit 12)
We have also valued Degussa AG on a sum-of the-parts

basis. Based on our forecasts, and modelling the effect of a
few of the companys planned disposals (dmc2 and ASTA
Medica in 2001, and Dental and Phenolchemie in 2002,
together worth proceeds of ELOOLRQRQRXUHVWLPDWHV
on an industry divisional comparison basis, we believe
Degussa AG would be worth somewhere in the region of
SHUVKDUH$VXPPDU\RIRXUVXPRIWKHSDUWVPRGHO
is shown in Exhibit 10. Again, we have focused on 2001

(and 2002) and believe these reflect the likely form of the
new Degussa more closely than its current structure, and
include a proportion of the expected cost savings in the
valuation. This target of UHSUHVHQWVDQHVWLPDWHG
EV/EBITDA multiple of 4.9 for 2001.
As we do not expect that Degussa AG will be separated on
a divisional level in the near term, it seemed prudent (and
is also consistent with our approach across the sector) for
us to include in this model a conglomerate discount of 10%
and a liquidity/low-free-float discount of 10%. Factoring
both these discounts into the valuation gives our adjusted
sum-of-the-parts valuation of around SHUVKDUH*LYHQ
the different assumptions inherent in these two approaches,
we consider this is reasonably in line with our SULFH
target derived from the relative comparisons (above).
Page 16
Exhibit 9
Degussa and SKW: Historical EV/EBITDA, 1994-2000
1 6 .0 0
1 4 .0 0
1 2 .0 0
EV/EBITDA
1 0 .0 0
8 .0 0
6 .0 0
4 .0 0
2 .0 0
SK W T R O S TB ER G AG N PV
6/2000
4/2000
2/2000
12/1999
8/1999
10/1999
6/1999
4/1999
2/1999
12/1998
10/1998
8/1998
6/1998
4/1998
2/1998
12/1997
8/1997
10/1997
6/1997
4/1997
2/1997
12/1996
8/1996
10/1996
6/1996
4/1996
2/1996
12/1995
10/1995
8/1995
6/1995
4/1995
2/1995
12/1994
0 .0 0
D EG US SA -H U LS A G O RD N PV
Source: FactSet
Exhibit 10
Global Specialty Chemicals Companies: Valuation Comparisons, 2000-01E

P/E
P/CE
EV/EBIT
EV/EBITDA
EV/Sales
2000E
2001E
2000E
2001E
2000E
2001E
2000E
2001E
2000E
2001E
European
Ciba SC
ICI
Laporte
Henkel
Rhodia
Degussa1
Clariant
Average
16.36
8.92
8.40
22.41
10.39
13.92
16.86
14.45
13.19
7.77
7.53
18.93
8.11
11.15
15.35
12.27
7.53
5.21
5.57
8.66
3.44
4.38
7.01
6.63
6.95
4.74
5.10
7.79
3.20
4.12
6.63
6.13
11.08
7.84
7.85
12.33
9.94
10.83
13.49
10.95
9.43
7.32
7.10
10.61
7.04
7.96
11.13
9.10
7.22
6.57
6.01
7.07
4.81
5.60
7.30
6.85
6.45
6.26
5.48
6.26
4.22
4.32
6.17
5.99
1.13
0.73
1.33
0.94
0.73
0.68
1.39
1.16
1.12
0.74
1.23
0.87
0.73
0.60
1.21
1.08
American
Crompton
Ecolab
Ethyl
Ferro
Great Lakes
Lubrizol
PolyOne
Millipore
3M
Praxair
Schulman, A.
Sigma-Aldrich
Average
8.86
24.20
8.14
9.98
12.13
9.19
10.63
24.07
17.99
12.58
8.41
15.89
13.51
8.45
21.29
5.95
8.99
10.84
8.42
7.76
19.65
16.23
11.44
7.61
14.26
11.74
3.47
13.79
1.99
6.01
12.44
4.86
4.17
17.31
11.87
6.41
5.48
10.27
8.17
3.38
12.60
1.83
5.58
12.52
4.59
3.33
14.80
10.80
5.65
5.12
9.83
7.50
8.17
14.65
8.96
6.90
7.86
7.19
8.79
18.01
11.49
10.49
5.24
10.18
9.83
7.86
13.20
8.59
6.50
7.41
6.50
7.27
14.98
10.37
9.80
4.86
10.07
8.95
5.14
10.23
4.66
5.15
5.58
4.64
5.40
14.32
8.79
6.84
4.08
7.74
6.88
5.01
9.44
4.56
4.93
5.28
4.34
4.52
12.24
7.98
6.18
3.83
7.63
6.33
0.81
2.23
0.74
0.70
1.26
0.78
0.37
3.23
2.14
1.83
0.38
2.08
1.38
0.80
2.04
0.73
0.69
1.17
0.77
0.36
2.81
1.99
1.74
0.37
1.94
1.28
Overall Average
13.88
11.95
7.56
6.95
10.28
9.01
6.87
6.19
1.29
1.20
1. Numbers based on Degussa Hls share price and Degussa AG estimates

Source: Morgan Stanley Dean Witter Research Estimates

Page 17
Exhibit 11
European Chemicals Companies: M&A Multiples, 1997-2000

Implied
Equity Value (mn)
Date
Announced
Target
16-Aug-99
Industrial Gases
AGA
Average
18-Dec-97
23-Feb-98
26-May-98
6-Jul-98
5-Aug-98
11-Aug-99
24-Jan-00
21-Mar-00
Fine Chemicals/Animal Health

Holliday Chemicals
Gist-Brocades
Hexachemie
Archimica
Inspec
Hoechst Vet
BTP
American Cyanamid (AHP)
Average
21-Jan-98
18-Mar-98
30-Mar-98
17-Sep-98
16-Apr-99
11-May-99
14-Dec-99
Specialty Chemicals
Allied Colloids
Daesung Lysine Unit
Acheson
Gustafson Seed Treatment
Albright & Wilson
Zeneca Specialty
Chemicals
Ciba Polymers
Average
Coatings
20-Apr-98
Courtaulds
29-Oct-98
Herberts
28-Apr-99 ICI Auto and Industrial Coatings
2-Jun-99
PRC DeSoto
1-Jul-00
Lilly Industries
24-Aug-00
Mason Coatings
Average
Ind./Commodity Chemicals
10-Apr-99
Acrylics plant
12-May-98
Brunner Mond Soda Ash
15-Apr-99 ICI various industrial chemicals
9-Aug-99
Acordis
30-Sep-99
ICI Fluoropolymers
4-Oct-99
ICI Acrylics
8-Oct-99
Neste
16-Nov-99
Lyondell Polyols and PO
7-Dec-99
Vestolit
8-Mar-00
Vinnolit
Average
Implied
Aggregate Value (mn)
Aggregate Value /
Acquirer
Curr.
Local
(US$)
Local
(US$)
Sales
EBITDA
EBIT
Linde
SKr
30,681
3,700
34,543
4,166
2.3
2.3
9.7
9.7
20.0
20.0
Yule Catto
DSM
BTP
BTP
Laporte
Akzo Nobel
Clariant
BASF
US$
248
1,225
55
100
601
665
1,038
3,800
412
1,439
90
165
984
709
1,713
3,800
292
1,316
55
140
638
665
1,139
3,900
485
1,545
90
231
1,044
709
1,879
3,900
1.8
1.3
2.1
3.3
2.5
1.5
2.9
2.3
2.2
10.2
9.1
N/AV
N/AV
13.9
N/AV
13.3
N/AV
11.6
14.9
15.4
10.4
73.5
17.7
11.0
18.5
15.6
22.1
Ciba
BASF
ICI
Bayer
Rhodia
Cinven/
Investcorp
MGPE
US$
US$
US$
1,420
600
695
180
525
2,313
600
695
180
848
1,570
600
560
180
700
2,557
600
560
180
1,130
3.1
2.4
3.0
1.8
0.9
13.6
N/AV
N/AV
N/AV
7.6
19.1
9.8
12.2
N/AV
11.2
SFr
1,300
1,600
2,108
1,010
1,300
1,600
2,108
1,010
1.9
0.9
2.0
9.4
8.1
9.7
14.4
11.9
13.1
Akzo Nobel
DuPont
PPG
PPG
Valspar
Akzo Nobel
1,832
1,600
400
490
762
N/AV
3,074
1,879
640
513
762
N/AV
2,232
1,600
400
490
975
N/AV
3,746
1,879
640
513
975
N/AV
1.1
1.1
1.5
2.3
1.0
1.5
1.4
9.5
7.5
N/AV
N/AV
N/AV
8.0
8.3
14.9
14.8
25.6
N/AV
N/AV
N/AV
18.4
5,268
145
1,750
825
136
505
505
2,450
140
236
2,822
883
136
540
537
2,450
5,268
193
1,750
825
136
505
505
2,450
140
315
2,822
883
136
540
537
2,450
0.6
1.3
0.9
0.4
1.2
1.0
0.6
3.1
N/AV
N/AV
N/AV
4.2
N/AV
9.4
N/AV
13.6
4.4
9.3
14.0
12.9
N/AV
18.7
27.0
24.5
150
N/AV
153
N/AV
150
N/AV
153
N/AV
0.5
N/AV
1.1
N/AV
N/AV
9.0
N/AV
N/AV
15.8
1.7
9.9
17.7
US$
US$
Ineos
BFr
CVC
Huntsman
CVC
Asahi
US$
Charterhouse
Industri Kap
Bayer
US$
Candover/
George Harris
Advent Intl Corp
M&A Average

N/AV = Not available
Page 18
Exhibit 12
Degussa AG: Sum-of-The-Parts Valuation, 2000-02E

EBITDA
2000E
EBITDA
2001E
Health & Nutrition

Feed Additives
Texturant Systems
BioActives
Flavours & Fruit Systems
Total
75.5
42.2
11.1
28.9
157.8
85.5
47.4
11.9
31.9
176.8
94.2
52.0
13.1
33.9
193.2
6.7
7.2
7.4
7.2
7.0
6.0
6.4
6.6
6.4
6.2
5.4
5.8
6.0
5.8
5.6
505
303
82
208
1,098
512
305
79
205
1,101
511
303
78
198
1,090
Germany
Europe
Americas
Asia/Pacific
Total
73.5
51.0
81.7
42.8
249.0
77.9
53.7
86.4
45.1
263.1
81.9
56.2
90.7
47.2
276.1
6.4
6.4
6.4
6.4
6.4
5.7
5.7
5.7
5.7
5.7
5.2
5.2
5.2
5.2
5.2
467
324
519
272
1,582
443
305
492
257
1,497
422
290
468
244
1,423

Fine Chemicals
Bleaching and Water Chemicals
C4 Chemicals
Total
131.2
87.6
51.8
270.6
152.3
95.8
56.5
304.7
166.6
103.6
61.9
332.2
6.7
6.0
6.0
6.3
6.0
5.4
5.4
5.7
5.4
4.9
4.9
5.2
877
527
312
1,716
912
517
304
1,733
904
506
302
1,712
Superabsorbents
Care Specialties
Oligomers/Silicones
Total
52.1
104.1
57.2
213.3
66.9
114.4
62.0
243.3
75.1
121.9
65.8
262.8
7.0
7.2
7.7
7.3
6.3
6.4
6.9
6.5
5.7
5.8
6.2
5.9
366
748
439
1,553
420
737
427
1,584
428
711
410
1,549

Coatings & Colorants
Aerosil & Silanes
Advanced Fillers & Pigments
Total
166.2
114.0
199.9
480.1
182.7
124.6
215.0
522.3
191.9
131.6
233.8
557.3
6.4
6.4
6.0
6.2
5.7
5.7
5.4
5.6
5.2
5.2
4.9
5.0
1,056
724
1,203
2,983
1,039
709
1,159
2,907
989
678
1,142
2,809
Specialty Polymers
Methacrylics
Specialty Acrylates
Plexiglas
Engineering Plastics
Total
51.3
49.2
107.1
55.5
263.1
56.8
55.6
120.3
60.0
292.7
64.9
61.2
131.5
63.9
321.6
5.3
6.2
6.2
6.4
6.1
4.8
5.5
5.5
5.7
5.4
4.3
5.0
5.0
5.2
4.9
274
305
663
352
1,594
272
308
666
341
1,588
282
307
660
330
1,579
Total Core Businesses

1,633.9
Discontinuing Businesses
481.7
Total Business
2,115.6
Other (Secondary Activities,
Reconciliation, etc.)
63.2
Total Group EBITDA
2,178.8
Total Implied EV
Less Conglomerate Discount of 10.0%
Adjusted EV
Less Restricted Float Discount of 10.0%
Total Adjusted EV
Net Debt
Pension Provisions
Minority Interests
Total Implied Market Value
Implied Market Value per Share (
1,802.9
374.4
2,177.3
1,943.2
192.9
2,136.1
6.4
6.0
6.3
5.8
5.4
5.7
5.2
4.9
5.2
10,526
2,899
13,426
10,409
2,018
12,427
10,163
942
11,106
64.0
2,241.3
64.8
2,200.8
6.2
5.5
5.0
5.0
4.5
4.1
13,426
13,426
1,343
12,083
1,208
10,875
2,977
2,387
92
5,549
27.0
12,427
12,427
1,243
11,184
1,118
10,066
321
2,387
92
7,389
35.9
11,106
11,106
1,111
9,995
1,000
8,996
(1,285)
2,387
92
7,912
38.5
PLOOLRQ
EBITDA
2002E

EV/EBITDA EV/EBITDA EV/EBITDA Implied EV Implied EV

2000E
2001E
2002E
2000E
2001E
Implied EV
2002E
3b. DCF valuation (Exhibit 13)
We have also valued Degussa AG using a DCF model,

shown in Exhibit 11. Based on our assumptions of a WACC
of around 8.0% and a long-term growth rate of 3% (a
standard assumption we use when running these models for
commodity and specialty chemical companies), our DCF
model estimates current fair value at SHUVKDUH2QRXU
forecasts, this represents a 2000 EV/EBITDA of 6.3 and a
2001 EV/EBITDA of 5.0. The DCF valuation correlates well
with our relative EV/EBITDA and sum-of-the-parts derived
valuations of SHUVKDUHGHVFULEHGDERYH
Our DCF valuation also implies considerable upside potential
on a 12-month viewpoint. Our 12-month DCF target is
per share, representing an EV/EBITDA multiple of 8.0 for
2000 and 6.6 for 2001. This higher value reflects the
additional value that we believe would be created on the
realisation of major planned disposals (dmc2 and ASTA
Medica in 2001, and Dental and Phenolchemie in 2002,
together worth proceeds of ELOOLRQRQRXUHVWLPDWHVDQG
restructuring benefits. Although we would argue that
Degussas core businesses should not necessarily be valued
Page 19
at a premium to the specialty chemicals sector, this higher

valuation reflects our view that the completion of these
disposals would leave Degussa in a very strong financial
position, with estimated net cash of ELOOLRQE\WKHHQGRI
2002 (excluding pension provisions).
4. Merger valuations ascribed to SKW and Degussa-Hls
Using a target price of SHUVKDUHRXUHVWLPDWHRIWKH

target EV of Degussa AG is around ELOOLRQLQ
(our target price of HTXDWHVWRDQ(9RI ELOOLRQIRU
2000). This gives a target equity market value of around
billion, which compares with the most recent independent
audited merger valuation of ELOOLRQZKLFKZDVFDUULHG
out in the run-up to the Degussa-Hls and SKW Trostberg
merger (such valuations are required under German
accounting law). The audited merger valuation indicated
equity values of billion and ELOOLRQIRU'HJXVVD
Hls and SKW Trostberg and share-price values of DQG
UHVSHFWLYHO\7KHRIILFLDOPHUJHUYDOXDWLRQLVEDVHG
on a discounted earnings value model (IDW Standard

method) and reflects both internal growth forecasts and the
likely outcome of the German tax reforms.
Exhibit 13
Degussa AG: DCF Valuation, 1999-2010E

(
1999
PLOOLRQ
2000E
2001E
2002E
2003E
2004E
2005E
2006E
2007E
1,152.8
(432.0)
990.9
(952.2)
(220.6)
1,183.2
(443.4)
928.6
(785.3)
134.6
1,244.3
(466.3)
918.1
(776.0)
31.9
1,322.2
(495.5)
933.7
(817.5)
(67.8)
1,402.8
(525.7)
949.6
(867.9)
(69.6)
1,481.1
(553.6)
966.3
(915.6)
(150.0)
1,556.1
(580.0)
983.2
(956.8)
(140.0)
(12.4)
538.9
1,017.7
952.0
875.1
889.3
828.2
862.4
894.9
930.4
967.5
6.5
0.94
7.5
0.87
7.8
0.81
8.1
0.75
8.1
0.69
8.1
0.64
8.1
0.59
8.1
0.55
8.1
0.51
8.1
0.47
8.1
0.44
(11.7)
470.8
824.8
713.9
607.1
570.8
491.8
473.8
454.8
437.5
420.9
Adjusted EBIT
945.2 1,056.2
Cash Tax
(299.4) (419.1)
Depreciation & Amortisation
934.0 1,017.2
Adjusted Capital Expenditure (1,043.8) (1,077.6)
Other Changes in Cash1
(365.2) (589.2)
Operating Free Cash Flow
170.7
Discount Rate (WACC, %)

Discount Factor
Discounted Free Cash Flow

Discounted Value
5,454.5
Terminal Value
(Long-Term Growth of 3%)
7,883.8
Total Value (Equals EV)
2009E
2010E
1,751.9
(649.5)
1,020.5
(1,045.4)
(110.0)
13,338.3
Net Debt
Market Value (EV (Net Debt)
Market Value per Share (
2008E
1,626.8 1,692.4
(604.8) (627.5)
997.9 1,010.4
(995.1) (1,024.9)
(130.0) (120.0)
5,363.1
7,975.2
38.8
1. Other changes in cash include changes in working capital, provisions and related charges
2. WACC is based on cost of debt of 7-7.5% and cost of equity of 8-8.5%
3. 2000E net debt includes pension liabilities. Financial net debt alone for 2000 will be PLOOLRQRQRXUHVWLPDWHV
Note: Framed forecast years are full Morgan Stanley Dean Witter Research forecasts. The additional five years are generated from a linear decline to our assumed longterm growth rate of 3%
E = Morgan Stanley Dean Witter Research Estimates

The difference between our target equity value of around

billion and the combined official valuation of billion
probably reflects two factors. First, differing growth rate
assumptions for the ongoing businesses (our assumptions are
on the cautious side); and second, that our models are looking
at a very different situation the post-disposal Degussa.
Given these factors, we do not think that the difference
should be seen as a significant issue.
Degussa AG share-price target of
From our various approaches above, we have derived a 12month target price for Degussa AG of SHUVKDUH2QRXU
forecasts, this represents EV/EBITDA multiples of 6.2 for
2000 and 4.9 for 2001. These valuations are at discounts to
the sector, on our estimates, but we believe the implied 18%
upside from current levels (via the existing Degussa-Hls and
SKW) is a conservative estimate of the potential inherent in
this particular case.
Page 20
our target price of IRUWKHQHZ'HJXVVDLPSOLHVWDUJHW

share prices of IRU'HJXVVD+OVDQG IRU6.:
Trostberg. We have rounded up the SKW share-price target
to IURP 7KHVHWDUJHWVUHSUHVHQWSRWHQWLDOXSVLGHRI
19% for Degussa-Hls and 22% for SKW Trostberg from
current levels, indicating that SKW shares offer a marginally
less expensive way into Degussa AG. However, we think
this slight difference probably reflects, in part, the different
liquidity of the two stocks (Degussa-Hls market value is
considerably greater than that of SKW).
Given the announced (calculated) merger share ratio for

SKW Trostberg and Degussa-Hls of 4.4:1 (respectively),
What is the preferred way into Degussa AG? As we have

commented previously, the market seems to have effectively
arbitraged out the valuation differences between DegussaHls and SKW. Recent trading has brought about no more
than a one-percentage-point difference in upside potential (to
our implied DQG IDLUYDOXHVUHVSHFWLYHO\EHWZHHQ
the two existing stocks. Hence, we think the chief issue is
likely to be liquidity. Degussa-Hls is considerably more
liquid than SKW (with much higher trading volumes, see
Exhibit 16), and may therefore be a preferred entry point for
investors looking to build sizeable holdings.
Exhibit 14
Exhibit 15
Degussa-Hls: Implied Valuation
SKW Trostberg: Implied Valuation
Implied valuation of Degussa-Hls and SKW Trostberg
Based on our 12-month target price for Degussa AG of
Based on our 12-month target price for Degussa AG of

Implied Degussa-Hls Market Value ( PQXVLQJVSOLW1

Implied Degussa-Hls Share Price (
Current Price (
Difference (
Potential Upside (%)
5,933.7
38.0
31.9
6.1
19.1
Implied SKW Market Value (

Implied SKW Share Price (
Current Price (
Difference (
Potential Upside (%)

1,879.9
8.6
7.1
1.6
21.9
PQXVLQJVSOLW

1. Valuation split implied by official merger valuation of Degussa AG (by equity

value 76% Degussa-Hls, 24% SKW Trostberg)
1. Valuation split implied by official merger valuation of Degussa AG (by equity

value 76% Degussa-Hls, 24% SKW Trostberg)
Exhibit 16
Exhibit 17
Degussa-Hls and SKW Trostberg: Daily Trading

Volumes in Last 24 Weeks (000s Shares)
Specialty Chemicals Price Index: Absolute and Relative

Performance, January 1999-September 2000
8/9/00
210
800
0.17
700
0.16
200
600
0.15
190
500
0.14
400
180
0.13
300
170
200
0.12
100
160
0.11
0
150
J
F M A M J
J
A S O N D J
SPECIALTY CHEMICALS - PRICE INDEX
X%SPEC/MSEROP$(R.H.SCALE)
Degussa-Huels Trading Volumes

Source: DATASTREAM
SKW Trostberg Trading Volumes
Source: FactSet
0.10
F
Source: Datastream
Page 21
Exhibit 18
Exhibit 19
European Chemicals Sector: EV/EBITDA, 2000E
European Chemicals Sector: EV/EBITDA, 2001E
9.0
8.0
7.5
8.1
7.0
7.8
8.0
7.0
7.4
7.3
7.2
7.2
6.5
7.1
7.0
6.4
6.2
6.7
6.6
Avg.
6.2
6.2
6.1
6.0
6.0
6.0
Avg.
5.4
5.3
5.6
5.3
5.0
4.6
4.8
5.0
4.3
4.2
4.0
4.0
3.3
di
a
ho
R
sa
gu
s
Source: Morgan Stanley Dean Witter Research Estimates. Degussa AG is

artificial, based on current Degussa-Hls price
Source: Morgan Stanley Dean Witter Research Estimates, Degussa AG is

artificial, based on current Degussa-Hls price
Exhibit 20
Exhibit 21
European Chemicals Sector: P/E, 2000E
European Chemicals Sector: P/E, 2001E

20.0
25.0
22.4
D
SM
AG
A
De
AS
F
te
La
Li
nd
po
r
O
C
B
nk
e
He
Cl
a
ria
nt
IC
I
SC
a
C
ib
er
A
A
kz
o
Ai
rL
ay
id
e
N
ob
iq
u
di
a
D
SM
ho
R
A
G
BA
SF
AG
te
sa
eg
us
IC
I
La
po
r
O
C
B
a
SC
ye
rA
G
He
nk
el
Ba
C
ib
C
la
Li
nd
N
ob
iq
u
A
kz
o
Ai
rL
ria
nt
2.0
el
2.0
id
e
3.0
el
3.3
3.0
18.9
17.6
18.0
16.8
20.2
19.4
20.0
15.4
16.0
15.3
17.9
16.9
14.0
16.4
14.6
15.0
13.9
Avg.
13.3
13.2
13.0
Avg.
12.0
11.2
11.2
10.8
13.0
12.0
10.3
10.0
10.4
10.0
8.3
8.9
8.8
7.8
8.0
8.4
6.0
5.0
6.0
4.0
2.0
Source: I/B/E/S estimates for Degussa Hls, DSM and SKW, and Morgan Stanley
Dean Witter Research Estimates. Degussa AG is artificial, based on current
Degussa-Hls price

el
No
b
EV
C
kz
o
A
AG
A
SF
SK
W
B
sa
eg
us
De
gu
ss
Hu
ls
A
G
O
C
B
SC
Ci
ba
nt
G
A
la
ria
er
ay
B
id
e
e
ir
L
iq
u
Li
nd
en
H
en
ke
l
ke
l
0.0
Li
ir nde
Li
qu
id
B
ay e
er
A
Cl G
ar
ia
Ci nt
ba
SC
De
B
gu OC
ss
a
A
B
G
A
D
eg S F
us
A
sa G
H
ul
s
SK
W
Rh
od
ia
Ak
zo ICI
N
ob
L a el
po
r te
D
SM
0.0
Source: I/B/E/S estimates for Degussa-Hls, DSM and SKW, and Morgan Stanley
Dean Witter Research Estimates. Degussa AG is artificial, based on current
Degussa-Hls price
Page 22
Definition of Specialty Chemicals

What are specialty chemicals?
To call this a vexing question would be to rather overstate the

importance of specialty chemicals and chemicals in general
to the layman, but within the industry and among investors, it
certainly is an important issue.
specialty chemicals has been low historically, particularly

compared with commodity chemicals. Their margins tend
therefore to be more stable than for commodity products and
are often higher. Growth rates are typically higher and they
are sold with a much higher level of technical service.
We believe that the key defining characteristics of specialty

chemicals products are that they are high-value-added, highgrowth, high-margin and low-volume. Commodity
chemicals are sold in large quantities (tonnes) for a couple of
euro per tonne, whereas specialty products are sold in small
quantities (kilograms) for SHUNJ6SHFLDOW\
chemicals also give the finished product or process
distinctive characteristics, and typically represent only a
small part of the total cost of these.
Due to the complexity of the products, the R&D expenditure

is significantly higher than in basic chemicals. Currently,
R&D expenditure represents 3% of sales at both DegussaHls and SKW Trostberg, and 7% of sales at SKWs
Performance Chemicals division (formerly Goldschmidt).
The higher percentage at Goldschmidt reflects the companys
focus on consumer markets (about 60% of Goldschmidts
products are concentrated on this market). Innovation is the
key success factor in this area, in our view.
Below we list the typical attributes of specialty chemicals in

more detail.
Development of specialty chemicals companies
High-margin, low-volume chemicals used for incorporation in other products and processes, and sold for the
effects they produce rather than for their chemical
composition.
Highly differentiated products, where competing

suppliers often provide the same or similar effects for the
customer by means of different chemical compounds or
formulations.
Chemicals produced by batch production with smallervolume vessels.
Products generally represent only a small portion of the

cost of the process into which they are incorporated (for
example, life science additives), or the finished goods.
Products may be patented to protect intellectual property

rights.
Products often involve co-operations with customers and

high levels of service on a partnership basis.
Danger of misinterpretation
The term specialty chemicals has in the past been used to

describe growth products, or at least products that are
relatively immune to economic cyclical upturns and
downturns, but in the recent past we have seen that this is not
always the case. Nevertheless, price volatility among

Pure specialty chemicals companies are relatively new to the

market, emerging in the last five years as the continued trend
for more focused companies forced the managements of life
sciences and consumer products companies to spin off their
specialty chemicals operations. Clariant was the first pure
specialty chemicals company to come to the market, having
been spun off from life science group Sandoz in 1995. In
early 1997, Ciba Specialty Chemicals was floated when
Novartis was created (the merger of Ciba-Geigy and Sandoz).
In 1998, Rhodia came to the market, spun-off from RhnePoulenc. After buying Unilevers specialty chemicals
business and subsequently selling its commodity operations,
ICI emerged as the fourth big specialty chemicals player in
the market. Since then, Lonza has been demerged from the
AL Group and Givaudan from the Roche Group.
We expect that the sector will continue to grow as further
specialty chemicals companies emerge: for example, further
assets may come to the market when Henkel spins off
Cognis, as the company has said it plans to do later this year.
Unlike many of the specialty chemicals groups, DegussaHls and SKW Trostberg were not spin-offs of major life
science companies. Degussa-Hls was created in 1999 by
the merger of Degussa AG with Hls AG. SKW Trostberg
has steadily built up its reputation as an interesting niche
player in specialty chemicals, but has low sales relative to the
big players.
Page 23
Sector Outlook Slowing Fundamentals

Soft landing in sight?
Generally speaking, there is a strong correlation between

regional and global GDP and the fundamentals of the
chemicals industry. For industrial cyclical stocks, the timing
of the economic cycle is also an important factor in
considering when assets may get allocated to the sector.
For these reasons, we have in this section set out the
economic assumptions underlying our forecasts and valuation
methodology.
Our economics teams target for the euro is US$0.95/ DW

the end of 2000, and US$1.00/ DW-XQH7KLVLVGXHWR
their expectations of strong demand growth and structural
reforms implemented by governments, together with ongoing
corporate restructuring, which should make the euro area a
more attractive place to invest. We appreciate that
forecasting currencies is notoriously difficult, but, if this
scenario is played out, the European sector would lose some
of its competitive advantage.
Implications for the chemicals industry
Europe, and Germany in particular, are the most important

regions for Degussa, accounting for around 60% and 30% of
group sales, respectively, on our estimates.
For 2000, our economists are forecasting GDP growth of
3.3% for Western Europe and 2.6% for Germany, which for
the latter would be the highest growth rate since the
beginning of the 1990s. The German economy is expected to
gain more than its neighbours from the recovery outside
Euroland and the weak euro, as a higher proportion of its
exports go to destinations outside the euro area.
We expect Degussa AG and the other German chemicals
companies to benefit from these developments. For France
the outlook appears optimistic: for 2000, our economists are
forecasting GDP growth of 3.8% in France, and 3.5% for the
EMU countries. GDP growth is expected to be even higher
in the US at 5.4%, and globally at 4.9%, according to our
economists.
Driven by global GDP growth, we forecast an underlying

volume growth of 6% in 2000 for the European chemicals
companies. Prices are likely to be up slightly in 2000,
reflecting the impact of good volume growth throughout the
year, as well as the significant increases in raw materials (oil)
prices endured by the sector generally. We also expect
improved bottom-line performances to be driven by strong
sales volumes and rationalisation at the company level.
These are strong fundamentals, but we think it is worth
looking also at the change in volumes and prices to try to
gauge how investors might read the changes in the
fundamentals. Below we look at volume, pricing, input costs
and currency trends in order to get a directional feel for how
things are evolving.
Second-quarter fundamentals overview
In general, the second-quarter 2000 results showed a

continuation of the growth trends seen in the first quarter.
However, this growth is beginning to show some moderation
Exhibit 22
Global Economic Outlook: GNP/GDP Growth, 1997-2001E

(%)
1997
1998
1999
2000E
2001E
Western Europe
EMU
UK
France
Germany
Italy
US
Asia ex-Japan
Japan
Latin America
OECD
World
2.5
2.5
3.5
2.0
1.5
1.5
4.2
6.2
1.6
5.6
3.2
4.3
2.7
2.8
2.2
3.4
2.2
1.3
4.4
2.2
-2.5
2.2
2.6
2.5
2.4
2.3
2.1
2.9
1.5
1.4
4.2
6.4
0.2
0.1
2.9
3.6
3.3
3.5
2.9
3.8
2.6
2.7
5.4
7.3
1.1
4.1
3.9
4.9
2.9
3.0
2.6
2.8
3.1
2.4
3.6
6.9
-0.7
4.5
2.7
4.1
Note: As at September 1, 2000.

Source: Morgan Stanley Dean Witter Research
from first-quarter levels, reflecting less favourable year-onyear comparisons. We are expecting a continuation of this
trend as comparisons become more difficult through the year.
Volumes and pricing strong but slowing. Volumes
remained strong through the second quarter, although it
seems that the first quarter was the peak for volume growth.
Pricing also improved fairly strongly, but by different
degrees across the industry. As in the first quarter, pricing
trends were strongest for those companies with exposure to
basic chemicals (such as BASF and DSM) and upstream
specialty chemicals (such as Rhodia). There has also been
some evidence of improved pricing for the more downstream
specialty chemicals companies (such as Ciba, Clariant and
ICI), although we believe pressures from the customer side
are unlikely to diminish.
Currency effects are favourable currently, although recent
trends imply that, on a translation/transaction basis, the
second/third quarter is likely to have been the peak for higher
US-dollar earnings. If the euro trends away from its recent
weakness, as we expect, we believe that export business with
the US is likely to become less lucrative as the second half
progresses.
Input costs (raw materials and energy) are still high and
look likely to remain so. We expect companies to continue
to find it difficult to pass these increases on to customers
through product pricing alone. Margin erosion is likely in the
more industrially exposed specialties and certain polymer
chains. In the current environment of slowing demand and
excess capacity, the sustained high pricing levels of oil, in
particular, are likely to emphasise this adverse issue. It is
hard to anticipate the extent to which price rises would be
needed to make up for higher raw material costs, but if oil
prices move up from current levels, there is likely to be
downward pressure on forecasts across the sector. This
situation has been highlighted recently by half of the profit
warnings from the US (including US major DuPont), which
have affected the chemical sector worldwide share prices.
Overall, therefore, the environment looks to us to be
reasonably benign for Degussa AG, although growth rates
and increases in profitability across the industry look likely to
moderate. Most company outlook statements regarding
trading fundamentals moving into the second half of 2000
suggest to us that our assumptions are well supported. High
raw material prices and a diminishing ability to pass these on
to customers, along with slowing demand, may lead to
margin corrosion.
Page 24
Asset allocation is likely to hold the key
The economic fundamentals look good (but may be slowing)

and the stocks look inexpensive generally, so surely chemical
stocks will be racing skywards, buoyed by good fundamental
data and cheap valuations...? This has not been the case
historically, and is not the case at the moment, in our view.
We believe that the real trigger for stock performance in the
sector (as it has appeared to be over the last few months) will
be changes in asset allocation, which in turn will be driven by
investors expectations regarding the economic outlook and
periods of TMT momentum market investing. The bottom
line is that the TMT momentum market may have run out of
steam, but slowing economic fundamentals, although still
good, do not necessarily support a strong fundamental
investment case for specialty chemicals stocks.
The stock market tends to like to anticipate cyclical changes
whether economically driven or supply/demand inbalance-driven. We believe that investors would have been
looking to own the sector as the fundamentals accelerated
between early/mid 1999 and early 2000 (during the
momentum market, see Exhibit 16), but we do not expect
them to want to own the sector strongly now that the
fundamentals look likely to decelerate. However, the stocks
did not perform as we anticipated during the period of
accelerated improvements.
The momentum market destroyed chemical performance
The momentum market is our name for the recent period of

sector-driven market bifurcation. Between October 1999 and
April/May 2000, the market appeared to have reached a
period when some of the historical indicators and drivers for
sectoral performance (such as rising bond yields and nominal
GDP increases) broke down temporarily (Exhibit 15).
During this period of extreme sectoral volatility, the chemical
sector underperformed strongly, despite strong fundamentals.
The phenomenon commenced in October last year, when the
Vodafone/Mannesmann bid triggered a strong rally in
telecoms and technology stocks. These sectors gained
considerable performance momentum as investors scrabbled
to get positions in them. For some time over that period,
investors continued to increase weightings in order to
outweight and therefore outperform their competition, as
the stocks headed skywards. Higher TMT valuations led to
higher index weightings, which in turn led to the need to
increase exposure to TMT.
European Chemicals Sector: Earnings Momentum

(Indexed in Local Currency), 1999-2002E
2002 Earnings forecast
120
115
110
105
100
95
90
85
80
8/2000
7/2000
6/2000
5/2000
4/2000
3/2000
2/2000
1/2000
12/1999
11/1999
10/1999
9/1999
8/1999
75
7/1999
To date, asset allocation adjustments involving TMT have

not seen the chemical sector emerge as a strong winner in
sector rotation back into the old economy, as other, higherquality sectors (such as pharmaceuticals and financials),
appear to have had attractive valuations also.
Exhibit 23
6/1999
Such momentum-driven broad asset allocation trends do not

seem to have been moved by the picture of improving
chemical fundamentals. However, the rally into TMT stocks
appeared to run out of steam, leading to the re-establishment
of the more traditional stock-market drivers largely
speaking, investors expectations of growth and economic
developments.
to be the single most important driver of share-price

performance? See the next section to find out what we think.
5/1999
In order to finance purchases of technology, telecoms and

media stocks, money managers diverted new money into
those sectors and sold anything else that was not performing
(including some chemical stocks).
Page 25
Source: IBES and Morgan Stanley Dean Witter Research Estimates
So where does this leave the sector in terms of likely asset

allocation and its potential future popularity, which is likely
Exhibit 24
Exhibit 25
European Chemicals Sector: Relative Performance vs.

European Bond Yields, 1993-2000
European Chemicals Sector: Relative Performance vs.

Technology and Telecoms Sector, 1990-2000
8/9/00
0.95
11/9/00
10
3.50
3.00
0.90
9
2.50
0.85
0.80
2.00
1.50
0.75
0.70
0.65
6
1.00
0.60
0.55
4
0.50
0.45
3
1993
1994
1995
1996
1997
1998
1999
2000
CHEMSER/MSEROP$
EURO BENCHMARK BOND (SYNTHETIC) - RED. YIELD(R.H.SCALE)
Source: DATASTREAM
Source: Datastream

0.50
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
CHEMSER/MSEROP$
MSTELEL/MSEROP$
MSELECL/MSEROP$
Source: DATASTREAM
Source: Datastream
Page 26
Outlook for Share-Price Performance

Recent downgrade of specialty chemicals sector
Our ethylene forecasts show a somewhat better trading

environment than we had been expecting at the start of the
year, due mainly to delayed plant start-ups as well as
stronger-than-expected downstream demand. As a result, we
do not expect petrochemical prices to decline until the back
end of 2000, leading to further raw material pricing pressure
in the sector.
Given the current high-oil-price environment, we expect that

a margin squeeze will be a major factor in the second half.
As a result, we have downgraded our 2000 average EPS
numbers for the specialty chemicals sector. The average oil
price for 2000 is significantly higher than our expectations at
the start of the year and remains high, leading to increased
raw material prices and hence margin pressure. If the oil
price heads higher than US$32, we expect increased margin
pressure.
Exhibit 26
Average Quarterly Exchange Rates: Currency Comparatives May Get Tougher, 1Q 1999-4Q 2000E
Q1
Euro/US$
Euro/Yen
US$/Yen
Change
Q2
Change
Q3
Change
Q4
Change
1999
2000
(%)
1999
2000
(%)
1999
2000E
(%)
1999
2000E
(%)
1.12
132.80
113.45
1.03
102.99
101.60
-8.4
-22.4
-10.4
1.08
129.23
120.55
0.96
100.20
104.86
-11.4
-22.5
-13.0
1.02
123.82
120.82
0.90
95.00
105.0
-12.0
-23.3
-13.1
1.07
112.43
105.13
0.95
97.00
102.0
-11.4
-13.7
- 3.0
Source: Morgan Stanley Dean Witter Research
Exhibit 27
European Chemicals: Price and Volume Trends vs. European GDP Growth, 1997-2002E
14%
5%
12%
10%
4%
8%
6%
3%
4%
2%
2%
02
E
20
01
E
20
00
E
20
00
1
Q
99
99
3
Q
99
99
1
Q
98
98
3
Q
98
98
1
Q
97
97
Q
97
2
Q
-2 %
97
0%
1%
-4 %
-6 %
-8 %
0%
E u r o la n d G D P G r o w th (R H A x is )

P r ic e T r e n d s (L H A x is )
V o lu m e tr e n d s (L H A x is )
Page 27
Exhibit 28
European Chemical Sector: P/E Relatives, 1973-2000
1.50
35.0
1.40
30.0
1.30
1.20
25.0
1.10
20.0
1.00
0.90
15.0
0.80
10.0
0.70
0.60
5.0
0.50
Chemical Sector (LH Axis)
MSCI Europe (LH Axis)
Source: Datastream, Morgan Stanley Dean Witter Research

Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Jan-89
Jan-88
Jan-87
Jan-86
Jan-85
Jan-84
Jan-83
Jan-82
Jan-81
Jan-80
Jan-79
Jan-78
Jan-77
Jan-76
Jan-75
Jan-74
0.40
Jan-73
0.0
Chemical P/E Relative (RH Axis)
Page 28
The Merger Process

Planned merger of Degussa-Hls with SKW Trostberg
Ambitious timetable for the merger
Driven by the merger of the German utilities Viag and Veba,

and as part of the ongoing consolidation of the chemicals
sector, Degussa-Hls and SKW Trostberg have agreed to
merge to form Degussa AG.
The shareholders of Degussa-Hls AG will be voting on the

planned merger with SKW Trostberg AG at an Extraordinary
Shareholders Meeting scheduled for October 20, 2000.
Shareholders in SKW Trostberg will vote on a similar
resolution at an Extraordinary Shareholders Meeting
scheduled for October 24, 2000. The companies hope that,
having obtained the approval of the shareholders, it should be
possible to enter the new company in the commercial register
this year, paving the way for the new Degussa AG to start
operating on January 1, 2001. Compared with other recent
mergers in the industry, this would be an impressively quick
timetable for what is essentially a four-into-one merger.
The new company is to be called Degussa AG and will be

headquartered in Dsseldorf, Germany. According to our
estimates, Degussa AG will rank among the worlds leading
specialty chemicals companies, and will focus exclusively on
sustainable value-oriented growth in the segment of specialty
chemicals. The use of the term specialty chemicals by the
company refers to high-growth, highly application-oriented,
client-service- and client-partnership-oriented performance
chemicals.
Following the completion of the merger, E.ON will continue

to own 64.5% of Degussa AG, according to management.
All key strategic decisions have been made within three

months of the merger announcement in order to minimise
disruptions.
Exhibit 29
Exhibit 30
Degussa AG: Expected Timetable of Planned Merger
Degussa AG: Planned Merger Procedure and Shareholder

Structure
Date
Announcement / Events
May 15, 2000
Viag and Veba announced their intention to merge

SKW and Degussa-Hls
May 20, 2000
Designated board agreed on general strategy,
organisation and responsibilities
Jun 23, 2000
Publication of operating structure and designated
business unit heads
Jul 6-7, 2000
First corporate conference (executive levels)
Aug 2000
Definition of business and service units
responsibilities and organisation
Aug 23, 2000
Boards of SKW and Degussa-Hls approved draft of
merger contract
Sept 5, 2000
Corporate staffing accomplished
Sept 21, 2000
International roadshow to kick off
Oct 20, 2000
EGM Degussa-Hls
Oct 24, 2000
EGM SKW
December
Registration of merger
Appr. 3 days later Start of trading in Degussa shares

free float
35.3%
free float
35.5%
Degussa Huls
64.7%
DEGUSSA
(NEW CO)
E.ON
64.0%
SKW Trostberg
E.ON
64.5%
free float
36.0%
Page 29
Strategy
The new Degussa lean and decentralised
Managements stated guiding principle for the new Degussa

is that it should be managed as decentrally as possible and
as centrally as is necessary. As detailed below, the
organisational structure should ensure flat hierarchies and
clear assignment of responsibilities: the group management
will be responsible for the sustainable strategic development
of the company geared to creating value. The six division
heads will be responsible for ensuring that the 21 business
units meet their goals. The business units will be responsible
for the operational side and have full responsibility for
earnings.
Lean company management
The new company will be headed by a four-member

Management Board, with Prof. Dr. Utz-Hellmuth Felcht as
the designated CEO. Heinz-Joachim Wagner has been
designated as CFO and Dr. Alfred Oberholz will be
responsible for Corporate Development. Dr. Thomas
Schoeneberg will be responsible for Human Resources
(Arbeitsdirektor).
We believe that it is also a critical positive that the decisionmaking body is a small, but experienced unit, and that none
of the divisional management members hold seats on the
Management Board. Rational decisions on portfolio strategy,
as well as resource allocation (whether capital or human), can
sometimes be clouded by the involvement of self-interested
bodies.
of management positions. We believe that the Corporate

Centre is likely to remain small by industry standards.
The new Degussa will have a lean Corporate Centre with
about 100 employees at its headquarters in Dsseldorf. The
key managers will be remunerated with a significant element
of variable compensation based on the operational
performance of the group and a returns measure (yet to be
decided, but probably ROCE/EVA, according to early
indications from management). Decisions will be taken
where operational know-how is based, and legal structures
will be subordinated to operate management structures.
Level 2 divisional control. Each of the six divisions will
have a small executive-management body of around five
people. This will include the head of the division, who will
be responsible for implementing strategy within the divisional business units with a strong market orientation and for
financial control within the division, as well as ensuring
business unit objectives are met. The divisional heads will
have joint responsibility with the heads of the business units
for operating results. New appointments or functions
performed by this team will require approval from the
Management Board. The key managers will be remunerated
with an element of variable compensation based on the
operational performance of the division and a returns
measure (again, this is yet to be decided, but will probably be
ROCE/EVA).
Exhibit 31
Both these moves represent significant cultural changes at the

new Degussa. The empowerment of the business units and
the complete removal of the strategic decision-makers from
day-to-day operational responsibilities represent significant
and positive steps for the new company, in our view.
Degussa AG: Strategic Parameters
s p ee d
Focus
Four levels of management and operations
G ro w th
Level 1 strategic overlords: Corporate Centre will

focus on key strategic functions. In line with the
philosophy of decentralisation, the group management will
concentrate on the strategic alignment of the business,
especially defining corporate strategy, active and continuous
portfolio management and the effective use of resources. In
addition, the Corporate Centre will be responsible for
dialogue with the financial community and the public, as well
as the development of executive restructuring and the staffing
s tro n g o rg an ic

g ro w th
v alu e
en h an c in g
ac q u isitio n s
ex it n o n c o re
C hang e
c o n ce n tra tio n
o n s p ec ia lty
c h em ic als
s p e ed
p ee ed
ed
ss p
R e s tr u c t u r in g
d ec en tral an d m ark e t o rie n ta te d
o rg a n iz atio n
im p ro v ed p erfo rm an ce
Page 30
Level 3 business unit operators. These people will

effectively manage the important function of day-to-day
business operations. Each business unit head will have
global sales, profit and loss, personnel and production
responsibilities. Each unit will be organised according to its
business processes. As in levels 1 and 2, the managers will
be remunerated with an element of variable compensation
based on their operational performance and a returns
measure.
Business unit categorisation
Level 4 service units. Local and regional service units

will provide services for the business units, the divisions and
for the group. Functions will include personnel
administration, payroll accounting, order processing,
purchasing, logistics, environmental services and information
technology. The units will be designed as cost centres and
managed as businesses. They will provide services at normal
market rates and will be placed in direct competition with
external service providers.
Research and development
The supervisory board of each of these service units will

include the business unit manager of the unit served. To
avoid conflict between service units and business units over
capital allocation (as occurred in the past when service units
went directly to the Corporate Centre for capital), all capital
expenditure on service units, including plant expansions, will
need to be sponsored by the business units that the service
units serve.
All employees will need to be attached to either a business
unit or a service centre. We expect that this will eliminate a
certain number of employees and should help to reduce the
cost base of the new Degussa AG, particularly between the
two existing corporate headquarters, where around 600 staff
are employed.
Each business unit will be categorised under one of three

strategic functions: cash-generation; growth; or investment to
grow (consumers of cash). Their categorisation will be a
major factor in assigning their targets. Degussa will not
allow cross-subsidisation between business units, nor
subsidies from the Corporate Centre. Underperforming
businesses will be given up to a maximum of two years to put
their houses in order before a terminal decision is taken.
Degussa recognises the importance of R&D in sustaining and

increasing innovation-driven growth. R&D will be marketfocused and performed at the business unit level within the
units individual budgets. There is to be no corporate R&D
as part of the companys attempt to hold down R&D costs.
There will, however, be a small corporate venture capital
fund (Creavis), whose objective will be to foster new
technologies that fall outside the realm of the operating
divisions.
Six market-oriented divisions
The planned new Degussa will have six market-oriented

divisions Health and Nutrition, Construction Chemicals,
Fine & Industrial Chemicals, Performance Chemicals,
Coatings & Advanced Fillers and Specialty Polymers as
discussed in more detail below. The executive vice
presidents of the divisions will be responsible for managing
the business units in their division and for ensuring they meet
their objectives. All divisions already rank among the
leaders in attractive market segments, based on information
from the company, whose stated aim is to improve on this as
part of the systematic development of the group.
For our detailed analysis of the Degussas six new core
divisions, see the individual divisional sections on pages 3768.

Health & Nutrition
This division will consist of four business units (Feed

Additives, Texturant Systems, BioActives, Flavours & Fruit
Systems). The key focus will be on the development and
marketing of high-quality nutrition ingredients and additives.
The development of the business is expected to be based
extensively on the nutritional/physiological and functional
effects of nutrition ingredients.
Degussa intends to grow the division both organically and
through acquisition. We believe that the focus at BioActives
will be strong organic growth with some small bolt-on
acquisition possibilities. Growth at Feed Additives and
Texturant Systems is expected to be mostly organic.
In Flavours & Fruit Systems, while Degussa is a small player
in flavours, the company has indicated it wishes to stay in
that industry, and that to do so it will need to grow by
acquisition. We believe there is scope for one or two
acquisitions in this area.
Page 31
Exhibit 32
Degussa AG: Health & Nutrition Overview

Product and Markets
special food additives with health benefits, flavour, fruit and texturant
systems for the beverage, food and dairy industry, feed additives for
animal nutrition
Competitive Advantages
efficient network in R&D and applied technologies
synergies in fermentation technologies
only supplier to offer whole range of feed amino acids

Competitors
Dragoco, Haarmann & Reimer, Hercules, FMC, Aventis, BASF
Leading Positions
lecithin, methionine, texturant systems
Exhibit 33
Degussa AG: Construction Chemicals Overview

Product and Markets
products, additives and systems for new construction, repair and
renovation
SKW became the global leader in this business through a

dual-track process of organic and acquisitive growth. The
business specialises in systems for new construction, repair
and renovation, covering concrete additives, tile adhesives,
coating and sealing systems, insulation systems, flooring and
construction and oilfield polymers. Given that practices and
materials for construction differ around the world, the
business is organised into four separate regional business
units. The strategic focus going forward is expected to be
further organic growth through the cross-fertilisation of
different regional products, techniques and materials around
the world. We believe that there are one or two small bolt-on
acquisition opportunities.
largest global supplier of construction chemicals with broadest

product and technology base, based on 1999 data
strong partner of local customers due to worldwide production, sales

and service network
all local activities have direct access to divisions innovative

technology and know-how portfolio
Competitors
SIKA, W.R. Grace, Fosroc, Mapei
Leading Positions
concrete admixtures, underground construction systems, protection and
repair
Exhibit 34
Degussa AG: Fine & Industrial Chemicals Overview

This division will contain three separate business units: the

combined Fine Chemicals operations of both contributing
merger partners, Degussas Bleaching & Water Chemicals
businesses (including the ex-Stockhausen flocculants
business and the cyanide chemicals business), and the exHls C4 Chemicals business. Managements stated aim is to
maintain or increase the companys share in C4 chemicals,
organically grow Bleaching & Water Chemicals, and focus
strongly on growth in Fine Chemicals, where it has said it is
likely to make substantial investments both internally and
through acquisition. In the longer term, we believe that the
two industrial business units may not feature in the longterm core activities of the group, as they do not fit closely
with the specialty chemicals profile.
Product and Markets

intermediates, advanced building blocks and active ingredients for the
pharmaceutical and agro industries, as well as bleaching, water treatment
and C4-chemistry
broad portfolio of key technologies, such as HCN chemistry
excellent applied technologies and therefore close customer

relationships
C4-Verbund-structure makes better use of resources and optimises

production costs
Competitors
DSM, BASF, Bayer, Lonza, Solvay, DuPont
Leading Positions
a variety of specialty ingredients, such as malonester and orthoester,
hydrogen peroxide, isononanol, nitrile chemistry
Page 32
Exhibit 35
Performance Chemicals will house three business units: the

superabsorbents business from Stockhausen; Care
Specialties, which bring together the various surfactant,
detergent raw material, skincare and cosmetic products in
both SKW and Degussa; and the ex-Goldschmidt
Oligomers/Silicones business. Management has said that
organic growth will be the focus at Oligomers/Silicones and
Superabsorbents, and that at both businesses there will be a
strong focus on R&D-driven innovation (for instance, on
superabsorbent polymers for fire-fighting). In Care
Specialties, we expect growth to come from bolt-on
acquisitions (especially in areas such as cosmetic additives)
and selling opportunities resulting from the new companys
expected ability to offer consumer products companies a
fuller range of laundry, body care and cleaning materials.
Degussa AG: Performance Chemicals Overview

Product and Markets
surfactants and additives for care products, perborates for detergents,
superabsorbents for diapers, oligomers and silicones as polyurethane
additives, industrial surfactants, paint and coating additives
thorough understanding of customer industries and applications
strong position in interface and surface technology
high added value for clients through improvement of their products

and innovation performance
Competitors
BASF, Cognis, Crompton, Dow Corning, Solvay
Leading Positions
superabsorbents, sodium perborate, organo-modified silicones,
amphoteric surfactants
Exhibit 36
This division will contain three business units, all ex-Degussa

from Sivento and Creanova. The business units are Coatings
& Colorants, Aerosil & Silanes and Advanced Fillers &
Pigments. The three businesses occupy strong market
positions currently, and therefore we believe the
opportunities for significant acquisitions are remote. We
expect the focus to be on continued organic growth and
investment in ground-breaking new products, such as the raw
materials made by Degussa for the green tyre.
Specialty Polymers
This division will comprise a collection of five highperformance polymer businesses based on methacrylate and
C12 chemistry Methacrylics, Specialty Acrylics,
Plexiglas, Engineering Plastics and an existing joint venture
with Bayer in Polmer Latex. With the exception of the joint
venture, the businesses came mostly from Rhm, and partly
from Creanova.
Methacrylics will provide monomers for specialty acrylates.
This division contains some commodity products, and
management has said that the investment focus in this
division will be on specialty low-volume performance grades
of acrylates and nylon 12. There is little scope for significant
acquisitions in this area, in our view, although there does
appear to be scope for one or two small bolt-on acquisitions.
Degussa AG: Coatings & Advanced Fillers Overview

Product and Markets
silicas and carbon black used in the tyre and rubber industries, silanes to
improve the adhesion of surfaces, coatings raw materials, colorants and
biocides
preferred and largest system supplier to tyre industry (based on 1999

data)
high innovation speed resulting in excellent possibilities for growth
only totally integrated supplier of isophorone chain

Competitors
Cabot, Crompton, Osi, PPG, Dow Corning
Leading Positions
carbon black, precipitated and fumed silicas, silanes, colorant dispersions,
isophorone, derivates, flatting agents
Exhibit 37
Degussa AG: Specialty Polymers Overview

Product and Markets
specialty polymers and monomers for the medical, electrical and
electronic, coating and adhesives, aviation and automotive industries;
refinery, construction, displays and optical discs
high entry barriers through intellectual property
back integration into key raw materials
highly integrated IP systems (supply-chain management, e-business)

Competitors
Ineos, Atofina, Rhm & Haas, Mitsubishi Rayon, EMS, Ube
Leading Positions
speciality acrylics, plexiglas, polyamide 12, coating and reactive resins,
pharma polymers, industrial lubricants, specialty monomers

Systematic divestment of non-core operations
Over the next few years, managements stated aim is for the
new Degussa to systematically divest operations that do not
form part of its core business. Operations at Degussa-Hls
earmarked by the company for disposal comprise the
precious metals activities, which were transferred to the
subsidiary dmc2 on January 1, 2000, ASTA Medica AG, the
Dental division, Phenolchemie and Degussa Bank.
Divestments on the SKW Trostberg side are to comprise
SKW Piesteritz and the gelatin, salt, metal chemicals and
industrial chemicals operations, according to management.
In total, the proposed divestments accounted for sales of over
ELOOLRQLQH[FOXGLQJWKHSUHFLRXVPHWDOVWUDGLQJ
operations at dmc2).
Since the companies involved are mostly successful in their
market segments, the executive board of the new Degussa
has indicated that it will take whatever time it needs to
implement the divestiture plans. Our discussions with
management, however, indicated that the disposal plan will
be mainly completed within one year, and that it appreciates
that speed is of the essence. We believe that managements
public statements reflect its desire not to be pigeon-holed to a
specific date or time period for the divestment plans. The
proceeds are expected to be used to strengthen the new group
s specialty chemicals operations.
M&A strategy
E.ON stated at the time of the merger of Viag and Veba that
it expected Degussa AG to be making acquisitions of
billion of specialty chemicals turnover and to grow to a total
sales size of somewhere in the region of ELOOLRQE\
2004.
While acquisitions remain on the agenda for Degussa, we do
not expect them to be of the magnitude suggested by E.ON.
We found the management of the new Degussa to be a little
wary of establishing an exact target for its proposed
acquisitions. We believe that E.ONs original estimate may
be on the high side of Degussas expectations.
The strong sense that we got from our discussions with
management was that growth would be achieved through
both internal and external means. Degussa sees specialty
chemicals, as we do, as an industry in transition, and views
consolidation as a fact of life. The new group has said it is
keen to be a leading participant in the expected consolidation
process, and envisages that the leading specialty chemicals

Page 33
companies will be worth in the region of

terms.
ELOOLRQLQVDOHV
There are many industry participants who argue that there is

little industrial logic to the formation of large specialty
chemicals players, as these are niche businesses, which do
not benefit from any economies of scale, and whose diversity
can overstretch managements.
We do not share this viewpoint. We believe that
consolidation is inevitable and that larger global specialty
companies will become a reality, for the following reasons.
The continued consolidation of the specialty chemicals
customer base; the need for a global presence; the move by
the customer base to limit the number of its suppliers; the
need to have critical mass; and the extremely low market
valuations suffered recently by small- to mid-cap specialty
chemicals stocks.
We believe that Degussas decentralised structure with its
devolved and autonomous business units and a strategic
portfolio management at the top make it well placed to
manage larger collections of specialty businesses and to
identify opportunities.
Relationship with E.ON
With E.ON owning 64.5% of Degussa AG, the new groups

relationship with its controlling shareholder is very
important. E.ON is expected to have three members on the
supervisory board of Degussa, who will have a mandate to
sign off on strategy, but will have no involvement in day-today operations.
Professor Felcht, the CEO designate of Degussa AG, has
monthly meetings with the top E.ON management to discuss
the integration process. However, we got the strong sense
from Degussa that it has a high degree of autonomy. We
would not expect E.ON to counter any ambitions that
Degussa has to grow the business, either internally or
externally.
In the medium to long term, investors may question the
strategic logic of E.ONs ownership of Degussa AG.
Clearly, there are few synergies between energy and
chemicals, and we think it is possible that a second round of
strategic focusing at E.ON could see at least a reduction of its
stake in Degussa AG, if not a complete sell-down, although
management has not suggested this. In a few years time,
Degussa AG should be a restructured, sizeable leader in
specialty chemicals, which would command a higher
valuation than that of the original SKW Trostberg and

Degussa-Hls. The question may then be whether this value
is fully reflected in E.ONs overall valuation.
Financial targets
Degussa AGs portfolio is currently showing profitability at

below-industry-average levels. The EBITDA margin for the
group in 1999 was 14% (17% in the core businesses).
Degussa has said it aims to achieve an EBITDA margin of
20% in its core businesses by the end of 2003. This would
put the company in the upper quartile of specialty chemicals
companies financial performers, on our estimates. We expect
profitability to improve through a combination of the
proposed restructuring measures, cost-cutting plans, disposals
and acquisitions. Management has said it expects to grow
sales organically by 5% per year to around ELOOLRQE\
2003, with a focus on acquisitions with both a strategic and
financial fit, and a focus on expanding the groups coverage
in Asia, NAFTA and Eastern Europe.
Management has also said it aims to improve returns to
exceed its cost of capital by two percentage points.
Degussas measure in this respect is a pre-tax EBITA-based
return on capital methodology, where it estimates its cost of
capital is currently around 12% (7.5% post-tax) and current
profitability is generating returns of around 11%. Therefore,
management is looking to improve the spread between
ROCE and capital costs by some three percentage points.
We believe returns are likely to be improved by a
combination of better margins (through cost savings and
divestments) and better use of capital (in the short term,
Page 34
driven by the disposals of relatively capital-inefficient

businesses).
In terms of restructuring, Degussa has indicated that
synergies are not the main driver of this merger. The new
group has said it expects to realise around PLOOLRQIURP
synergies over the next two years. This is expected to come
mostly from projects in the Fine Chemicals and Care
Specialties businesses (the only areas with significant
overlap). Degussa aims to realise much greater benefits from
restructuring in general: it is targeting a PLOOLRQ
reduction in costs over the next three years. This is the main
driver behind Degussas targeted improvement in EBITDA
margins, and centres around the new companys
best@chem strategy of implementation, integration and
reorganisation (Exhibit 40).
Both of these cost-reduction measures are likely to incur
implementation costs of 50-100% of their targeted benefits,
we believe. For the purposes of our forecasts, we have
estimated costs of PLOOLRQDQG PLOOLRQIRUWKH
restructuring and synergy projects, respectively.
Exhibit 38
Degussa AG: Financial Targets, 2000-2003E

(%)
EBITDA Margin
Exceeding Cost of Capital
Dividend Policy Payout1 (%)
20
2 % points
40-50
1. From net income after tax before extraordinary income.

Source: Company targets, Morgan Stanley Dean Witter Research
Exhibit 39
Degussa AG: Restructuring and Synergy Targets

Synergies
Target
PLOOLRQSHUDQQXP
Timing
2 years
Objectives (1) Overlapping businesses
Care Specialties and Fine
Chemicals ( PLOOLRQ
(2) Overlapping admin.
functions
Tools
benchmark-based: corp.
and business units take
individual action
Restructuring
PLOOLRQSHUDQQXP
3 years
(1) Restructuring business
organisation
(2) Downsizing of required
services
(3) Business process
re-engineering
best@chem
Source: Company targets, Morgan Stanley Dean Witter Research

Exhibit 40
Degussa AG: Main Restructuring Tool best@chem

Fundamental Process Optimisation
implement best-practice processes and structures

realise synergies of company scale and know-how platform
foster integration of Degussa-Hls and SKW and catalyse
transformation into new Degussa
increase flexibility to enable portfolio changes and reorganisation for
future growth
backbone: efficient IT landscape
Page 35
Management Board and Incentive Plans

Prof. Dr. Utz-Hellmuth Felcht was appointed Chairman
of the Management Board and CEO as of May 30, 2000.
He is responsible for the Corporate Division Board Office,
Corporate Development, Corporate Communications,
Investor Relations and Corporate Audit. He had been
Chairman of the Board of Management of SKW Trostberg
since October 1, 1998. Before that, he had been a member of
Hoechst Board of Management since 1992, and at the
beginning of 1997 became responsible for the Hoechst
Chemicals businesses Celanese, Ticona and Herberts.
Divisional control
Hans-Joachim Wagner will be CFO and responsible for

Corporate Treasury and Investor Relations, Corporate
Controlling, Corporate Accounting, Corporate Taxes and the
subsidiary Degussa-Bank GmbH. He also is in charge of the
North American region. He had been CFO at the former
Degussa-Hls since 1996.
Thomas Erb will be head of Construction Chemicals,

located in Trostberg. He was CEO of MBT Holding AG
since 1997 before becoming Head of the Construction
Chemicals Division of SKW Trostberg in 2000.
Dr. Alfred Oberholz will be responsible for Corporate

Development, and was responsible in Degussa-Hls for the
Sivento Division, the subsidiaries Infracor GmbH and Rhm
GmbH, the Corporate Division Integration Office and
Consulting, IT Strategy, Purchasing and Logistics, and the
Near East and Rest of World regions.
Each of the six divisions will have a small executive

management body of around five people, including the head
of the division.
Dr. Michael Witzel will be head of Health & Nutrition,
located in Trostberg. He had been a member of SKW
Trostbergs Nature Division since January 1997. He worked
for the former Degussa AG from 1985-90, before becoming a
management consultant at Arthur D. Little International.
Dr. Jrn Rter is head of Fine & Industrial Chemicals,

located in Marl. At Degussa-Hls, he was responsible for
Creanova, Industrial Chemicals, Stockhausen and Creavis.
He is president of Research & Development, responsible for
Exports and in charge of the South America region.
Previously, he had been a member of the Degussa Board of
Management since 1993.
Dr. Thomas Schoeneberg will be responsible for Human

Resources (Arbeitsdirektor). Before joining Degussa, he
was head of Human Resources and Social Affairs at Veba
AG until 1986, before joining Preussen Elektra AG, where he
was a member of the Executive Board starting in 1988.
Professor Dr. Hans-Joachim Kollmeier will be head of

Performance Chemicals, based in Marl. Since 1999, he had
been a member of the Board of Management of SKW
Trostberg for Performance Chemicals. Previously he had
been member of the Board of Management of Th.
Goldschmidt.
Exhibit 41
Exhibit 42
Degussa AG: Proposed Organisation of the Corporate

Centre
Degussa AG: Management Team, 1999/2000

Board of
Management
Corporate Centre
Chairman
CFO
Corpor. Development
Human Resources
Prof. Dr. U-H Felcht
H-J Wagner
Dr. A Oberholz
Dr. T Schoeneberg
Board Office
Controlling
Mergers & Acquisitions
HR and Social Policies
Corporate Governance
Finance
Corporate Development
Health, Safety,
Environment, Quality
Corporate Audit
Corporate Auditing
Innovation Management
Integration
Corporate Taxes
Synergy Management
Executive Resources
Legal and Insurance
IT Strategy
Chairman
&
CEO
CFO
Corporate
Development
Human
Resources
U-H Felcht
H-J Wagner
A Oberholz
T Schoeneberg
Food & Feed

Additives
Construction
Chemicals
Fine Chem &

Intermediates
Care Chemicals
Coatings &
Rubber Ingred.
Specialty
Polymers
Trostberg
Trostberg
Marl
Marl
Frankfurt
Frankfurt
T Erb
J Rter
H-J Kollmeier
C Voigt
M Spindler
Executive Vice
Presidents
M Witzel
Corp. Communications
Investor Relations

Dr. Carl Voigt will be responsible for Coatings &

Advanced Fillers, based in Frankfurt. Since 1993, he had
been head of Production and Technology in the Inorganic
Chemical Products Division of the former Degussa, before
becoming in 1996 a member of the Executive Board with
responsibility for Rubber Chemicals and Pigments, Silicas
and Chemical Catalysts, Precious Metals, Auto Catalysts,
Cerdec AG and Engineering.
Dr. Manfred Spindler will responsible for Specialty
Polymers, located in Frankfurt. Since 1992, Mr. Spindler
had been Vice President and General Manager of the Organic
Chemicals business area within the Industrial and Fine
Chemicals division of the former Degussa AG. In 1997, he
became a member of the Executive Board with responsibility
for Specialty Chemicals, Polymers, Environment and Safety
and the Far East region.
Page 36
early indications from management), and will take into

account the performance and development of individual
businesses under the direct influence of the individual
concerned. The long-term package will reflect the
performance of the whole Degussa group, through the
allocation of stock options/phantom shares (stockappreciation rights). In this case, movements in the share
price of Degussa as a whole will be reflected in
compensation levels.
At the present time (September 2000), fine details on the
structure or levels of these variable compensation packages
are being worked out. Looking at comparables across the
industry, we estimate a likely structure would be along the
lines of 50% base salary, then a 50:50 split of the remaining
50% into short-term and long-term incentives.
Exhibit 43
Management incentive plans
The most important structural change in the incentive plans

of the new group is the establishment of value-oriented
remuneration for the top executives. Changes in compensation packages towards this style of performance-linked
remuneration have in the past been well received by the
investment community, especially when seen as a sign that
efforts to effect cultural change are serious and far-reaching.
The top few hundred executives will be remunerated through
base salary and short- and long-term incentives. The shortterm incentives will probably be linked to some measure of
value creation (some variant of ROCE or EVA, based on

Degussa AG: Value-Oriented Management Remuneration
Top 300
Executives
Tool
Benchmark
Base Salary
Market analysis
Market conditions
Short-term
incentive
Target agreement
steering
Individual performance
Business development
Long-term
incentive
Stock options
(phantom shares)
Share Performance
Page 37
Health & Nutrition

11% of core sales, 12% of core EBIT
Enzymes business. The unit makes ingredients for functional

foods and cultures used in the production of dairy products.
Based on Morgan Stanley Dean Witter Research 2000 forecasts
Summary
The new Health & Nutrition division will house the

following four business units: the ex-Degussa-Hls Feed
Additives business, and from SKW, Texturant Systems,
BioActives and Flavours & Fruit Systems. We estimate this
division had sales in 1999 of around PLOOLRQZLWK)HHG
Additives being the largest stand-alone business in terms of
sales and profits.
The other two segments of the original SKW Nature Products
division Gelatin Specialties and Salt Products are now
classified by the company as non-core, and Degussa has
indicated it is likely to divest them.
The Feed Additives business produces amino acids that are
used as additives for animal feed. This has been one of
Degussa-Hls more profitable operations, with margins well
above the group average. Feed Additives also produces
vitamins, but this business accounts for less than 10% of the
segments sales.
The Flavours & Fruit Systems segment manufactures

flavours additives, especially for fruit, confectionery and
dairy applications.
Benefiting from a good strategic fit between the Feed
Additives business and the ex-SKW operations, we believe
the Health & Nutrition division should be a strong
contributor to both the top and bottom line for the new
Degussa. This is the only division that does not have strong
ties to GDP growth, and as such we expect this to be
reflected in above-GDP growth rates.
Building on a strong performance in the first half of 2000, we
expect sales to increase by 17.8% in 2000 to PLOOLRQ
and to increase by 6.9% in 2001. We estimate top-line
growth over the medium term of 5-6% per annum, and an
improvement in margins to 11.2% in 2000 and 12.1% in
2001, with scope for further improvements over the next few
years, driven by solid market growth and internal
improvements.
Exhibit 44
Texturant Systems, the largest of the segments included from

SKW, produces food additives (gums, thickeners and emulsifiers) for product areas such as dairy, meat, confectionery, ice
cream, sauce and dressings.
Degussa AG: Health & Nutrition Sales and EBIT,

1999-2003E
BioActives has been a separate business unit since the start of

2000, having been formed from part of the former Cultures &
1. Pro-forma
Exhibit 45
Exhibit 46
Degussa AG: Health & Nutrition Sales Breakdown,

2000E
Degussa AG: Health & Nutrition EBIT Breakdown,

2000E
Flavours and Fruit

Systems
19%
Bio Actives
7%
PLOOLRQ
1999A1
2000E
2001E
2002E
2003E
806
73
950
106
1,015
122
1,067
137
1,124
149
Sales
EBIT
Flavours
Feed Additives
46%
Texturant Systems
28%
Source: Company data, Morgan Stanley Dean Witter Research Estimates

and Fruit Systems

21%
Bio Actives
7%
Feed Additives
44%
Texturant Systems
28%
Recent corporate developments
In 1998, SKW acquired the Ingredient Systems division

(ISD) from Bunge Foods to strengthen its position in the food
processing additives sector and in the North American
market. The integration was largely complete by the end of
1998. Following this acquisition, SKW gained a more
balanced regional portfolio, with sales volumes in North
America increasing by DM 120 million, or 30%. ISD fits
strategically within the existing businesses of Texturant
Systems and Flavours & Fruit Systems.
In the same year, the antibiotics operations of SKW
Biotechnolgiai, Hungary, and the garden-care business of
Euflor, Germany, were sold by SKW as part of its ongoing
restructuring. SKW Biotechnolgiai produced generic
antibiotics for human and animal use, and therefore did not
fit into SKW Nature Products core businesses.
In August 1999, SKW completed the acquisition of the Lucas
Meyer Group (LM), a family-owned, Hamburg-based group
of companies with sales of DM 160 million and 245
employees in 1998. As its main activities are in lecithinrelated products and other food ingredients and additives, LM
fits with the other businesses in Texturant Systems.
LM is the global market leader in lecithins (global market
share of 27%). Lecithin is used mainly as an emulsifier in
food processing and health and functional food. LM is
focused on the German market, with a market share of 34%.
The company also has activities in the UK, Belgium, the
Netherlands and the US.
Page 38
In November 1999, SKW announced the acquisition of Alex

Fries, Inc. and Alfrebo, Inc. from Land OLakes, a North
American national farmer-owned food and agricultural cooperative, to strengthen its position in the food flavouring
market.
The two businesses will form part of the Flavours & Fruit
Systems segment, adding sales of US$36 million (pro-forma
1998). Alex Fries is specialised in artificial and natural
flavouring systems for beverages and dairy products, while
Alfrebos focus is on natural flavouring molecule isolation.
Following these acquisitions, SKW became one of the top
three beverage flavours companies in North America.
Other developments at SKW
SKW undertook two restructuring programmes over the last

two years to improve profitability. These were
Fortschritt/Progress, Integration, Team Spirit (F.I.T.) in the
Salt unit, and Management and Organisation for Value
Enhancement (M.O.V.E.) in the remaining four business
units. These two programmes resulted in significant cost
savings of about DM 30 million each in 1997 and 1998 and
around DM 10 million in 1999.
Detailed business unit performance and strategy
Feed Additives
The Feed Additives unit manufactures amino acids that are

used, along with minerals, essential oils and pre-mixes, as
additives for animal feedstuffs. This business has been one
of Degussa-Hls more profitable operations, with margins
well above the group average. Feed Additives also produces
vitamins, but this business accounts for less than 10% of the
segments sales.
Exhibit 47
Exhibit 48
SKW Trostberg: Nature Products Important

Transactions, 1995-99
Lucas Meyer Group: Sales Structure, 1998
Company/Division
Acquisitions
SBI Sanofi Bio-Industries
Bunge Foods, US
Lucas Meyer Group, Germany
Alex Fries, US
Alfrebo, US
Segment
Year
1995
1998
1999
1999
1999
Food Processing
Health & Functional Food
Animal Health/Nutrition
Technical Application
Cosmetics
Pharma
Total
(DM million)
(%)
90
40
12
8
5
5
160
56
25
8
5
3
3
100

Disposals
SKW Biotechnolgiai, Hungary
Garden Care Business of Euflor, Germany
1998
1998
Investments (selective)
DM 15 Million Fermenter at Xanthan gum unit, France
Flavours & Fruit Systems: About DM 20 Million in Projects
1999
1999

The business dominant product is methionine, which has

revenues in the range of PLOOLRQ'HJXVVDKDVD
significant advantage here in that the manufacture of
methionine requires inputs from acrolein and hydrogen
cyanide, which is already part of Degussas chemical
manufacturing chain.
Degussa has a market-leading position in methionine, with a
current global market share of at least 30%. The main
competition comes from Aventis, with a similar market
share, and Novus. Aventis produces a different, more
expensive formulation, and the impression in the industry is
that the business is probably not seen as core to the
companys healthcare strategy. However, we believe that
antitrust issues are likely to prevent any consolidation
between the major players.
Growth rates for methionine over the last decade or so have
been 7-8% per annum (lysine has grown at double these
rates). Methionine has suffered pricing pressure over the
recent past, due mostly to oversupply issues and a weak
agricultural pricing environment in general: for example,
average animal feed prices have fallen by around 10% over
the last three to four years. However, the Feed Additives
business still performed credibly last year management
indicated that in times of bad profitability, margins were
around the 10% level, with the ability to double in good
times. The pricing environment appears to be improving, and
the business is assisted by the weak euro, as methionine is
predominantly priced in US dollars.
Degussa also holds a leading market position in the production of threonine, which is widely used as a feed additive
for pigs. In terms of overall size, the threonine market is less
than 10% the methionine market, but growth rates are
currently well into the double-digit range. Lysine markets
have been affected by weak prices, especially due to
substantial low pricing in the soya bean markets (a natural
competitor).
As well as benefiting from the higher growth rates of
threonine and lycine, the company has said it aims to develop
the Feed Additives system approach further (offering a

Page 39
range of complementary products). This should increase

trading cyclicality and improve trading visibility. The
business has been strong so far in 2000, with earnings well
ahead of the first half of 1999. We estimate Feed Additives
could grow sales by around 20% in 2000 and around 7% in
2001, with margins improving from current levels of around
11% to 12-13% over the medium term.
Texturant Systems
Texturant Systems, the largest of the segments included from

SKW, produces food additives (gums, thickeners and emulsifiers) for product areas such as dairy, meat, confectionery, ice
cream, sauce and dressings.
Texturant Systems produces texturing agents including
alginates, biopolymers, blends, carrageenanes, compound
systems, galactomannans and pectins mainly for the food
industry, with three-quarters of the business in Europe and
North America. With the exception of Xanthan, all products
are produced from naturally derived raw materials. The
Texturant Systems business is the worlds third-largest
manufacturer of xanthan gum (the other large players being
Kelco and Jungbunzlauer).
The business re-oriented its products and customer portfolio
and acquired Lucas Meyer in mid 1999, whose main
activities are in lecithin-related products and other food
ingredients and additives. Texturant Systems had a good
1999, and demand remained promising in the first half of
2000, especially for pectins, blends and alginates.
BioActives
The BioActives business has only been around since the start
of this year, having been formed at the start of 2000 from part
of the Cultures & Enzymes business. The unit makes food
ingredients that are not functional (such as thickeners and
stabilisers), but are used for their nutritional benefits, such as
cultures, enzymes, phospholipids and amino-acid derivatives.
Cultures and enzymes are used for the production of dairy
products and cheeses, in starch and meat processing and in
breweries. In 1998, SKW implemented a new market
strategy focusing on value-added products. It increased its

profitability by concentrating on cultures systems and EMDI
(enzyme modified dairy ingredients) in order to benefit from
the increasing importance of probiotic cultures.
Market growth is supported by the food industry trend to sell
functional foods (foods that offer potential health benefits)
alongside traditional flavour-oriented foodstuffs. On forming
this segment, the companys stated strategy was to aim in the
medium term for sales of PLOOLRQYLDERWKRUJDQLF
investment and acquisitions.
This business produces flavours and fruit systems for soft

drinks, dairy products, prepared food and confectionery.
SKWs own CO2 extraction technology is used to
decaffeinate tea and coffee, to extract hops and for the
defattening of cocoa. These applications are concentrated on
the North American market.
With the 1998 acquisition of the Ingredient Systems division
of Bunge Foods Corp., SKW strengthened its position in the
US in the texturant systems and flavours & fruit systems
businesses, and became the North American number three
and two, respectively. The acquisitions of Alex Fries and
Alfrebo in November 1999 should further strengthen the
companys North American position.
Page 40
additives group within Health & Nutrition. The positioning

of these three ex-SKW businesses is weighted towards the
growth end of the industry lifecycle curve, an aspect
heightened by their strategic separation from the other former
SKW businesses, Gelatin & Specialties and Salt Products.
Although genetically modified organisms (GMOs) are the
subject of controversy worldwide, SKW Trostberg has said it
aims to be at the forefront of the development in biotechnology in order to remain an attractive partner for the food
industry. Within the next five to eight years, we expect that
biotechnology will play an increasing role in the texturant
systems and cultures & enzymes businesses, such as in the
replacement of natural coagulate rennet by genetic
chymosin. SKW has a number of R&D projects in this area.
In November 1999, the company announced a DM 15 million
investment in a new research centre for its Nature Products
division at the Weihenstephan campus of Munich Technical
University. SKW expects the new research centre to become
operational by December 2000. The company expects the
flavours and flavours-enhancers market to grow strongly,
hence Flavours & Fruit Systems is another segment in which
SKW has said it intends to expand its activities.
Feed Additives increasing demand for nutraceuticals
Before the planned merger, SKW had aimed to double sales

volumes in its Nature Products division to about ELOOLRQ
within the next few years, representing some 20% of the
billion global food additives market. We believe this
strategy is well suited to the current structure of the feed
Degussa-Hls has said it aims to meet the increasing demand

for nutraceuticals as the trend towards healthy living
continues. Nutraceuticals include natural-alternative or
complementary medicines, dietary supplements and
functional foods, and the Health & Nutrition division is
active in the latter two. World demand for bulk
nutraceuticals is likely to grow by 5-8% per year, from US$6
billion currently, according to various market studies in
Exhibit 50
Exhibit 49
Degussa AG: Feed Additives Industry Lifecycle

Positioning
Methionine Production Part of Degussas Chemical

Chain
Feed Additives outlook
Fine
Chemicals
Salt Products
Gelatin and
Specialties
Texturant Systems
IPDA
IPDI
ACH
MMA
H2O2
Flavors and Fruit Systems
NaCN
CYC
BioActives
Aerosil
H2
BMA - Process HCN
Methionine
MMP
Embrionic
Growth
Mature
Decline
Note: The Gelatin & Specialties and Salt businesses are now non core, according
to management

Silane
Acrolein Mercaptane
Europe and the US.

The functional food market is growing rapidly, with the number of products tripling since 1997-98, according to a US
marketing study (Naples). Within the US dietary supplements market, food supplements grew by 15% between April
1998 and 1999 (Exhibit 51). Within the food additives
market, processed food is the largest and fastest-growing
market as the food industry works on optimising taste,
convenience, nutrition, safety and affordability of products.
Regional development. We expect Asia Pacific and Latin
America to provide the best growth opportunities in the
nutraceuticals business, with demand growth from a low base
reflecting rising consumer income levels. However, these are
also the regions where we think SKW Trostberg needs to
play a more active role, as it currently is focused on the
European and US market.
Regulation. Whereas in the US regulation is quite liberal, in
Europe the regulatory environment is difficult and it seems to
take a long time for new products to be approved by the
European Commission.
Page 41
Products. According to BASF, which is an active player in

the nutraceuticals market, there are several risks and
difficulties in this market (apart from regulation). These
include short life-cycles; the publics unfavourable
perception of nutraceuticals; and the perception in the market
that that many products fail to live up to the beneficial claims
made for them.
Competition. In Europe, DSM entered the food
additives/nutraceuticals market in 1998 by buying GistBrocades. Along with its food intermediates business (Food
Specialties and Bakery Ingredients), this area accounted for
10% of DSMs 1999 sales. In addition, BASF is active in
vitamins and enzymes, and has stated that it intends to double
sales of fine chemicals over the next five years (of which
vitamins account for approximately half).
Competition looks likely to stiffen further as big pharma
companies are entering the market, such as Warner Lambert,
Roche and American Home Products.
Exhibit 51
Exhibit 52
US Dietary Supplements Market, 1998/991
Global Nutraceutical Market by Region (US$ bn), 1999
Total Sales
Total Growth
(US$ million)
(%)
Food Supplements
Miscellaneous Supplements
Vitamins and Minerals
Supplements, Powders/Sports Nutrition
Herbal Formulas
Herbal Singles and Bulk
Homeopathic Remedies
Total
484.1
929.5
1,750.6
229.7
365.5
699.3
96.3
4,554.4
1. For the 12 months ending April 1999

Source: SPINS, AC Nielsen, Morgan Stanley Dean Witter Research
15
17
7
10
17
0
6
1.20
1.00
0.80
0.60
0.40
0.20
0.00
North America (33%)
Europe (30%)
Supplements
Japan (14%)
Food
Source: BASF, Morgan Stanley Dean Witter Research

Rest of World (23%)
Page 42
Exhibit 53
Degussa AG: Health & Nutrition Overview of Proposed Portfolio

Business Units
Product Lines
Growth1
Margin2
Markets
Feed Additives
(methionine, lysine, threonine)
Amino acids
average
high
Animal feed (swine, poultry)
Alginates
Biopolymers
Blends
Carrageenanes
Compound systems
Galactomannans
Pectins
high
high
high
high
high
high
high
high
high
high
high
high
high
high
Dairy, ice cream, non-food

Sauces, dressing, convenience food
Food industry
Sausage, meat, dairy
Meat, dairy, confectionery
Dairy, ice cream, meat, non-food
Jelly, drinks, confectionery
Flavours
Fruit systems
CO2 extraction
high
high
high
high
high
high
Drinks, ice cream, confectionery

Yoghurt
Flavours, drinks
Cultures
Enzymes
EMDI
average
average
average
average
average
average
Food industry (dairy)

Texturant Systems
BioActives
1. low = GDP growth minus 1-2%; average = GDP growth; high = GDP growth +.
2. low = 0-5%; average = 5-10%; high = 10-20%
Exhibit 54
Degussa AG: Global Food Additives Market Competitive Positioning, 1999

Product Lines / Market Positions
No. 1
No. 2
No. 3
No. 4
No. 5
No. 6
No. 7
Gelatin & Specialties

Edible (for food)
SKW
Leiner
DGF
Technical (for photos/film)
SKW
DGF
Nitta
PB
(for pharma)
DGF
SKW
________________________________________________________________________________________________________________________
Salt Products
SKW
Solvay
K&S
Akzo
SAG
________________________________________________________________________________________________________________________
Texturant Systems
Alginates
Kelco
Pronova
China
SKW
Biopolymers
Kelco
Jungb.
SKW
Rhodia
Blends
Danisco
Leiner
CCI
SKW
Carrageenanes
FMC
Shemberg
SKW
Hercules
Compound Systems
Jaeger
SKW
Soussano
Ceylan
Galactomannans
Danisco
SKW
Hercules
Polygal
Pectins
Hercules
SKW
Danisco
Herbstr.
________________________________________________________________________________________________________________________
Flavours
Giv. Roure/
IFF
Tastemaker
Quest
H&R
Fruit Systems
SIAS
IFF
SKW
CO2 Extraction
Barth
SKW
________________________________________________________________________________________________________________________
Cultures & Enzymes
Hansen
Rhodia
SKW
Pfizer Gist. Brocad.

Page 43


million. We estimate that sales will grow by 9.5% to
ELOOLRQLQDQGVKRXOGJURZDWDURXQGSHU\HDU
over the medium term. Our operating-margin forecasts are

7.5% in 2000, rising to 7.8% in 2001 and 8.1% in 2001.
Summary
Degussas Construction Chemicals division is the only

division in the proposed new company made entirely from
non-Degussa-Hls businesses. The company benefits from a
global-leadership position in a wide range of construction
chemicals and was SKWs largest contributor to group sales
and profits. The business is likely to be a strong contributor
to profitability in the new group, and especially to overall
returns on capital, given its relatively low capital
requirements.
After the acquisition in 1996 of Master Builders Technology
(MBT, the building materials subsidiary of Sandoz), SKW
Trostberg became the world market leader in construction
chemicals, with more than double the sales and market share
of the number-two player, Sika Finanz AG. The business has
a global market share of 10% in a highly fragmented market.
With 6,500 employees it offers one of the broadest portfolios
of both products and technologies. We think this limits
SKWs growth in construction chemicals to internal growth,
as any large acquisition would probably be a cause for
concern for the antitrust authorities.
Recent corporate development
In March 1999, the company acquired Harris Specialty

Chemicals, a leading US construction chemicals group in the
US, thus improving its world-leadership position. Harris had
sales of US$200 million in 1998 and fit well with SKWs
existing construction chemicals, as it is active in
repair/sealants, exterior insulation finishing systems and
industrial flooring.
The acquisition strengthened SKWs position in the US and
Latin America, where Harris conducted two-thirds of its
business. The integration is now complete and the
headquarters has been moved from Jacksonville to the MBT
headquarters in Cleveland, Ohio. The production locations
of Harris and ChemRex/MBT have been rationalised and
decreased from nine to six sites. Moreover, the Harris
Specialty Chemicals brands have been integrated into the
MBT/ChemRex portfolio.
Exhibit 55
Degussa AG: Construction Chemicals Sales and EBIT,

1999-2003E
1999A1
2000E
2001E
2002E
2003E
1,537
111
1,683
126
1,752
137
1,817
146
1,883
154
1999 market conditions recovered from a tough 1998, particularly in Europe and North America, leading to full-year
1999 sales of ELOOLRQDQGDQ(%,7$RI PLOOLRQ
Trading so far in 2000 has been strong, with first-half sales
up by 15% to PLOOLRQDQG(%,7$XSE\WR
Exhibit 56
Exhibit 57
Degussa AG: Construction Chemicals Sales

Breakdown, 2000E
Degussa AG: Construction Chemicals EBIT

Breakdown, 2000E
Asia Pacific
17%
Germany
30%
Americas
30%
PLOOLRQ
Sales
EBIT
1. Pro-forma
Asia Pacific
15%
Germany
35%
Americas
33%
Europe
23%

Europe
17%
In June 1999, SKW Trostberg announced the investment of

DM 42.5 million in two projects: the construction of a new
research centre for construction chemicals in Trostberg, and
the financing of a construction chemicals chair at Technische
Universitt Munich. By doing this, SKW is supporting the
governments High-Tech Offensive in Bavaria, and is
therefore eligible to apply for government grants of some
DM 12.5 million. The research centre is expected to be
completed by 2001 and will be used to develop key
technologies and products in the construction chemicals
sector, according to the company.
Because of the different local building conditions,

Construction Chemicals is a highly regional business, and
therefore, with the exception of construction and oil-field
polymers, the division is organised in regional business units.
Also, due to the regionality of the business, Degussa operates
ten research and development centres worldwide.
The main products and systems of Construction Chemicals
include admixtures for concrete and mortar, construction and
oil-field polymers, tile-setting adhesives, grouts and mortars,
flooring, sports floors, sealants, levelling materials, plastering
systems, building and industrial paints and coatings, thermal
insulation, and wall renovation.
Admixtures, where SKW has a global market share of 3035%, accounted for around 40% of Construction Chemicals
sales in 1999. SKW is at the forefront of new product
developments in this area, such as Glenium, a new generation
of concrete plasticiser that delays the hardening of fresh
concrete. The company developed Glenium in Japan, and
introduced it in Europe in 1997 and Latin America in 1999.
Page 44
The construction and oil-field polymers business unit is a

relatively small, but highly profitable business, with margins
in the double-digit range above the divisional average.
The unit is dependent on the highly specialised gas and oil
exploration market and is therefore sensitive to the US dollar.
The construction chemicals market is characterised by two
important features. First, the marketing of brands is crucial.
By developing a strong brand name, market shares have been
won from unbranded products. SKW offers superior, highquality products and markets them effectively, in our view.
Second, technology transfer is important. Degussa has said it
hopes to increase technology transfer across regions, as was
achieved with Glenium. The company hopes to introduce
product innovations worldwide after adapting them to
prevailing regional market conditions and requirements.
The construction chemicals production plants have fairly
low capital-intensity requirements, which resulted in a return
on capital employed for this division of 17-18% in 1999, on
our estimates. In our view, Degussa is the global market
leader in construction chemicals, recording an estimated
1999 EBITA margin of 11%.
The companys stated strategy for Construction Chemicals is
twofold. In mature markets, the business concentrates on
renovation and repair, as this requires about three times the
number of building chemicals per building unit as new
construction. In growing markets, Construction Chemicals
focuses on new construction (infrastructure, residential and
industrial construction). Degussa has said it aims to develop
core expertise in Underground Construction (UGC) and
Polyurethane Sealants/Waterproofing, as this should enable it
to become part of big construction plans.
Exhibit 58
Exhibit 59
SKW Trostberg: Construction Chemicals Important

Transactions, 1996-99
SKW Trostberg: Construction Chemicals
Company/Division
Year
Acquisitions
Master Builders Technology (MBT)
Harris Specialty Chemicals
1996
1999
Investments (selective)
DM 42.5 million in R&D centre and construction chemicals
chair at the University of Munich
DM 15 million in Turkish plant
DM 25 million in admixture joint venture near Shanghai
1999
1999
1999

In 1999, Europe produced good results. However, the German market was disappointing. New product and technology
launches drove the growth, particularly in Italy, Spain,
France, Belgium and the Middle East. Although the West
German market stabilised, the East German market was still
down, as overcapacity led to pricing pressure. The Americas
showed very good results, driven by the large repair and
improvement segment and new products and systems.
In Japan, where the business is the number one in the mixture
market, better results were reported despite the financial and
economic crisis. Asia was still difficult, as the construction
sector broke down in 1998. However, we believe that these
markets are now recovering.
Construction and oil-field polymers offer stable profitability,
we believe. The increase in the oil price and subsequent
increase in oil-field activity should help this business.
Page 45
According to independent studies, the US construction

chemicals market currently is worth around US$5.8 billion.
We expect demand to grow by 3-5% per annum, driven by
new applications and formulations, and by the large repair
and improvement segment.
The outlook for Europe looks good as well, with the
exception of Germany. We expect Germany to remain weak
initially, but to stabilise and improve over the medium term.
In Asia, we expect the recovery to continue at a slow but
accelerating pace, although Construction Chemicals does not
have a very strong position in these markets currently. For
Japan, the outlook looks good, as investments in infrastructure appear likely to continue. We expect total sales in
Construction Chemicals to grow more or less in line with
GDP growth.
Exhibit 60
European Construction Growth, 1996-2000E

(%)
1996
1997
1998
1999E
2000E
France
Germany
Ireland
Italy
Portugal
Spain
UK
Western Europe (EC-15)
-3.8
-3.1
17.5
2.0
4.5
-1.0
2.3
-0.3
-0.9
-2.5
12.7
0.7
12.4
2.0
3.0
0.9
1.9
-4.3
10.1
3.2
5.0
6.1
1.6
0.8
4.4
-0.1
12.6
3.3
2.6
6.3
2.4
2.4
2.7
1.0
8.9
1.5
2.9
4.5
2.6
2.1
Central Eastern Europe (EC-4)

Euroconstruct Countries (EC-19)
3.7
-0.2
6.8
1.1
3.7
0.9
3.4
2.5
6.5
2.3
E = Euroconstruct Estimates, June 1999
Source: Euroconstruct, June 1999
Exhibit 61
European Construction Spending, 1998
PLOOLRQ
New
Private
Public
Total
Total
Residential
Non-Resid.
Non-Resid.
Civil
Renovation
Total
of Total
Construction
Construction
Construction
Engineer.
Industry
Construction
Eur. Construct.
68.12
16.66
20.91
11.45
18.38
7.96
8.74
7.70
6.78
1.12
2.69
4.13
1.78
2.43
______
178.86
32.96
12.38
10.45
17.46
7.43
4.49
5.69
6.10
2.27
3.58
2.36
1.71
1.85
2.48
______
111.21
5.15
3.14
4.12
5.15
0.93
1.55
1.83
0.78
0.87
1.67
0.63
1.68
0.93
0.60
______
29.03
33.87
22.17
20.37
15.55
16.62
7.11
6.36
4.27
6.92
6.50
4.92
5.15
3.41
2.85
______
156.08
56.50
47.08
42.84
36.74
13.27
14.06
10.85
8.12
5.79
8.41
6.69
0.54
5.18
3.87
______
259.95
196.60
101.45
98.70
86.36
56.63
35.18
33.47
26.98
22.62
21.27
17.30
13.22
13.16
12.22
______
735.14
26.7
13.8
13.4
11.7
7.7
4.8
4.6
3.7
3.1
2.9
2.4
1.8
1.8
1.7
______
100
Germany
Italy
France
UK
Spain
Netherlands
Austria
Belgium
Switzerland
Sweden
Denmark
Portugal
Norway
Finland
Total
Source: Euroconstruct, December 1998

Streamlining the US organisation
Page 46
Exhibit 62
SKW started to streamline its operations following the Harris

acquisition in order to exploit synergies and to increase
profitability across the regional companies in the US. The
company has said that operations will be optimised by
centralising functions in administration, financing and
manufacturing. The company set up SKW Americas, Inc., in
Cleveland, Ohio, a central holding company offering services
in the areas of finance, personnel, law and purchasing to the
regional North American companies of the Construction
Chemicals and other North American divisions.
SKW Trostberg: US Organisation, 1999

50%
SKW Trostberg AG
100%
Affival SA
France
100%
Affival,
Inc.
SKW Americas, Inc.

100%
ESM II,
Inc.
85%
Stollberg,
Inc.
100%
100%
100%
100%
100%
51%
Tecpro,
Inc.
SKW
Chemicals
Inc.
ChemRex,
Inc.
SKW-MBT
Services
SKW
BioSystems
Proligo
LLC
Oregon
Research
Watson
Bowman
Senergy
HSC II
Master
Buildings
Inc.
SKW-MBT
Operations
SKW-MBT
Leasing

Exhibit 63
Construction Chemicals: Main Industry Players, 1999

Concrete Admixtures
Construction Chemicals and

Surfaces
Europe
Americas
Far East
Fosroc
SIKA
SKW-MBT
WR Grace
Euclid
SIKA
SKW-MBT
WR Grace
Fujisawa
Kao
SIKA
SKW-MBT
WR Grace
Dyckerhoff
Fosroc
Heidelberger
MC Bauchemie
SIKA
SKW-MBT
Sto
Fosroc
RPM
SIKA
SKW-MBT
Denka
Fosroc
SIKA
SKW-MBT
Sumitomo

Page 47
Exhibit 64
SKW Trostberg: Construction Chemicals Product Overview

Construction Chemicals Products and Systems for:
Building and civil engineering

Admixtures for concrete and mortar
Additives for plaster and anhydrite, refractory masses
Sealants
Coatings for industrial floors and parking decks
Tunnelling and underground construction
Admixtures for spray concrete
Anchoring
Backfilling and injection
Special equipment
Maintenance and protection
Concrete maintenance systems for buildings and civil engineering constructions
Sealing system for ground-water protection
Corrosion protection agents
Coatings for sealing and abrasion protection
Construction and wall renovation
Finishing work
Building-material systems for tile setting
Building materials for sealing surfaces, joints and cracks
Adhesives, insulation materials
Oil-well drilling technology
Additives for drilling mud and the completion of oil wells
Polymers and specialty chemicals
Sporting surfaces
Coatings for racing tracks, play and multipurpose sport halls
Surface Protection:
Building paints and coatings

Plaster, coatings and paints for walls, facades and floors
Wood protection varnishes and paints and wood sealants
Exterior insulation finishing systems
Paints, primers and colour tone systems
Metal-protection systems
Stucco systems
Marine Applications:
Marine paints
Underwater and above-water systems
Deck coatings
Interior work
Coatings Applications:
Industrial paints
Paint systems and coatings
Powder coatings and special-effect paints
Metal-protection systems
Industrial Applications:
Oil-well drilling technology

Additives for drilling mud and the completion of oil wells
Polymer and specialty chemicals
Well cementation

Page 48

Summary
The Fine & Industrial Chemicals division is home to three

businesses: Fine Chemicals (a combination of Degussas
Fine Chemicals and SKWs Special & Fine Chemicals);
Bleaching & Water Chemicals (Degussa); and C4 Chemicals
(part of Degussas Oxeno business). We estimate in 2000
divisional sales of around ELOOLRQDQGDQRSHUDWLQJ
margin of around 9%.
The Fine Chemicals business manufactures a diverse range of
chemicals and intermediates, and serves a wide range of
markets. In particular, both the ex-Degussa-Hls and exSKW businesses have significant sales of high-value intermediates into the life science industries. We believe the new
business will probably be one of the global top five manufacturers of fine chemicals, and also one of the global top five
manufacturers of intermediates for the pharmaceuticals
industry. The business potential for top-line growth is, at 58% on our estimates, well ahead of the group average. The
potential for margin improvement is also significant, we
believe. Degussa has indicated that the division aims to grow
sales to around ELOOLRQDQG(%,7WRDURXQG PLOOLRQ
in the next three years, and also to invest around PLOOLRQ
in the next four years to drive this growth.
The C4 Chemicals business is the more profitable part of the

ex-Degussa-Hls Oxeno business. C4 Chemicals is based on
strong positions in butadiene and butene chemistry, and sells
products used as copolymers, adhesives, rubbers and plastics,
and plasticisers.
We estimate that divisional sales in 2000 will increase by
9.3%, driven in particular by good volume growth in the C4
Chemicals and Hydrogen Peroxide businesses. Top-line
growth should reach 6% in 2001 and 5% in 2002, on our
estimates. We expect the overall operating margin to
improve from 8.3% in 1999 to 9.3% in 2000, although there
is likely to be some margin pressure in the Superabsorbents
business. Margins should improve further to 10.6% in 2001
and 11.5% by 2002, on our forecasts, reflecting restructuring
benefits and trading improvements.
Fine Chemicals
With sales of around PLOOLRQLQWKH)LQH

Chemicals business focuses particularly on nitrogencontaining intermediates. From the Degussa-Hls side, the
business includes the Standard Intermediates (1999 sales of
Exhibit 65
Degussa AG: Fine & Industrial Chemicals Sales and

EBIT, 1999-2003E
(
PLOOLRQ
1999A1
2000E
2001E
2002E
2003E
1,363
113
1,489
138
1,576
166
1,649
189
1,712
205
The Bleaching & Water Chemicals business has a leading

global position in the production of hydrogen peroxide and
cyanides, and also manufactures flocculants (ex-Stockhausen
business).
Sales
EBIT
Exhibit 66
Exhibit 67
Degussa AG: Fine & Industrial Chemicals Sales

Breakdown, 2000E
Degussa AG: Fine & Industrial Chemicals EBIT

Breakdown, 2000E
1. Pro-forma
C4 Chemicals
17%
C4 Chemicals
16%
Fine Chemicals
52%
Fine Chemicals
49%
Bleaching & Water
Chemicals
35%

Bleaching & Water

Chemicals
31%
PLOOLRQDQG$GYDQFHG,QWHUPHGLDWHVVDOHVRI

PLOOLRQEXVLQHVVHVZKLFKQRZLQFOXGH PLOOLRQ
of sales from the transferred ASTA Medica active ingredients

business as well as the Intermediates business formerly in
Creanova, but excludes the DMT (dimethylterephthalate)
operations (1999 sales of PLOOLRQ7KH6.:VLGH
contributes the Special & Fine Chemicals business (1999
sales of PLOOLRQ7KH'HJXVVD+OVEXVLQHVVVROG
around two-thirds of its products into the life science
industries in 1999. We estimate this split is likely to be
similar in the new division.
The Fine Chemicals product portfolio has the benefits of
SKWs expertise in cyanamides, aromatic nitriles, cyanuric
chloride (although the SKW part or all of this business may
be divested for anti-trust reasons) and N-heterocycles; and
Degussa-Hls know-how in peptide intermediates,
alkoxides, amino acids, esters, cyano compounds and
cyanuric chloride. The business has an advantageous raw
materials position, as it is back-integrated into, among other
chemicals, hydrogen cyanide.
The Advanced Intermediates area is capable of a wide range
of custom synthesis processes. Of particular interest are the
business offerings in peptide chemistry, chiral chemistry and
enzyme/biocatalytic reactions. Among other products, the
business currently supplies intermediate compounds for the
AstraZeneca/Merck drug Lisinopril, the Merck drug Virgan
and the Glaxo Wellcome drug Zovirax.
Although chemically well positioned, the business is not as
strong in cGMP facilities as some of the other industry
leaders (although the ASTA Medica business is FDAapproved). This is likely to be an area of significant
investment, we believe, as running cGMP-approved facilities
is perceived in the industry as a key factor in winning
Page 49
significant volumes of high-value intermediate

manufacturing contracts from life science customers.
In the Standard Intermediates area, Fine Chemicals produces
(and has leading positions in) cyanuric chloride, malonates,
cyanoacetates, alcoholates and orthoesters. Given that
Degussa-Hls has a leading market share in cyanuric
chloride, ahead of Lonza and SKW, the new combined
business should be the clear market leader in this area (even
post the regulatory-body-enforced sale of some or all of the
SKW part). Cyanuric chloride is used in the manufacture of
agrochemicals (particularly Atrazine), optical brighteners,
dyes and various plastics additives. This area has recently
faced some pricing pressure, and demand growth may not be
very strong, as the demand for Atrazine looks likely to fall
due to dosage restrictions. The cyanuric chloride business is
likely therefore to grow at sub-GDP growth rates: we
estimate around 2% per annum. Other standard intermediate
products are used in pharmaceuticals, agrochemicals,
adhesives, dyes and food additives.
The Standard Intermediates area also produces plant-growth
regulators and a range of dietary supplements. This business
is the global market leader in cyanamides. Cyanamides are
an important chemical building block in a range of chemicals
serving the production of pharmaceuticals, agrochemicals,
paints, plastics, paper and leather treatments.
Dietary supplements were hit by Chinas dumping of
products into the US market in 1999. An anti-dumping
request was filed successfully, but we believe it will be some
time before the markets get back to normal.
We estimate the Fine Chemicals business will grow sales
this year by around 6% over 1999 levels, with top-line
growth remaining in the 5-7% range over the medium term.
Exhibit 68
Exhibit 69
Fine Chemicals: Standard Intermediates Global Market

Shares, 1999E
Fine Chemicals: Nitrogen-Containing Intermediates
Market
Product Area
Uses
Cyanuric Chloride Agrochem/Dyes

Alcoholates
Pharma/Agrochem
Orthoesters
Pharma/Agrochem
Cyanoacetates Pharma/Agrochem
Alkyl Chlorides
Intermediates
Malonates Pharma/Agrochem/Dyes
Amino Acids
Pharma/Food
Share (%)
Position
Competition
>60
35
65
45
NM
44
NM
1
1
1
1
1
1
2
Lonza
BASF
Nippon
Lonza
Various
Various
Various
NM = Not meaningful

We estimate margins in 2000 at around 9-10%, up from

around 8% in 1999. Further improvements should be
forthcoming, and we expect margins to rise to around 12%
over the next few years.
Fine Chemicals recent industry developments
Recent industry news flow is testament to the perceived

attractiveness of the US$35 billion fine chemicals market, in
our view. Exhibit 70 summarises some of the recent
corporate deals in this area.
Although there is a significant concern in the market that
companies are paying over the odds for these types of
businesses, and hence risking earnings dilution and value
erosion (EV/EBITDA multiples have been in the range of 1013), we believe that across the industry, companies
especially specialty chemicals companies are both
financially and strategically committed to building a sizeable
presence in this area.
The attraction seems to be the perceived potentially punchy
7-10% per annum top-line growth in high-value
intermediates (and actives), as has been suggested by the
trend towards outsourcing seen in the consolidating life
science industry. However, revenue streams from this sort of
business are lumpy, and are often subject to delays from the
customer side and subsequent working-capital impacts on the
supplier side. In addition, capital investments in these
typically high-tech manufacturing facilities can be sizeable,
and may not easily be used for other manufacturing once
business in one area comes to an end.
Page 50
large enough to spread product-development risk and the

ability to scale-up from pilot to full production) and offering
an attractive range of chemical and bio-tech capabilities.
In this respect, we view the planned merger of the SKW and
Degussa-Hls businesses as a positive move, as it has formed
one of the larger fine chemicals operations in the market,
with combined sales of around PLOOLRQRQRXU
estimates.
We believe it is likely that Degussa will continue to invest in
this side of the business over the medium term, especially in
building its presence in cGMP-certified facilities and
expanding its business in higher-value advanced
intermediates and active ingredients.
Bleaching & Water Chemicals
This business includes the ex-Degussa-Hls Hydrogen Peroxide, Cyanides and Flocculants (Stockhausen) businesses.
We estimate sales in 1999 were around PLOOLRQ
Degussa is the second-largest global producer of
hydrogen peroxide, with an estimated market share of
around 20%. The market has consolidated significantly over
the last few years. Degussa has been an active participant in
this trend, purchasing most of DuPonts peroxide business in
1998, and subsequently selling some of these assets to
Kemira and Elf Atochem. Both Degussa and Solvay have
closed some of their more inefficient plants in Europe.
In the mid 1990s, pricing was weak in both Europe and the
US due to overcapacity. Market recovery and capacity
The overall impression in the industry is that size is

important, in terms of financial resources (running a portfolio
Exhibit 70
Exhibit 71
Fine Chemicals: Recent Completed M&A Transactions1,

1998-2000
Hydrogen Peroxide: Global Market Shares, 1998
Acquirer
BTP
BTP
Clariant
Laporte
Rhodia
Yule Catto
Target
Sales Multiple2
Hexachemie
Archimica
BTP
Inspec
Chirex
Holliday Chemicals
2.1
3.3
2.9
2.5
3.7
1.8
Value (
Others
14%
PLOOLRQ
100
260
2,100
1,200
610
540
1. DSM/Catalytic and Rhodia/Chirex announced but not completed

2. Sales multiples relate to published trailing 12-month sales figures
S olva y
25%
K em ira
11%
E lf
A tochem
10%
A kzo Nob el
1 0%
D egussa
20%
FMC
10 %

rationalisation have led to a much-improved pricing

environment.
The main use of hydrogen peroxide is in bleaching pulp and
paper (hence pulp and paper demand is a key driver). This
accounts for around 50% of end use, with uses in detergents
(20%), textiles (15%), environmental protection (5%) and
various others making up the rest. Degussa also uses around
40% of its hydrogen peroxide internally for, among other
things, the production of perborates and percarbonates.
The industry has shown reasonable growth over the last few
years (5-7% per annum) as chlorine has been replaced in
bleaching applications by hydrogen peroxide (and other
oxygen-based compounds). We believe the strongest growth
at present comes from areas such as water treatment and
recycled paper treatment. There is also the possibility of
significant growth in the US, as new environmental
regulations for paper producers come into force. Industry
estimates see growth in the range of 3-5% per annum for the
next few years.
Degussas Cyanides business has a leading global market
share along with DuPont (around 15% each). Degussa is the
US market leader in cyanide and the global leader in
potassium cyanide.
The main use of sodium cyanide is in the extraction and
refining of precious metals such as gold. Cyanide salts are
also used in chemical syntheses and electroplating. Sodium
salt is produced from the reaction between hydrogen cyanide
and sodium hydroxide. As such, it is integrated into
Degussas production chain and is an important link in the
Page 51
BMA process. This process reacts methane with ammonia to

produce hydrogen cyanide and hydrogen. The latter is used
elsewhere in Degussas chemical chain to produce hydrogen
peroxide, fumed silicas and silanes.
In general, European manufacturers are important exporters
of cyanide salts. Demand is strongly dependent on gold
extraction volumes, and, as such, growth is not likely to be
very strong given the markets current outlook for precious
metals demand and pricing. Current market estimates of
metal extraction growth are in the order of 2% per annum.
The ex-Stockhausen Flocculants business. Based on
polyacrylamides, these products are used in water treatment
to purify water by removing suspended particles and other
solid contaminants. Typical applications are in the cleaning
up of industrial and other effluents. The product offering is
fairly wide, due mostly to the versatility of the acrylic-based
chemistry used in manufacture. The business also has back
integration into strategic raw materials such as acrylic acid
and acrylamides.
The ex-Stockhausen Flocculants business is relatively small
compared with its main competitors Ciba SC, Cytec and
SNF Floerger (France). That is because this business
supplies only flocculants, whereas the competitors typically
supply a much wider range of additional water-treatment
products such as dispersants, thickeners and binders.
Degussa estimates this section of the market is worth
1.3 billion. Typical market growth rates are of the order of 45% per annum, but competition in the water-treatment
Exhibit 72
Exhibit 73
Sodium Cyanide: Global Market Shares, 1999
Sodium Cyanide and Hydrogen Peroxide in Mining

Applications
D egussa
1 5%
O thers
46%
D uP ont
15 %
P olifin
10%
Taicor
4%
O rica
5%
A GR
5%

markets remains tough, and margin pressures do not look

likely to ease. This business has historically focused on
Europe, where it has a market share of around 20%, but has
started to expand overseas in the last few years.
We estimate the Bleaching & Water Chemicals business
should increase sales by around 8% in 2000, and by 4-6%
over the medium term. We expect margins to improve to 89% in 2000 and 2001.
C4 Chemicals
This business is built around the more profitable C4 section

of the Oxeno business. The existing Oxeno operations
produce a range of C3-oxo products and C4/C4-oxo
compounds. Although the sales split over 1999 was roughly
50:50 for C3 and C4, the EBIT split was much more
weighted towards the C4 chain. We believe that around 90%
of 1999 EBIT came from the C4 side. The section of Oxeno
included in this division is solely the C4 business, with the
C3-oxo business now being on the non-core/potential
divestment list, according to management.
The C4 business makes products based on butadiene, butene
and related derivatives, and has market-leading positions in
those areas.
Page 52
customers (several of which are on site). The C4 business

has significant cash-cost advantages over the C3 area (which
is based on propylene raw materials). The C4 business
should also benefit from the significant isononanol capacity
expansion (40 kt to 140 kt) carried out by Degussa in January
1999. As a result of this new capacity, Degussa is the
second-largest supplier of nonanol (used in plasticisers), with
a global market share of around 25%.
The C4 business should benefit from the switch from C3based plasticisers (based on 2-ethylhexanol, 2-EH) to C4based products based on isononanol. Effectively, this is a
plasticiser switch from DEHP (diethylhexylphthalate) to
DINP (diisononylphthalate), which offers some processing
advantages for plastics (for example PVC, the dominant endmarket for plasticisers), such as lower viscosity and better
storage stability. Isononanol accounts for only around 25%
of the global plasticiser alcohol market at present, but is
growing annually at double-digit rates (15-20%). We expect
the plasticiser alcohol market as a whole to grow at around
2-3% per annum over the medium term.
We expect the C4 business to grow sales by 15% in 2000,
driven by strong demand, and by 5-6% per annum over the
next couple of years. We estimate that the margin will
improve to around 11% in 2000 and 12% in 2001.
Production integration levels are high, with a significant level

of C4-verbund (essentially integration) in raw materials
and further downstream, with both internal and external
Exhibit 74
Exhibit 75
Oxeno: C3/C4 Production Chains
Degussa AG: C4 Products Market Shares, 1999
2-Ethylhexanol
Product
DEHP
Propylene (C3)
Butanol
C4-Products
Crack-C4
1-Butene
Butylacetate
Butene
Butadiene
Methallyl derivatives
C4 specialties
Position
Market Share (%)
1 (Europe)
4 (Europe)
1 (Global)
1 (Europe)
60
10
30
50
Isononanol
DINP
1,3-Butatdiene
Methallylderivatives
C4-specialties
Isotridecanol

Exhibit 76
Exhibit 77
Degussa AG: C4 Products Main Competitors, 1999
Degussa AG: C4 Products Main Uses
Product
Product
Butene
Butadiene
Methallyls
N-butanol
Competitors
Shell Chemicals, Spolana

Dow, Elenac, Enichem, Erdol Chemie
FMC, Nissei Chemical, Toa Gosei
BASF, Celanese, Oxochimie, Neste Oxo

Butene
Butadiene
Methallyls
N-butanol
Major Uses
Copolymers, melt adhesives, gasoline additives

Rubbers, plastics, lattices
Polymer fibre additives, intermediates
Production of butyl acetate & acrylates
Page 53
Exhibit 78
Exhibit 79
Plasticiser Alcohols: Production Cost Comparisons, 1999
Plasticiser Alcohols: Market Developments, 1996-2002E

Total
(cagr + 2-3% p.a.
Mio. t
2-Ethyl-hexanol
Isononanol
(cagr + 20% p.a.)
0
1996

1998
2000E
2002E
E = Company estimates
Source: Industry data, Morgan Stanley Dean Witter Research
Page 54
Summary
The Performance Chemicals division consists of Degussas

Superabsorbents business (part of Stockhausen), Care
Specialties (a combination of Degussas Stockhausen
Skincare business and SKWs Personal/Home/Fabric Care
businesses) and Oligomers/Silicones (SKWs business of the
same name). We estimate that in 1999 the business had sales
of ELOOLRQDQGDQRSHUDWLQJPDUJLQRIDURXQG
The largest part of the business, with 1999 sales of around
PLOOLRQRQRXUHVWLPDWHVLVWKH&DUH6SHFLDOWLHV
business. This sells perborates (used mainly as bleach

activators), industrial skin-care products and surfactants
(surfactants and oleochemicals).
The Superabsorbents business produces super-absorbent
acrylic-based polymers for use in diapers and other personalcare products. We estimate 1999 sales were around
for sales of around ELOOLRQE\FRPSRXQG

growth of 5.5-8.0% per annum), and over the same period to
improve the EBITDA margin to 20% from the current level
of 16-17%.
We believe improved economic conditions were behind this
divisions reasonable trading performance in the first half of
2000. Volumes were strong year on year, although some
margin pressure was seen in the Superabsorbents business, as
it was exposed to the acrylic chain.
For 2000 as a whole we expect sales of Performance Chemicals to grow by 12.5%, driven also by the inclusion of the
acquired Witco businesses. We estimate sales growth will
slow in 2001 to 5.3%, and will be around 4% per annum in
the medium term. We estimate the EBIT margin will fall
slightly to 10.4% in 2000, versus 11.8% in 1999. Pricing
improvements and internal benefits should see margins
improving to 12.1% in 2001 and reaching the 9.0-9.5% range
over the medium term, on our forecasts equivalent to an
EBITDA margin of 18-19%.
PLOOLRQ
Exhibit 80
The Oligomers/Silicones section of the business

manufactures silicone-based products such as polyurethane
additives, paint additives and industrial surfactants. We
estimate sales last year were around PLOOLRQ
Degussa AG: Performance Chemicals Sales and EBIT,

1999-2003E
Around 80% of the Performance Chemicals business takes

place outside Germany, and about one-third of that is in the
North American market. This division has said it is aiming
1. Pro-forma
Exhibit 81
Exhibit 82
Degussa AG: Performance Chemicals Sales

Breakdown, 2000E
Degussa AG: Performance Chemicals EBIT

Breakdown, 2000E
Oligomers/Silicones
20%
Superabsorbents
34%
Care Specialties
46%
PLOOLRQ
Sales
EBIT
1999A1
2000E
2001E
2002E
2003E
1,001
118
1,126
117
1,187
143
1,233
160
1,277
170
Oligomers/Silicones
28%
Superabsorbents
26%
CareSpecialties
46%


Recent corporate developments
In August 1999, the acquisition of Witco Oleochemicals and

Derivatives Group (ODG) by SKW considerably strengthened the Performance Chemicals business position in
surfactants, positioning the portfolio more favourably versus
the market leaders Cognis (Henkel) and Croda. Witco ODG
had sales of US$260 million in 1998 and is the world market
leader in fabric softeners. Witco ODG manufactures highvalue products for the personal-care market, such as mild
surfactants for bathing gel, shampoos and hair conditioners.
The company also makes a wide range of products and active
substances for fabric softeners, as well as surfactants for the
cleaning of hard surfaces for household, industrial and
institutional applications. These activities are included in the
surfactants business unit. Other activities at Witco ODG
include additives for lubricants for metal treatment, for
emulsion polymerisation and the paper, asphalt and mining
industries. These activities are part of the silicones business
unit.
Cosmoferm B.V. was acquired by SKW Trostberg from
DSM, Netherlands in 1999 and had sales of around DM 6
million in 1998. The company produces additives including
ceramides, vitamins, enzymes and anti-inflammatory
substances for personal-care products. Through this
acquisition, the business now has access to special packaging
delivery systems for active ingredients.
Also in 1999, Goldschmidt (now part of SKW) acquired the
polyglycerol fatty acid ester group, Solvay Alkali GmbH in
Rheinberg, Germany. With this acquisition, the company
extended its range of additives for the cosmetic industry.
Given this margin susceptibility, the company has said it is

keen to develop further the back integration of the SAP
business into acrylic acid. To this end, as well as internal
capacity expansions, Degussa and Rhm & Haas set up a
joint venture for acrylic acid production in 2000, called
StoHaas Monomer. This should be fully operational by the
end of this year, and should enable the business to benefit
from more stable long-term raw materials supply.
SAPs are sold generally into the infant-care, feminine-care
and adult-care markets. In the infant-care area, SAPs have
market penetration of over 90% in developed markets such as
Western Europe and North America. We believe more
promising growth potential exists in developing markets such
as Latin America, the Middle East and Asia, where
Page 55
Polyglycerol fatty acid esters are used as PEG-free, mild

surfactants with refattening and thickening properties or as
solubilisers. They are used also as active ingredients in
deodorants and antiperspirants.
Superabsorbents
The Superabsorbents business manufactures cross-linked

polyacrylate polymers superabsorbent polymers (SAPs).
These polymers are primarily used in personal- and sanitarycare applications, such as diapers. SAPs are capable of
absorbing several hundred times their own weight of liquids,
and retaining this liquid even under physical pressure (the
SAP and water form a gel). The business sells primarily into
Europe (40%) and North America (45%), but also into Latin
America (10%) and Asia/other (5%).
Degussa holds a dominant market share (around 27%) and a
leading technological position in the SAP area. The global
SAP market is worth ELOOLRQDQGKDVEHHQJURZLQJ
at around 6% per annum over the last few years. SAPs are
made by a polymerisation and gel preparation process based
on acrylic acid and a suitable cross-linker. The company
believes that it is the joint lowest-cost producer along with
BASF.
The SAP market has been a fast growing area, with doubledigit growth rates in the early 1990s. However, overexpansion by both Stockhausen and its competitors during
this time of high profitability led to significant overcapacity
issues, and a period of very weak pricing in the mid 1990s.
Pricing has partially recovered since then, due mostly to
demand growth, but margins remain susceptible to
movements in key raw materials, such as acrylic acid.
penetration is much lower at around 20%. The main drivers
here are population growth, hygiene developments (the
adoption of improved hygiene levels in the developing
world) and purchasing power. Degussas business has
especially strong ties with its two major customers (worth
around 50% of sales) Kimberley Clark and Procter &
Gamble, although these sizeable customers have considerable
pricing power and, therefore, the ability to raise product
prices in line with input costs is likely to remain limited.
SAPs are also sold into new areas, such as agrochemicals (as
sustained release agents and for water-storage applications),
fire-fighting cable waterproofing and packaging. One of
Degussas key stated strategies for this business is to develop
more products from the same technology base.
We believe the SAP business felt some raw material-driven

margin pressure in 2000. We estimate the operating margin
will fall to around 6% in 2000, down by one percentage point
from 1999 levels, but should recover to around 7% in 2001
and 7-8% in 2002. We forecast sales growth of 12-13% in
2000, driven by solid demand growth, but expect top-line
growth to settle at 5-6% over the medium term. SAPs are
priced predominantly in US dollars, so Degussa should
benefit also from the weak euro.
Paint & Coatings Additives
This business unit is grouped under Tego Chemie Service

GmbH (TCS) a 100%-owned Goldschmidt subsidiary.
Products include additives for the lacquer and paint industry
(for example, defoamers), surface additives, wetting and
dispersing additives, hydrophobing agents for aqueous,
Page 56
solvent-based and UV-cured systems, and silicone and

silicone polyester resins that are used as heat- and weatherresistant binding agents for high-grade industrial paints and
lacquers.
Care Specialties
The Care Specialties business includes the SKW Surfactants

and ex-Witco ODG operations, the Stockhausen Industrial
Skin Care business and Degussa-Hls Perborates business.
Care Specialties manufactures products for a wide range of
markets, such as personal care, industrial (occupational) skin
care, cosmetics and detergents. We estimate sales in 1999
were around PLOOLRQ
Exhibit 83
Exhibit 84
Global Oleochemicals and Derivatives: Strategic

Positioning, 1998/99
Superabsorbent Polymers (SAPs): Global Market Shares,

1999
s tr o n g
DOW
13%
Nippon Shokubai
18%
Competitive Position
H en kel
G o ld s c h m id t
in c l.O D G
C ro d a
C la r ia n t
A lb rig h t s
&
W ils o n
IC I
BASF
25%
G o ld s c h m i d t
e x c l. O D G
Degussa
27%
A kzo
W itc o O D G
Sonstige
17%
w eak
lo w
M a r k e t A ttr a c tiv e n e s s
h ig h
Exhibit 85
Exhibit 86
SAP Polymerisation and Gel Preparation
StoHaas Monomer: Degussa/Rhm & Haas Acrylic Acid

Joint-Venture Plans
STOCKHAUSEN
1999
BA
40
kt
ROHM and HAAS
Crude Acid
165 kt
Crude Acid
total 570 kt
Joint Venture
2001
2003

Crude Acid
Marl
165 kt
Crude Acid
Marl new
150 kt
Crude Acid
Houston
165 kt
Crude Acid
Houston
405 kt
BA = Butyl- Acrylate
BA
40
kt
BA
Marl new
In Surfactants, Degussa is around the fourth- or fifth-largest

global player, after the acquisition of the Witco ODG
business. This unit focuses on the development and
production of skin-friendly products and highly effective
surfactants and organo-modified silicone compounds. In
1999, margins at the Witco business were low by industry
standards (and this was reflected in the price paid for the
business), but significant restructuring is effecting
improvements.
This business is home to three sub categories: Personal Care,
Home Care and Fabric Care.
The Personal Care unit makes betaines, amphoglycinates
and alkyl polyglucosides for the production of shampoos and
shower/bath products, and produces organo-modified
silicones, which are used as additives to optimise skin and
hair care and are highly effective emulsifiers. The product
range includes odour inhibitors for deodorants/antiperspirants
and a range of innovative products, such as special emollients
used as additives to improve the sun-block factor in sunscreen lotions. The main competition comes from players
such as Cognis, Croda and Uniqema (ICI).
Page 57
industry. Goldschmidt has increased sales of more expensive

products such as polish additives, odour absorbents and
emulsifiers.
Fabric Care includes the development and production of
active substances for fabric softeners for all types of textiles.
With the acquisition of Witco ODG, the SKW business
became the global market leader in fabric-softener additives.
It strengthened its overall position in the US market also. In
1999, the pro-forma sales split was US 43%, Europe 52%
and Asia 5%.
The personal-care market typically grows faster than GDP,
but the ongoing concentration of suppliers and customers is
leading to tougher competition.
The ex-Stockhausen Industrial Skin Care business
specialises in skin-care products (primarily cleansing and
protection) for industrial, or occupational uses. The main
end-users are the automotive, steelmaking and chemical
industries. One example is an industrial suntan cream for
steelworkers.
Goldschmidts Home Care products include amphoteric

agents and non-ionogenic surfactants, such as wetting and
cleaning agents, additives and thickening agents, active
microbiocidal ingredients and defoamers for use in liquid or
solid dishwashing agents, household and industrial cleaning
and washing agents. Amphoteric surfactants are a fairly
important driver of growth for this business, as amphoteric
agents are among the fastest-growing areas of the surfactants
The business occupies a leading position in the global

industrial skin-care market (number 2, we estimate), and is
the leader in several European markets with its Stocko brand.
We believe this business should benefit from the high level
of fragmentation in the skin-care market over the medium
term by growing market share in new application areas and
new geographies (for example, Asia). We estimate that this
section is capable of top-line growth of the order of 3-4% per
annum.
Exhibit 87
Exhibit 88
Performance Chemicals: Customer Industries and

Examples of Application Fields
Sodium Perborate: Global Market Shares, 1999
Customer Industries
Examples of Application Fields
Building Chemicals
Concrete, terracotta,
wood preservation
Polishes and care products,
laundry detergents, disinfectants
Hair and skin care,
deodorants/anti-perspirants
Metal production and
treatment, surface treatment
Architectural, industry, leather
coatings, printing inks
Pulp and paper production,
paper coating
PU foams, PVC,
polymer dispersion
Fibre production,
dyeing and printing
Cleaning and Polishing

Cosmetics
Metal Working and Processing
Paint and Printing Ink
Paper
Plastics and Rubber
Textile and Textile Auxiliaries

Othe rs
18%
D e g ussa
29%
E lf
A to che m
6%
A usim o nt
8%
FMC
10%
S o lva y
29%
The Perborates business makes products such as sodium

perborate and sodium percarbonate. These materials are sold
primarily into the detergent industry (washing powders),
where they act as bleach activators.
Degussa occupies a joint market-leading position (with
Solvay) in this area. The other main competitors are FMC,
Ausimont and Elf Atochem.
This relatively concentrated number of suppliers faces an
equally concentrated number of major customers. These
include Procter & Gamble, Unilever, Henkel, Benckiser and
Colgate Palmolive. Given the trading pressures these
customers have been facing, we think it is unlikely that
Degussas peroxo products will enjoy a benign pricing
environment. Perborate pricing was relatively poor in the
mid 1990s, as there were environmental concerns over the
potential toxicity of boron (an element in perborates), and
there was a shift towards percarbonates. However these
concerns have now reduced, and pricing has recovered to a
degree.
Degussas main strengths in this area are its world-scale,
low-cost production capabilities; its integration with the
supply of hydrogen peroxide; and its ability to co-market
perborates with other detergent-related products elsewhere in
its portfolio. We estimate market growth at 2-3% per year.
Oligomers/Silicones
The Oligomers/Silicones business unit produces additives,

process auxiliaries and intermediates based on modified
silicones and organic oligomers. It is divided into three subcategories: Polyurethane (PU) Additives, Silicones and Paint
and Coatings Additives. Goldschmidt is one of the global
market leaders in organo-modified silicones and polyurethane foams, and has a leading technology edge in radiation
curable silicone-release coatings. In Paint and Coatings
Additives, Goldschmidt focuses on water-based and UV
curable coatings. We estimate sales in 1999 were around
PLOOLRQ
Page 58
PU Additives include polyurethane foams and a range of

additives and auxiliaries for their production. These include
silicone stabilisers for the production of flexible and rigid PU
foams, amine and metal catalysts for the foaming process,
alternative propellants and plasticising additives, fire retardants for flexible block foams and mould release agents for
moulded foams.
Silicones includes additives and process auxiliaries for a
range of industrial applications. The business is divided into
four industrial groups corresponding to the respective target
markets. These are the Rubber, Plastic, Metal Industrial
Group; the Chemicals & Polymers Industrial Group; the
Release Coatings Industrial Group; and the New Markets
Industrial Group (which includes products for the agricultural
industry).
Goldschmidt is not back-integrated like Dow or WackerChemie, but buys raw silicone from GE, Bayer, Dow or
Rhodia. This is an advantage now, as Degussa can buy its
raw silicone from a couple of suppliers and only a relatively
small amount is needed for production. Raw silicone
(Silizium) accounts for approximately 35% of the cost of
silicon, and is a very capital-intensive product. Thus, given
the relatively small amount needed and the high number of
suppliers, it makes little sense economically for Degussa to
be back-integrated in this product, in our view. However,
this situation may reverse if consolidation in the sector
continues a situation that we believe is quite likely.
In the past, there have been reports in the press that SKW had
been in talks with Wacker-Chemie, 50%-owned by Dr.
Alexander Wacker Familiengesellschaft mbH and 50%owned by the former Hoechst AG, although neither company
confirmed this publicly. However, Wacker has stated
publicly that it has no interest in selling its stake.
Exhibit 89
Degussa AG: Performance Chemicals Global Market

Positions, 1999
Position
The key customers are large-scale manufacturers in the

polyurethane industry with products for the furniture,
automobile and refrigerator industries, lacquer and paint
manufacturers, coated paper/foil manufacturers,
manufacturers of rubber products for the automobile
industry, and metal-working and mineral oil processing
companies.
Oligomers/Silicones
Polyurethane additives
Silicone (radiation-curing silicones)
Paint and ink additives
1
1
3
Surfactants
Fabric softeners (Witco ODG)
Personal care
1
4

Page 59
Exhibit 90
Degussa AG: Performance Chemicals Oligomers, Silicones and Surfactants Overview, 1999
Product Lines
Growth1
Margin2
Main Competitors
Polyurethane Additives
Paint Additives
Industrial Specialties
high
medium
low
medium
medium
low
Witco, Air Products

Byk, Air Products, Dow Corning
GE, Rhodia, Henkel, Osi, Clariant
Fabric Care
Personal Care
Home Care
high
high
average
low
high
average
Clariant, Akzo Nobel

ICI, Henkel, Croda, Clariant
Clariant, ICI, Henkel, Rhodia
Business Units
Oligomers & Silicones
Surfactants
1. low = GDP growth minus 1-2%; average = GDP growth; high = GDP growth +.

2. low = 0-5%; average = 5-10%; high = 10-20%
Page 60

Summary
The Coatings & Advanced Fillers Division contains the exDegussa-Hls Advanced Fillers & Pigments business
(formerly in Sivento), along with sections of Sivento (Aerosil
& Silanes) and Creanova (Coatings & Colorants).
The ex-Sivento products are based on high levels of technical
skill in manufacturing and handling fine-particle surfaceactive materials and systems, such as fumed silicas and
carbon black. The Coatings & Colorants area occupies
leading positions in coatings raw materials (such as resins
and cross-linking agents isophorone chemistry) and
colorants for industrial and building coatings systems.
Contributing over 50% of 2000 operating income, on our
forecasts, the main driver of this division is the Advanced
Fillers & Pigments business. This business is also among the
most profitable in Degussa-Hls portfolio, due chiefly to its
unique ability to supply a full range of key products (silanes,
carbon black and precipitated silicas) to the tyre-manufacturing industry. This area also supplies the mechanical
rubber goods and sports shoe industries.
Profitability was affected by the Asian crisis, especially in
the Aerosil area, and the Advanced Fillers & Pigments area is
significantly leveraged to carbon-black feedstock costs (and
hence to oil prices). This has had a detrimental effect on the
industrial carbon-black business, and we expect margins in
this area to be affected slightly in 2000.
Overall, divisional margins should improve on 1999 levels,

reaching 13.0% in 2000 and 13.7% in 2001, on our estimates.
We expect top-line growth of around 8% in 2000, moderating
slightly to 5% in 2001 and 4% in 2002. The premium to
GDP growth is driven chiefly by market-share gains across
the board, but particularly in Coatings & Colorants and tyreadditive-related businesses.
Coatings & Colorants
This ex-Hls business is a leading manufacturer of paint

colorants (also colorants for printing inks and paint biocides),
and high-value functional raw materials for paints and
coatings. These coatings raw materials cover a range of
additives, such as cross-linking agents, binding agents and
various resins.
The key technological element of the coatings raw material
business is a strong base in isophorone chemistry. As well as
a leading global share of 50-60% in isophorone itself, Degussa also holds a market-leading position in isophorone derivatives, with a global market share of 22%. The business also
uses around 50% of its production internally. Products
Exhibit 91
Degussa AG: Coatings & Advanced Fillers Sales and

EBIT, 1999-2003E
(
PLOOLRQ
Sales
EBIT
1999A1
2000E
2001E
2002E
2003E
2,163
293
2,341
302
2,466
337
2,568
366
2,665
386
1. Pro-forma
Exhibit 92
Exhibit 93
Degussa AG: Coatings & Advanced Fillers Sales

Breakdown, 2000E
Degussa AG: Coatings & Advanced Fillers EBIT

Breakdown, 2000E
Coatings and
Colorants
22%
Coatings and
Colorants
28%
Advanced Fillers and

Pigments
53%
Advanced Fillers and

Pigments
51%
Aerosil and Silanes
21%

Aerosil and Silanes

25%
include isophorone derivatives such as isocyanate monomers,

diamine derivatives and polyisocyanates, the latter being the
dominant product area, we believe. These are used as
hardeners in industrial/powder coatings, intermediates for
polyurethane coatings and epoxy resins. One of the most
important end-markets is automotive manufacturing, but the
products also go into the coil and can coatings markets.
Degussa occupies one of the leading market positions in
cross-linking agents, with a global share of just under 20%.
The business has the benefit of being back-integrated into
hydrogen cyanide and phenol/acetone (although Degussa has
said it is looking for a buyer for Phenolchemie, which is now
on the companys non-core-business list). The business also
has a strong position in polyester resins in Europe, with a
market share of around 40%.
The isophorone-related business has been expanded significantly over the last few years, with the former Hls business
increasing capacity for isophorone derivatives (such as
isophorone diisocyanate, IPDI) in Germany and the US in
1997 and 1998. The business has also invested in the
polyester resins area in the US.
The main competitors in the coatings raw materials area are
Rhodia, Ciba SC and Bayer, which occupies a leading
position in polyisocyanates.
Degussas business in the Colorants area is based mostly in
the US (under the Nuodex subsidiary). Its market leading
position is based chiefly in the colorants and pigments area
(both water and non-water based), where the business has a
global market share of around 20%. These colorants and
Page 61
pigments are supplied to point of sale colour-blending

facilities.
Degussa has said its main development strategy in this area is
to leverage off the trend for paint manufacturers to outsource
their production of colorants, and hence to gain market share
in formerly captive market areas. The company estimates
around 70% of global colorants manufacture is captive at
present (illustrating a downward trend, as ten years ago this
figure was reported to be around 80%). The business also
supplies biocides used in personal-care products, coatings
and inks.
The main competitor in the Colorants area is part of Kemira,
namely, Tikkurila. The chief difference between Degussas
Colorants business and Tikkurila is that Tikkurila supplies
both the colorants and the required mixing/analysis
equipment.
Having posted sales of around PLOOLRQLQRQRXU
estimates, we expect the Coatings and Colorants business to
grow sales by around 3% in 2000 and 5% in 2001. We
estimate that margins will increase from around 8% in 1999
to around 10% in 2000, reaching 11% in 2001.
Aerosil & Silanes
The Aerosil part of this segment produces precipitated and

fumed silicas, and accounts for around 60% of segment sales.
The remaining 40% come from the Silanes business, which
manufactures organosilanes and silane derivatives.
Degussa holds the global market-leading position in fumed
silicas, with a market share of around 50% (brand name
Aerosil). The silicas market is highly concentrated, with only
five businesses accounting for total global production.
Exhibit 94
Exhibit 95
Isophorone: Global Capacity, 1998/99
Fumed Silica: Global Market Shares, 1998/99
OtherCoatings
Coatings and
and Advance
Advance Fillers
Fillers
Operating
Income
exceptionals
pre
9%
Sales
2000E
BP
Chemicals
8%
Degussa -Huels
50%
Sisas
8%
Dow /
Union
Carbide
10%
Tokuyama
Soda
7%
GE
3%
Wacker
15%
Degussa
50%
Cabot
25%
Elf
Atochem
15%

Source: SRI, Morgan Stanley Dean Witter Research Estimates
Using sand (silicon dioxide) as a raw material, the business

produces fumed silica, which is a significantly higher-value
product than precipitated silica. Degussa has a strong
manufacturing technology position in this area, which acts as
an effective entry barrier. The largest end-markets for fumed
silica are silicone rubber, where it is used as a re-enforcing
agent, and coatings, where it is used as a flow modifier.
Industry figures suggest that the fastest-growing market areas
currently are additives for silicone elastomers and additives
used in the manufacture of silicon wafers via chemical
mechanical planerisation (CMP). Current industry estimates
put annual market growth at around 4-5%.
We believe Aerosils key strengths are its global spread;
technological position; high technical service component;
and its position as a key supplier for leading silicone
manufacturers.
Based on surface-modification technologies, the Silanes
business sells organosilane and chlorosilane derivatives into
end-markets such as construction, aerospace, pharmaceuticals
(silane-based intermediates), electronics, polymers (wiring
and cables) and optoelectronics (chlorosilanes are used as
raw materials for optical fibres). Degussa has around a 35%
market share in this area, placing it behind Dow-Corning, but
ahead of the other leading players, Wacker and Shin-Etsu.
Degussa is also Europes largest manufacturer of silicon
tetrachloride. The Silanes business is related to, but is not the
same as that dealt with organosilane production for tyre and
rubber use in the Advanced Fillers & Pigments business.
Page 62
scratch resistance). Industry estimates suggest that market

growth will be around 5% per annum in the medium term.
The main strengths of this business are a broad product
range; a deep customer relationship culture; and benefits
from back-integration into chlorosilane raw materials.
This business also used to include the chemical process
catalyst business, which supplied a considerable amount of
its products internally (such as silane production catalysts),
and the Zeolites business, where the main use was as a
phosphate substitute in detergents. According to Degussa,
the Zeolites business is now regarded as non-core and is on
the divestment list, while the chemical catalyst business is
effectively part of dmc2, which is also on the divestment list.
Advanced Fillers & Pigments
The Advanced Fillers & Pigments business is focused on

manufacturing materials for rubber reinforcement, pigmentation applications and uses of precipitated silicas. The unit
consists of Degussas carbon black, precipitated silicas and
organosilanes businesses. As such, the unit occupies a
unique position in the industry in that it is the only global
supplier of all three additive components for the manufacture
of green tyres. The main industries and applications served
are tyres, mechanical rubber goods and sports shoes (manmade high-performance shoe soles). The sales split in recent
years has been dominated by Europe (worth around 60% of
the segments sales in 1999), but the business is also exposed
to the Americas (25%) and Asia/Pacific and Africa (15%).
The main applications are in enhancing adhesion and crosslinking and aiding the protection of surfaces (promoting
The dominant route for the production of carbon black is the

partial oxidation (burning) of vaporised heavy-oil fractions in
a specialised furnace. Production is therefore linked to
Exhibit 96
Exhibit 97
Fumed Silica: Global End-Market Use, 1999
Silane Production Chain

Purchased Raw Materials
Insulation
4%
Personal
care
5%
Inks
5%
Electronics
2%
Other
8%
Raw Materials
Trichlorosilane
Trichlorosilane
Silicon
Silicon Metal
Metal
Silicone
rubber
40%
Chloropropyltri
-Chloropropyltri
chlorosilane
chlorosilane
Silicon
Silicon TetraTetrachloride
chloride
Sand
Sand (SiO
(SiO22))
Endproducts
Functional
Functional
Silanes
Silanes
Organization
BU Silane
Tetraalkylsilicates
Monosilane
Fumed
Fumed Silica
Silica
BU Aerosil
Resins
16%
Hydrophobic
Hydrophobic
Silica
Silica
Precipitated
Precipitated
Silica
Silica
Waterglass
Waterglass
Coatings
20%
Waterglass
Waterglass
Zeolites
Zeolites

Source: SRI, Morgan Stanley Dean Witter Research

Division
Fillers and
Pigments
BU Catalysts
Zeolites
petroleum, and input costs are leveraged to oil prices. Low

oil prices in early 1999 supported high margins across the
industry, but the current US$30/bbl environment has resulted
in significant margin pressure, and we believe that some
capacity expansions across the industry may be delayed.
Carbon black price increases are ongoing, but have lagged
input-cost rises. Business with the large tyre manufacturers
is protected somewhat, as most contracts contain some
pricing link or are leveraged to the price of crude oil (WTI).
The carbon-black market grew at 3.5-4.0% per year between
1994 and 1998. Most industry forecasts see market growth
of around 3% per annum going forward, in line with market
GDP growth expectations in the range of 2.5-3.5% per
annum. One noticeable trend over the last few years has
been the growth of the larger manufacturers at the expense of
the smaller competition, through both organic expansion and
consolidation. This concentration of supply is likely to
continue over the medium term, we believe, with the smaller
players coming under pressure from both trading economics
and environmental legislation.
Carbon-black demand is driven by the tyre industry, which
accounts for around 65% of overall carbon-black demand.
The presence of carbon black in tyres extends their useful life
considerably, and also improves the three key factors of
treadwear, rolling resistance and wet traction. Industry
forecasts suggest that the proportion of carbon black used by
the tyre industry is likely to fall by 10% or so over the next
five years, as alternative fillers are used and green tyres
become more widely used.
Page 63
the demand is from relatively high-value (non-rubber)

applications such as printing inks, coatings, paper additives
and sealants. Of these, printing inks have seen the fastest
growth over recent years of around 10% per year. Degussa is
also the leading producer of iron blue pigments (sold into the
ink industry). This area has been declining, however, due to
the preferential growth of phthalocyanine-based blue
pigments.
Degussa is the worlds second-largest producer of carbon
black after Cabot (in the US), with an estimated market share
of around 17%. The business has operations in North
America, Latin America and Asia (Korea and China).
Margins in the business were under pressure through the
latter half of 1999, and we believe this situation has
continued so far in 2000. Price increases have been effected
(Degussa announced one in March 2000), but these have
lagged input cost rises.
Degussas precipitated silicas business is the global market
leader, with a market share of around 25%. This market is
dominated by only a few companies (five companies make
up around 90% of total market capacity).
The second-largest area of carbon-black demand (around

20%) is other rubber goods, such as shoe soles, ribbons/belts
(for example, conveyor belts) and hoses. The remainder of
Precipitated silicas leading end-market is rubber/elastomer

production, where they are used as reinforcing fillers. This
area accounts for around 30% of the market. The dominant
use in the rubber/elastomer area is in the manufacture of
sports-shoe soles. The main product competition comes from
other fillers such as clay products or calcium carbonate, but
silicas in general offer superior performance and have been
taking market share. The other main segments of the market
are food/healthcare (15%), batteries (15%, used as a battery
separator) and agriculture (15%).
Exhibit 98
Exhibit 99
Carbon Black: End-Markets, 1999
Carbon Black: Global Market Shares, 1999
Plastics
5%
Printing Other
Inks
7%
3%
Rubber
non-tyre)
20%
Continental
8%
CSRC
4%
Others
33%
Columbian
12%
Tyres
65%
Degussa
17%
Cabot
26%
Source: SRI, Morgan Stanley Dean Witter Research Estimates

Source: ECN, Morgan Stanley Dean Witter Research Estimates
Degussa also manufactures rubber silanes (siloxanes), which

are used chiefly as coupling agents, along with silica products, in rubber products and tyres. When used together, these
significantly improve wear resistance. The organosilane
component acts as the chemical bridge between the rubber
and filler components.
Page 64
chemical industry, this offering lends itself to a system

approach which is part of Degussas stated strategy. We
believe this should help enhance Degussas leading global
position in this area, and should also give the company access
to the growing market for green tyres, for which growing
demand should increase demand for silicas, and silanes in
particular.
Probably the key advantage Degussa has in its business with

tyre manufacturers is its unique position of being able to
supply all three widely used additives for tyre reinforcement
carbon black, silicas and silanes. Like many areas in the
Green tyres offer lower rolling resistance (lower by some

20%), reduced tread wear, improved wet grip and improved
fuel economy (around an 8% reduction in fuel consumption).
Exhibit 100
Exhibit 101
Precipitated Silica: Global Market Shares, 1999
Green Tyres: Technical Aspects

New state-of-the-art solution: system of carbon black - silica - organosilane
Other
15%
Huber
9%
Rolling resistance
Degussa
25%
Target:
improve one or more
out of the three key tyre
properties listed in the
magic triangle.
Carbon black/
silica / Si 69
Carbon black
Akzo
11%
Rhodia
22%
PPG
18%
Treadwear
Traction

Source: Company data and Morgan Stanley Dean Witter Research Estimates

Page 65
Specialty Polymers
link to GDP trends, although the higher-value areas should be

capable of exceeding GDP growth, we believe.
Summary
The new Specialty Polymers division comprises Methacrylics, Specialty Acrylates and Plexiglas (ex-Degussa
businesses formerly in Rhm), as well as Engineering
Plastics (ex-Degussa business called Technical Polymers,
originally from Creanova). The division also looks after the
50:50 Latex joint venture that Degussa runs with Bayer AG,
Polymarlatex. Degussa has indicated that sales of this joint
venture were around PLOOLRQLQ
The division centres mostly on Degussas expertise in
methacrylate chemistry, and produces methylmethacrylate
(MMA)/polymethylmethacrylate (PMMA) specialty acrylate
monomers and a range of polyamide-based engineering
plastics.
The MMA monomer area has not been as profitable as the
higher-value more downstream areas (such as acrylate
polymers), but remains an important link in the specialty
acrylate and PMMA chains. The business also holds global
market leading positions in polyamide-11 and -12, and is
among the market leaders in polybutylene terephthalate
(PBT). In both these areas, the business is back-integrated
into raw materials. We believe that Degussa is the only
polyamide producer that is completely back-integrated into
butadiene. Given that the main exposures of the business are
the automotive and construction markets, growth has a strong
Profitability has improved significantly following intensive

restructuring over the recent past. The merger of the Rhm
(Hls) and Agomer (Degussa) businesses provided
opportunities for rationalisation (the company is targeting
benefits worth PLOOLRQE\DQGSURGXFWLYLW\KDV
improved significantly. The business now occupies industryleading low-production-cost positions. In the Degussa-Hls
Rhm business (effectively the first three businesses
described below), 1999 sales were split as follows: Europe
61%; NAFTA 31%; Asia 6%; and other 2%.
For the division, we estimate sales growth of 11.6% in 2000,
moderating to 4-5% going forward. We estimate that the
operating margin is likely to decrease from around 10% in
1999 to around 9% in 2000, but should recover to 1999 levels
in 2001, and is likely to improve further over the medium
term as rationalisation benefits are realised.
Exhibit 102
Degussa AG: Specialty Polymers Sales and EBIT,

1999-2003E
(
PLOOLRQ
Sales
EBIT
1999A1
2000E
2001E
2002E
2003E
1,243
118
1,386
125
1,454
149
1,515
173
1,576
188
1. Pro-forma
Exhibit 103
Exhibit 104
Degussa AG: Specialty Polymers Sales Breakdown,

2000E
Degussa AG: Specialty Polymers EBIT Breakdown,

2000E
20%
Plexiglas
36%
Methacrylics
24%
Specialty Acrylates
20%

21%
Plexiglas
31%
Methacrylics
24%
Speciality Acrylates
24%

Methacrylics
Serving chiefly the PMMA markets, Degussas Methacrylics

business is one of the worlds largest producers of MMA,
with a global market share of some 12%, on our estimates.
Other leading producers include Rhm & Haas in the US,
Ineos in Europe (ex-ICI Acrylics), and Mitsubishi Rayon in
Asia, with smaller market shares held by companies such as
Elf Atochem.
Methacrylics comes from the new Rhm business, formed
from the combination of old Degussas Agomer and Hls
Rhm businesses. Most (around 70%) of the MMA capacity
came from the Hls side. We believe a key strength of the
business is its back-integration into raw materials,
specifically acetone, hydrogen cyanide and methanol
(although the acetone link, via Phenolchemie, is to a non-core
business, which Degussa has said it plans to divest).
Demand for MMA is driven by the automobile and
construction industries. Typical uses include polymer sheets
(PMMA), emulsion polymers, surface coatings and impact
modifiers. Global demand was affected by the Asian crisis
(in particular, Asia was a key export market for European
producers), but demand has recovered strongly. Given the
importance of Asia to these markets, we believe Degussa will
look to expand the Methacrylics business further there.
European demand has suffered over recent years from
lacklustre automotive and construction markets (and export
weakness). This trading environment (and subsequent
overcapacity) has put significant pressure on prices. There
has also been a significant degree of capacity coming
Page 66
onstream in both MMA and PMMA, and we think the

outlook for pricing is likely to be fairly moderate in the
medium term. However, there has been some pricing
recovery in 2000 (driven by rising raw material costs).
Margins have been affected by adverse raw material pricing
movements. However, Degussas MMA/PMMA business as
a whole is significantly more integrated than the competition
(makes the business less leveraged to input cost swings) and
is also (following restructuring) one of the lowest-cost
producers in the industry, in our view. We believe this cost
position is a key competitive advantage that benefits not only
Methacrylics, but also the connected downstream businesses
of Specialty Acrylates and Plexiglas.
We estimate top-line growth of 4-5% in 2000, with growth
rates of 3-4% per annum going forward. Margins in 2000 are
likely to be in the mid-single-digit range, and we expect
improvements over the next 12-24 months.
Exhibit 104
Degussa AG: Specialty Polymers Leading Positions in

the Global Markets, 1999E
Business
Position
Market Share (%)
2
1
1
1
1
1
2
1
12
31
21
63
29
55
19
20
MMA
Moulding Compounds/PMMA
Sheet Products/PMMA
Lubricant Additives
Coating Raw Materials
Resins
Pharma Polymers
Special Monomers
Exhibit 106
Exhibit 107
Degussa: Specialty Polymers Production Chain
US MMA Pricing, 1995-2000 (US/lb)
Raw
Materials
Standard
Products
Standard
Products
HCN
Actone
CH3 OH
MMA / Basic
Monomers
Molding
Compounds
Specialty
Products
Special Semifinished
Products
MMA,USG Domestic FD Railcar UC/LB

FROM 30/8/95 TO 30/8/00 WEEKLY
75
70
Performance
Plastics
65
Special Molding
Compounds
60
Pharma Polymers
55
Sheet Products
Special Monomers
Resins & Additives
50
Lubricant Additives
45

40
1995
1996
1997
1998
1999
2000
HIGH 72.50 18/10/95 LOW 43.00 10/11/99 Source:

LAST 51.00
DATASTREAM
Source: Datastream

Specialty Acrylates
This business centres on the manufacture of methacrylate

derivatives such as methacrylic acid and specialised
monomers for pharmaceutical coatings (such as coatings for
solid dosage forms), cross-linking agents, coatings additives,
water treatment and raw materials for adhesives. Products
include such compounds as isobutyl methacrylate and 1, 4butanediol dimethacrylate.
Degussa estimates this business has a 20% global share, with
the main competition coming from Ciba SC, Dow Chemical,
Rhm & Haas, Avecia, Rhodia and Laporte (namely, the
former Inspec business areas). We believe the key strengths
of this business are its low-cost manufacturing position; its
high level of technical service; and its good record of
innovation-driven new products to support top-line growth.
In general, the business streams have strong market positions,
good profitability (double-digit margins) and have achieved
decent growth rates, we believe.
We estimate top-line growth of 4-5% in 2000, with similar
levels going forward. We believe operating margins were at
the low-double-digit level in 1999. However, there is likely
to be some input cost pressure in 2000, and we expect
margins to be eroded to a degree this year, before recovering
in 2001 and beyond.
Plexiglas
Degussas Plexiglas business manufactures PMMA, which

serves chiefly the automotive/transport, construction and
moulding (for example, baths) end-markets. The business
holds a world-leading position in PMMA manufacture and
benefits from best in class low-cost production facilities.
Page 67
Plexiglas accounts for around 30% of PMMA manufacturing

worldwide, with the largest competitors being Ineos Acrylics
(ex-ICI), Rhm & Haas, Mitsubishi Rayon and Elf Atochem.
The business also holds a 20% global share in sheet PMMA
manufacturing, where it faces mostly the same competitors.
We believe the business key strengths are its strong brand
names (Plexiglas in Europe and Asia, and Acrylite in the
Americas); its large product portfolio; and its extensive sales
and service network (leveraging off its global position).
In line with the MMA/PMMA markets worldwide, trading
over the last few years has felt the adverse effects of the
Asian crisis. The market has since recovered to a large
extent, and we estimate Plexiglas should this year achieve
top-line growth of around 5%. We estimate growth in the
medium term at 3-4% per annum and that margins should
improve from current high-single-digit levels.
With revenues of around PLOOLRQLQRQRXU

estimates, approximately one-third of which were ex-Europe,
the ex-Creanova Engineering Plastics business is one of
Degussas most profitable operations.
The business holds global market-leading positions in
polyamide-11 and -12, with a market share of around 30%,
on our estimates, and is also among the market leaders in
PBT, with a market share of around 50%, we believe. In
both these areas, the business is back-integrated into raw
materials, with polyamide manufacture using caprolactam,
Exhibit 108
Exhibit 109
European MMA Production Cost Comparisons, 1999
European PMMA Production Cost Comparisons, 1999

P M M A
Rhm
Rhm
Production costs
MMA
0
0
200
400
600
800
Capacities / kt
Column width indicates capacity, column height indicates production cost level

5 0
1 0 0
1 5 0
2 0 0
C a p a c itie s / k t
Column width indicates capacity, column height indicates production cost level
which is based on butadiene (from C4 Chemicals) and PBT

production using DMT. We believe that Degussa is the only
polyamide producer that is completely back-integrated into
butadiene. In addition, DMT was produced by DegussaHls Fine Chemicals business, but this part of the business
(with sales of around PLOOLRQLQLVQRZVHHQDVD
divestment candidate, according to Degussa. The business
main competitors in polyamide-12 are EMS Chemie and Elf
Atochem.
Engineering Plastics also manufactures polyamide elastomers
and derivatives, polyvinylidene fluoride (PVDF), and several
other related technical polymers. Over the whole business,
we estimate at least 50% of sales goes into automotive and
electronics applications. This exposure is driven by the
dominant use in automotive markets of polyamide-12, which
is considered by the industry as a considerably more durable

Page 68
and wear-resistant alternative to traditional polyamide-6

(nylon). Uses in automotive markets include coatings for
brake cables and fuel lines. PBT is used for, among other
applications, coating optoelectronic components such as glass
fibres.
Trading in the Engineering Plastics area has been strong, and
we estimate top-line growth of around 12% in 2000, 7% in
2001 and 4-5% per annum over the medium term. There is,
however, likely to be some input cost pressure over 2000,
and we estimate that margins will fall slightly from the
double-digit levels seen in 1999, but should recover steadily
over the medium term, driven by both cost-base and market
improvements.
Page 69
Disposal Programme
Summary
Following the setting up of the new Degussa group structure,

management has identified several business areas of both
Degussa-Hls and SKW that are not considered core to the
companys new direction. Management has said it is likely
that most of these businesses will ultimately be divested in
their entirety, but has indicated also that it does not see any
short-term time pressure to carry out these divestments. The
company has indicated that it is likely that several of those on
the divestment list will be placed into alliances as preludes to
possible complete divestment. In addition, Degussa has
indicated that dmc2 may be floated off through an IPO, rather
than a trade sale. The areas that we believe could be joint
ventured in the medium term are Agrochemicals,
Phenolchemie and possibly the DMT business, as we think it
would be challenging for Degussa to achieve a clean sale of
these businesses in the near future.
The non-core businesses had combined sales of around
ELOOLRQLQRQRXUHVWLPDWHVDQGLQFOXGHVL]HDEOH
standalone business units such as ASTA Medica, dmc2 and

Phenolchemie, as well as smaller businesses such as DMT
and the non-C4 side of Oxeno.
medium term this may be put into an alliance, rather than

sold outright, due to the difficulty in effecting a complete
sale), some 65% of the estimated ELOOLRQFRPHVIURPWKH
three largest businesses.
We believe this weighting towards dmc2, ASTA Medica and
Dental is a clear positive, as it places 65% of the potential
divestment value in businesses that should face few barriers
to ownership change on an attractive time-scale. Whether the
disposal programme is completed or partially completed, we
believe that by the end of 2001 Degussa is likely to be in a
very strong financial position and should benefit from the
growth options that affords. The company should also
benefit from running a leaner chemicals only portfolio, as
margins and top-line growth potential are significantly better
for the core businesses versus those under the non-core
heading, in our view.
We outline below descriptions of the larger candidates on the
non-core list and our estimated disposal valuations. We also
describe our estimates of the scope for financial improvement
if the majority of these divestments are carried out over the
next two years.
We estimate that, if sold in their entirety, the businesses on

the non-core list could fetch around ELOOLRQ7KLVWRWDOLV
weighted towards the larger businesses: on our estimates,
some 75% of the estimated ELOOLRQFRPHVIURPWKHIRXU
largest businesses (dmc2, ASTA Medica, Phenolchemie and
Dental). Excluding Phenolchemie (as we believe that in the
dmc2
Exhibit 110
Exhibit 111
Degussa AG: Non-Core Businesses Sales Split, 2000E
Degussa AG: Non-Core Businesses Estimated

Potential Disposal Proceeds Split
Industrial Chem.
Salt Products
1%
Gelatins
4%
5%
Agrochemicals
Metallurg.Chem 3%
5%
Degussa Bank
0% KWH
DMT
0%
2%
TFL
0%
Textile Auxil
1%
dmc2
35%
The dmc2 business manufactures functional high-tech

materials and coatings based on precious metals (such as
platinum and palladium). These products are sold chiefly
into the automotive industry (as emission catalysts), the
Metallurg.Chem
5%
Degussa Bank
3%
KWH
0%
DMT
1%
C3 Oxo
2%
Industrial Chem.
2%
Gelatins
7%
Salt Products
3%
Agrochemicals
1%
dmc2
25%
TFL
0%
Textile Auxil
1%
C3 Oxo
3%
Zeolites
1%
Zeolites
1%
Phenolchemie
10%
Phenolchemie
17%
Dental
8%
ASTA Medica
15%
Note: dmc2 excludes precious metals trading revenues


Dental
9%
ASTA Medica
30%
chemicals industry (as chemical process catalysts), and the

electronics industry (as advanced electronic materials).
We believe the business has several leading positions in these
areas and promising leverage into the fuel-cell story
(hydrogen-powered generators of electric power) via its
presence in chemical catalysts (essential for converting
hydrogen fuel into electricity), and we expect significant
benefits to come from its ongoing restructuring. This
business was set up as a separate entity at the start of 2000.
We estimate sales in 1999 (excluding trading revenues) were
around ELOOLRQ7UDGLQJVRIDULQKDVVKRZQDFOHDU
improvement over 1999 levels.
We estimate this business could fetch around ELOOLRQRQ
disposal, representing around 0.5 times sales (excluding
trading revenues) and around 5.5 times EBITDA, on our
2000 forecasts.
ASTA Medica
ASTA Medica is a medium-sized pharmaceutical business

with a global presence, and particular strength (especially in
OTC) in Germany and Western Europe (which together
accounted for 55-60% of 1999 sales). Sales in 1999 sales
were just below PLOOLRQRQRXUHVWLPDWHV7KHEXVLQHVV
is divided into four strategic areas: oncology/endocrinology;
respiratory diseases/allergies; special products; and
healthcare.
Degussa has said its main strategy for ASTA Medica is to
grow the business through an increased focus on potential
growth-product areas and markets such as North America,
Latin America (especially Brazil) and the EU. The stated
strategy is also to increase profitability through costmanagement measures, reducing working capital and
streamlining the product portfolio. A significant amount of
this strategic refocusing has been carried out over the last 12
months. However, in the short term, we believe development
and marketing costs are likely to be markedly higher than in
the past.
Following the near-completion of ASTAs sale earlier in
2000 (which did not go ahead), we believe that it is likely
that ASTA will now be sold piecemeal, rather than as a
complete unit. We estimate this potential sale could raise
around ELOOLRQ7KLVZRXOGEHHTXLYDOHQWWRWLPHV
sales and 12.5 times EBITDA, on our 2000 estimates, and
represents the largest single contribution (just over of 30%)
to our overall disposal proceeds estimate of ELOOLRQ

Page 70
Dental
Degussas Dental business started operating in its new form

in July 2000. With sales around PLOOLRQLQWKH
Dental unit is based in Germany, North America, Japan,
Brazil and the Netherlands. The business produces various
materials and product systems for fillings, dentures and
orthodontics in general. The business also holds global
market-leading positions in the majority of its product areas.
Dental is the leading business of its type in Europe and is the
second-largest globally. Trading over the last 12-18 months
was affected by the debate over German healthcare reforms,
but this was offset by cost-cutting benefits and efficiency
gains. Earnings have improved in 2000 so far, and the
company expects this business to see a clear improvement
this year.
We estimate proceeds on the potential sale of this business
could be PLOOLRQUHSUHVHQWLQJWLPHVVDOHVDQG
6.5 times EBITDA, on our 2000 forecasts.
Phenolchemie
Degussas Phenolchemie business is the leading global

producer of phenol and acetone (a by-product of phenol
production). The business market shares are around 25%
globally and above 40% in Europe. Phenol and acetone are
important raw materials for the manufacture of plastics and
resins such as polycarbonates, nylons and PMMA. A large
proportion of acetone produced by Phenolchemie is used
internally by the Specialty Polymers business in the
manufacture of MMA and PMMA.
We estimate sales in 1999 were around PLOOLRQ
Industry overcapacity in phenol, driven by significant recent
expansions, has eroded margins over the last 12-18 months.
However, an earnings recovery has been evident in the first
half of 2000, helped by recovering volumes. We believe that
raw materials pressures are likely to remain an issue going
forward, but earnings should improve markedly year on year.
We estimate disposal proceeds from the potential sale of
Phenolchemie could be PLOOLRQUHSUHVHQWLQJWLPHV
sales and 5.0 times EBITDA, on our 2000 forecasts. Degussa
has indicated that it is likely that some of the non-core
businesses may be joint ventured before ultimately being
sold.
C3-Oxo
This business contains the non-C4 section of the Oxeno

business. We estimate 1999 sales were around
Although trading volumes have improved, margins have been

affected by high propylene costs over the last 6-12 months.
This situation is now improving, but a lasting recovery in C3oxo profitability is only likely over the medium term, we
believe.
We estimate the proceeds from the potential sale of C3-Oxo
could be around PLOOLRQUHSUHVHQWLQJDSSUR[LPDWHO\
0.5 times sales and 5.5 times EBITDA, on our 2000
forecasts.
Degussa Bank
With its origins in Degussas metal trading activities,

Degussa Bank has developed into a specialised bank with a
focus on consumer banking, corporate services and securities
transactions. We estimate the bank had interest income of
PLOOLRQLQ,WVFRUSRUDWHEDQNLQJVWUDWHJ\KDV
produced above-industry-average growth and consistently

high returns.
Degussa Bank has over 50,000 private customers (including
existing Degussa employees) via its 45-branch network and
telephone/electronic banking, and manages assets worth
some ELOOLRQ7KHFRUSRUDWHVHUYLFHVDUHDLVGHYHORSLQJ
This ex-SKW business unit produces chemical products and

systems that aid the processes of metal and continuous
casting, alloy production, iron/steel production and other
metal fabrication and casting tasks. The business operates in
Germany, France, North America, China, Japan, Brazil, India
and Korea. The Metallurgical Chemicals unit holds marketleading positions in many of its product areas. The business
is heavily exposed to the steel and automotive industries. We
estimate sales in 1999 were around PLOOLRQ
We estimate that the Metallurgical Chemicals business could
bring in around PLOOLRQRQSRWHQWLDOGLYHVWPHQW
This represents 0.7 times sales and 6.0 times EBITDA, on
our 2000 forecasts.
Agrochemicals
Formerly in SKWs Agro & Industrial Chemicals unit, the

Agrochemicals business Stickstoffwerke Piesteritz produces
ammonia, urea, nitric acid and urea-based fertilisers. We
estimate sales in 1999 were PLOOLRQ7KHEXVLQHVVKDV
been undergoing significant restructuring in the face of tough
market conditions for agrochemicals in general, especially
ammonia and carbamide.
Degussa has said one of its main strategic focuses for this
business is to raise the sales mix of specialty products, such
as stabilised liquid fertilisers, to 50% (from around 10%
currently). The recovery in global ammonia and urea
markets is ongoing, and we believe earnings for 2000 should
be substantially up on 1999.
We estimate the potential disposal of the Agrochemicals
business could raise proceeds of around PLOOLRQ
Exhibit 112
Oxeno, C4 and C3-Oxo: EBIT Progression, 1994-2004E
Internet strategies for foreign transactions/currency business

and cash/risk management. The bank employs more than
200 people currently. The business benefited last year from
expansion into sites formerly run by Hls AG.
2000E
1998
1996
E = Company and Morgan Stanley Dean Witter Research Estimates


C4
OXO
1994
We estimate that potential divestment proceeds could be

around PLOOLRQ'HJXVVD%DQNLVIDLUO\SURILWDEOHDQG
as such we think proceeds of the order of PLOOLRQZRXOG
be required to avoid a dilutive sale.
OXENO
2004E
Industrial Chemicals. Using mainly propylene raw

materials, the business produces chemicals such as 2ethylhexanol (2-EH, used to make plasticisers) and butyl
acetate (used in solvents and coatings).
Metallurgical Chemicals
2002E
million. The existing Oxeno operations produce a range of

C3-oxo products and C4/C4-oxo compounds. Although the
sales split over 1999 was roughly 50:50 for C3/C4, the EBIT
split was much more weighted towards the C4 chain. We
estimate that around 90% of 1999 EBIT came from the C4
side. The section of Oxeno included in this division is solely
the C3-oxo business, with the C4 business now being part of
Fine &
Page 71
equivalent to 0.3 times sales and 4.0 times EBITDA, on our

2000 forecasts.
Page 72
The Gelatin business could, on our estimates, bring in around

PLOOLRQRQSRWHQWLDOGLYHVWPHQWUHSUHVHQWLQJWLPHV
sales and 6.0 times EBITDA, on our 2000 forecasts.

Industrial Chemicals
This business consists of both the former Th. Goldschmidt

Industriechemikalien operations and part of the Harris
Specialty Chemicals business acquired by SKW. We
estimate 1999 sales were PLOOLRQ7KHXQLWSURGXFHV
a range of inorganic chemicals and coatings systems.
Typical uses for the inorganic metal and sulphur chemicals
are surface treatments for metals and wood, and in water
treatment. The coatings systems are used as anti-corrosion
agents in pipelines/pipeline seals and in road construction as
bitumen additives.
We believe future growth areas include expanding the range
of tin products for electroplating applications. Profitability in
1999 was not spectacular, due mostly to lacklustre endmarkets, but the performance improved significantly in the
first half of 2000.
We would expect proceeds of around PLOOLRQIURPWKH
potential disposal of this business, representing 1.0 times
sales and 6.0 times EBITDA, on our 2000 estimates.
Gelatins
The ex-SKW business unit Gelatin & Specialties is the

worlds largest producer of gelatin. The business produces
all kinds of gelatin, such as acidic, alkaline, bovine, porcine
and fish-derived types. Gelatin & Specialties had good
results in 1999, sustaining the result of the previous year in
an increasingly competitive environment due to restructuring
efforts. The business operates a joint venture in China,
which we believe is developing favourably. We estimate unit
sales in 1999 were PLOOLRQ7KHFRPSDQ\RSHUDWHV
seven gelatin production sites: two in France and one in each
of Argentina, Belgium, China, Spain and the US.
The business supplies the international food industry and the
photo and pharma industries. With its strong market
position, Gelatins was one of the core areas in SKWs Nature
Products division. However, the business faces a changing
demand environment, with lower-quality standards in photos
and increasing regulation in pharmaceuticals. The
concentration of buying power in the food-customer side and
the commoditisation of photo gelatin are leading to
increasing margin pressure.

Salt Products
The Sudsalz business was formed in 1995 and has an annual

capacity of over 4 million tonnes. Through SKW, Degussa
owns a 64% share of this business. Formerly part of SKWs
Nature Products division, the Salt Products unit is the largest
German supplier, offering the full range of consumer salt
(with the recognised brand Bad Reichenhaller Markensalz),
de-icing salt, regenerative salt for water-softening equipment,
livestock salt and industrial salt. The salt comes from Bad
Friedrichshall, as well as from the Berchtesgaden and
Heilbronn salt mines. Salt Products is a cash-cow business,
in our view: however, it is a mature business and therefore
has not been classified as one of Degussas core businesses.
We estimate the potential disposal of Salt Products could
bring in proceeds of around PLOOLRQHTXLYDOHQWWR
0.59 times sales and 7.5 times EBITDA, on our 2000
forecasts.
Other non-core businesses
The remaining non-core businesses consist of the exDegussa-Hls units Zeolites, Textile Auxiliaries, TFL (TFL
Ledertechnik), DMT (Dimethylterephthalate) and KWH
(Katalysatorenwerke Hls). We estimate that the combined
sales of these businesses was around PLOOLRQLQ
We estimate these businesses could bring in proceeds of
million on potential disposal, equivalent to combined
multiples of 0.5 times sales and 4.3 times EBITDA, on our
2000 forecasts.
Potential disposals time-scale and financial impact
Our overall estimate of potential disposal proceeds in the

event of the successful sale of all businesses on Degussas
non-core list is ELOOLRQ:HEHOLHYHWKLVWRWDOZRXOG
more than cover the 2000 net debt position of just under
billion, on our estimates, should be accretive to value and
would free up Degussa to pursue various avenues for internal
and external growth on a considerable scale. Degussa has
indicated that it aims to realise ELOOLRQSUHWD[IURP
planned disposals.
However, we believe that it will be challenging to realise
100% of this estimated ELOOLRQLQWKHPHGLXPWHUP7KLV
reflects our views that it may be difficult for Degussa to
achieve a clean sale of some of the smaller businesses, that
some other areas are more likely to be joint ventured in the

medium term (possibly as preludes to eventual sales), and
that it is possible that dmc2 may be floated off via an IPO,
rather than sold outright. Degussa has indicated that some of
the companies on its non-core list may initially be put into
joint ventures rather than be sold outright.
Degussa is nevertheless in a promising position, in our view,
as 65% ( ELOOLRQRIRXUIRUHFDVWWRWDOGLYHVWPHQWYDOXH
resides in three units (dmc2, ASTA Medica and Dental), the
sale of which we believe should be realisable during
2001/2002. We have estimated that the Phenolchemie
business may be joint-ventured in 2001, but an eventual sale
may not materialise until 2002 although the company has not
indicated any time scale for this. Hence, we believe that by
the end of 2002 Degussa could have realised 75% of its
potential disposal proceeds ( ELOOLRQRIRXUHVWLPDWHG
ELOOLRQ
This is, in our view, the more likely disposal scenario that
investors should consider to help gauge how Degussa could
look in 24 months time. We believe this scenario is
reasonable, mainly because it may prove quite a challenge
for Degussa to find buyers for some of its lower-margin
businesses. The potential disposals of dmc2, ASTA Medica
and Dental are likely, on our estimates, to be accretive to
earnings and cash flow. However, many of the commodity
chemical type businesses and the more unique one-off cases
(such as Degussa Bank) are unlikely to attract premium
prices, in our opinion, and, as such, their potential disposals
could risk some degree of earnings dilution. However, with
industry forecasters predicting a strengthening chemical
cycle from early 2002 onwards, valuations may pick up from
our more cautious estimated levels.
We have attempted to account for the benefit of these
potential disposals in our model of Degussa AG. We have
assumed partial completion of the disposal programme, with
dmc2 and ASTA Medica sold in 2001 (for a combined
billion), and Phenolchemie and Dental sold in 2002 (for
a combined billion). We have assumed (for the
purposes of our model) that the rest of the non-core list
remains part of Degussas overall portfolio. This would leave
Degussa with, in 2003, non-core businesses accounting for

Page 73
around ELOOLRQRIVDOHV PLOOLRQRI(%,7DQG

million of EBITDA, on our estimates.

We have estimated the overall disposal proceeds by assigning

disposal multiples (based on both sales and EBITDA) to our
forecasts for the non-core businesses for 2000. These
multiples have been estimated using industry comparables,
and are laid out in Exhibit 111. On average, we estimate the
potential estimated ELOOLRQUDLVHGIURPWKHGLYHVWPHQWRI
the entire non-core list (not our working assumption)
represents 0.7 times 2000 sales and 6.8 times 2000 EBITDA.
The highest-value contributor to this multiple is ASTA
Medica, which we estimate could be disposed for around
12.5 times 2000 EV/EBITDA, or 1.4 times 2000 sales.
Our assumed divestment scenario would see Degussa with
net debt of around PLOOLRQE\WKHHQGRIDQGQHW
cash of around ELOOLRQE\WKHHQGRIQHWGHEW
figure excludes pension liabilities). Our model also reflects
our view that the potential disposals would be significantly
accretive to overall group value. Our sum-of-the-parts calculation (for 2000-2002) indicates upside potential of
per share for our 2001-02 valuation compared with 2000.
This is similar to the upside indicated by our DCF model.
Probably the most important issue coming out of this noncore strategy is that, even if only partially completed, by late
2001 Degussa should have enhanced earnings, be in a very
strong financial position, and have benefited from the
strategic options such a position brings, in our view.
The portfolio should also be that much clearer from the point
of view of financial analysis, as divestments should clear up
the top-line and balance-sheet distortions caused by dmc2
(trading revenues) and Degussa Bank (bank liabilities),
respectively. As the quality and visibility of Degussas
portfolio improves, it is likely that market valuations may
move ahead as well, in our opinion. However, given the
expected profitability of Degussas core portfolio, we believe
the scale of such a re-rating is not likely to take valuations
past average levels for the global speciality chemicals sector.
Nevertheless, we feel this would still imply substantial upside
from the current trading levels of Degussa-Hls and SKW
Trostberg.
Page 74
Exhibit 113
Degussa AG: Estimated Potential Divestment Proceeds, 2000E

Sales
EBITDA
2000E
2000E
Implied
Implied
2000E
2000E
EV/Sales
EV/EBITDA
2000E EV
2000E EV
dmc2
ASTA Medica
Dental
Phenolchemie
Zeolites
Textile Auxil
TFL
C3 Oxo
DMT
KWH
Degussa Bank
Metallurg. Chem
Agrochemicals
Industrial Chem.
Gelatin
Salt Products
1896.9
808.0
440.0
912.5
52.7
33.9
10.4
164.5
112.9
15.5
244.1
187.0
58.5
257.6
195.0
168.8
89.1
53.2
69.4
6.7
5.8
1.0
11.7
9.5
4.7
-29.9
11.1
10.3
41.6
24.3
0.5
1.4
0.8
0.4
0.5
0.6
0.4
0.5
0.5
0.4
0.7
0.3
1.0
0.9
0.9
5.5
12.5
6.5
5.0
4.3
4.0
5.0
5.5
5.0
5.5
948
1,131
352
365
26
19
2
74
56
6
100
171
56
58
232
112
929
1,114
346
347
29
23
3
64
48
26
100
180
44
62
250
116
Total
5,389.5
537.2
0.7
6.8
from sales
3,710
from EBITDA
3,679
PLOOLRQ
Overall Multiples (x)
6.0
4.0
6.0
6.0
7.5
Total Implied EV
E= Morgan Stanley Dean Witter Research Estimates
Exhibit 114
Degussa AG: Disposal Assumptions, 2000-2002E

Sales
EBITDA
EV/Sales
EV/EBITDA
Estimated Proceeds
2000E
2000E
2000E
2000E
2001/02E
Proposed scenario sale of the following in 2001

dmc2
1,896.9
ASTA Medica
808.0
168.8
89.1
0.5
1.4
5.6
12.6
939
1122
Proposed Scenario sale of the following in 2002

Dental
440.0
Phenolchemie
912.5
Total Proceeds
4,057.4
53.2
69.4
380.5
0.8
0.4
0.7
6.6
5.1
7.3
349
356
2,766
Assumptions
Source: Company and Morgan Stanley Dean Witter Research Estimates

Page 75
Services and Corporate Centre

Summary
The Services and Corporate Centre divisions incorporate

management by corporate division and innovation and
technology development. Degussa indicated that in 1999 the
Services division had revenues of around PLOOLRQDQG
incurred costs of around PLOOLRQDQGWKDWWKH&RUSRUDWH
Centre incurred costs of around PLOOLRQ7KHVH
previously were not shown separately in the divisional
breakdown, but were allocated internally per division.
The development unit, called Innovation & Technology
Management (ITM), includes the Creavis unit from DegussaHls, and the development unit from SKW. These will be
combined and will exist under the Creavis banner in the
New Businesses unit, headed by Dr. Michael Drscher, the
existing president and CEO of Creavis.
The New Business unit will have much in common with the
previous modes of business of Creavis, which was effectively
Degussa-Hls venture-capital unit. According to the
company, the unit will use its own resources to discover and
develop new ideas, from the initial research level to
establishing business ventures. Successful ideas will be
marketed internally to the appropriate divisions, or, if
necessary, externally.
The unit allocates 35% of R&D funds to areas considered by
management as high risk (interesting ideas, but limited
commercial application or low estimated success rates). The
unit can obtain funding from the group for high-risk projects
with sales of more than around PLOOLRQRUIRUSURFHVV
developments with cost-saving potential of more than
million. Typically, if a project is developed fully and
commercialised, ITM would be repaid for part of its funding.
The unit will allocate around 10% of R&D resources for
process improvements (for instance, improving process
technologies, knowledge management and analysis).

This approach towards investing in blue-sky research holds

considerable value and has the potential to develop products
and technologies that otherwise would not be likely to see the
light of day, in our view. Creavis has invested in new areas
such as enzyme-based processes (biocatalysis), biotechnology and microtechnology.
The ITM business will have responsibility for co-ordinating
R&D activities across Degussas portfolio, at the development, management and information technology levels
(through the supply of corporate information systems). ITM
will organise link-ups with external parties, such as start-ups
and universities. The business will also offer advice at an
R&D level across the whole portfolio, and the company
estimates it will spend around 8% of the ITM research budget
on strategic research issues such as this.
The Corporate Centre will also include the Degussa-Hls
Infracor unit, which provides services such as energy supply,
maintenance, waste disposal and other utilities to the various
large chemical-manufacturing sites in the group. The unit
will also provide these services to third parties that will be
located at the same sites. The split between internal and
external business is around 75:25. The business was in loss
in 1998, but the situation has improved significantly since
then, due primarily to cost-cutting measures.
For 2000, we estimate the Services division will achieve
sales of around PLOOLRQGULYHQE\JURZWKDW,QIUDFRULQ
particular). We believe costs are likely to remain in the low
to mid-single-digit range. We estimate the Corporate Centre
will incur similar costs (around the PLOOLRQOHYHOIRU
2000 and 2001, but we forecast these should decline
thereafter as cost-base improvements and disposal effects
come through.
Page 76
Current Trading
First-half 2000 results summary
Both Degussa-Hls and SKW Trostberg reported first-half

2000 figures that were well ahead on a year-on-year basis.
Both companies reported double-digit sales and profit
growth, helped by a good economic environment and some
internal improvements. The two companies benefited from
strong trading volumes and positive currency benefits, helped
especially by the continuing strength of the US dollar. The
companies have indicated that growth rates for the second
half are likely to be below those seen in the first half, due to
tougher comparisons. We believe growth in the second half
will also be affected by slowing quarter-on-quarter volume
growth.
Degussa-Hls first-half 2000 results
Degussa-Hls first-half 2000 sales increased by 23% year on

year, returning an EBIT margin of 5.8% (up from 5.4% in the
first half of 1999). Adjusting for the divestments of Vestolit
and Neuber, sales increased by 28%. The strong sales
development was due mainly to strong volumes (particularly
in North America), and higher selling prices and favourable
exchange rates.
Health and Nutrition. First-half 2000 EBIT decreased by
26% year on year, despite a 12% increase in sales. The
disappointing results were due to weak performances in
Stockhausen and ASTA Medica. Stockhausen suffered from
higher depreciation charges for the expansion of the acrylic
acid facility in Marl and from rising raw material costs,
whereas ASTA Medica faced unsatisfactory demand in
Germany. Feed Additives and Dental, on the other hand,
showed improved earnings development.
Specialty Products. First-half 2000 EBIT increased by 62%
year on year, with sales growth of 14% (22% excluding the
Exhibit 115
divestment of Neuber). This was due to good volumes in all

three business units Creanova, Industrial Chemicals and
Fine Chemicals. Creanova benefited from high demand for
coating raw materials and engineering plastics.
Polymers and Intermediates. First-half 2000 sales
increased by 32% (adjusted for the sale of 50% of Vestolit),
returning an EBIT of PLOOLRQDQLQFUHDVHRI\HDU
on year). This was due to a very good volume and pricing
environment and despite increased raw material costs, as
these were partly passed on to customers. Earnings at all
three business units Rhm, Oxeno and Phenolchemie
improved considerably.
Performance Materials. First-half 2000 sales increased by
25% and EBIT by 21% year on year. The numbers do not
include precious metals trading. The increase in earnings
was due entirely to a strong improvement at dmc2, which
recorded a good performances from electronic materials,
engineering materials, Cerdec products and automotive
catalysts. These results offset lower earnings in both Sivento
and Advanced Fillers & Pigments.
SKW Trostberg first-half 2000 results
First-half 2000 sales increased by 27% year on year. Without

acquisitions, structural changes and currency effects, sales
would have increased by around 6%. The proportion of sales
generated outside Germany increased to 76%, and the
American continent was the largest market, accounting for
30% of sales, due mainly to acquisitions. First-half 2000
EBITA improved by 19% year on year to PLOOLRQGXH
mainly to better results in Chemicals and strong results in
Performance Chemicals (the latter being due mainly to the
integration of Witco ODG).
Exhibit 116
Degussa-Hls: Sales by Division, 1H 2000 vs. 1H 1999
Degussa-Hls: EBIT by Division, 1H 2000 vs. 1H 1999
PLOOLRQ

Specialty Products
Polymers and Intermediates
Performance Materials
Service Units
Total Sales
1H 2000
1H 1999
% Change
1,181
1,154
1,371
2,034
334
6,074
1,055
1,009
1,038
1,624
216
4,942
+12
+14
+32
+25
+54
+23

PLOOLRQ

Specialty Products
Polymers and Intermediates
Performance Materials
Service Units
Total EBIT
1H 2000
1H 1999
% Change
45
103
62
142
3
355
60
63
29
119
(1)
270
-26
+62
+113
+21
NM
+32
NM = Not meaningful
Nature Products. First-half 2000 revenues increased by

18% year on year, with EBITA up by 25%. BioActives,
which includes the main segments of Cultures & Enzymes,
had better results than the company had expected. This unit
includes Traco Labs, which was acquired in May 2000.
Texturant Systems had good results, driven by higher
demand for pectins, blends and alginates.
Performance Chemicals. First-half 2000 sales were up by
93% year on year, and EBITA increased by 32%. This
successful performance was driven mainly by the integration
of Witco ODG, but also by the positive business
development in all three business areas and favourable
exchange rates.
Exhibit 117
Page 77
Chemicals. First-half 2000 sales increased by 23% year on

year, with EBITA up an impressive 63%, although this was
based on a weak year-on-year comparison. The main
contribution to the results was from Agro and Industrial
Chemicals, due to the present recovery of ammonia and urea
markets.
Construction Chemicals. First-half 2000 sales increased by
15% year on year, returning an EBITA of PLOOLRQXSE\
9%), due mainly to positive currency effects and the
inclusion of Harris Specialty Chemicals. Europe developed
positively, despite varying results by country.
Exhibit 118
SKW Trostberg: Sales by Division, 1H 2000 vs. 1H 1999
SKW Trostberg: EBITA by Division, 1H 2000 vs. 1H 1999
PLOOLRQ
Nature Products
Chemicals
Other
Total Sales
1H 2000
1H 1999
% Change
505
387
352
807
19
2,070
428
200
287
701
16
1,632
+18
+93
+23
+15
+16
+27

PLOOLRQ
Nature Products
Chemicals
Other
Total EBITA
1H 2000
1H 1999
% Change
59
46
33
85
(15)
208
47
35
20
78
(6)
174
+25
+32
+63
+9
NM
+19
NM = Not meaningful.
Page 78
Financial Assumptions and Forecasts

Summary
This section summarises the more important financial

assumptions we have made in setting up our model of the
new Degussa AG. While most of our assumptions are fairly
standard, we believe explanations should prove useful in
this case, as we believe that Degussa AG is being assembled
via essentially a four-way merger of SKW, Goldschmidt,
Degussa and Hls. Hence, any detailed financial appraisal of
the new Degussa at this stage is bound to rely particularly
heavily on the assumptions chosen. We have split up the
summary of our assumptions and forecasts into comments
concerning our models of Degussas divisional breakdown,
the profit and loss account, cash flow and the balance sheet.
Our disposal assumptions include contributions of 50%

to 2001 estimated sales and EBIT from dmc2 and ASTA
Medica, and contributions of 50% to 2002 estimated
sales and EBIT from Phenolchemie and Dental.
We estimate that in 2003 the remaining non-core

businesses will account for sales of around ELOOLRQ
EBITDA of PLOOLRQDQG(%,7RI PLOOLRQ
Post-2002, by which time we have assumed Degussa

will have sold dmc2 and ASTA Medica (in 2001 for
billion), and Phenolchemie and Dental (in 2002 for
billion), we believe the remaining non-core
businesses will hold group EBITDA margins back by
around one percentage point. In 2003, we estimate the
group margin should reach 17.5% and the core-business
margin should be 18.4%. This is short of Degussas
stated 2003 EBITDA margin target for the core
businesses of 20%.
Degussa divisional assumptions
Our main assumptions and forecasts are as follows.
Forecasts are grown from the base level of profitability

given by Degussa for 1999 (these are pro-forma
numbers).
Group EBIT and EBITDA totals are now quoted after

corporate and other charges (of around PLOOLRQLQ
1999, as indicated by Degussa).
Degussa profit and loss assumptions
Margins are modelled on both a divisional and group

basis, reflecting our appraisal of the impact of Degussas
planned PLOOLRQUHVWUXFWXULQJEHQHILWVDQGRWKHU
operational improvements, and our assumptions as to
how much of these cost benefits will be competed away
or passed on downstream to customers.
We estimate group EBITDA margins should improve
slightly in 2000 to 14.2% (versus 13.9% pro-forma in
1999), and should improve significantly going forward,
reaching 15.3% in 2001, 16.8% in 2002 and 17.5% in
2003. These figures exclude the effect of precious metal
trading revenues.
We expect the chief performers on an EBITDA-margin
basis in 2001 to be Coatings & Advanced Fillers
(21.2%), Performance Chemicals (20.5%) and Specialty
Polymers (20.1%). Our 2001 EBITDA margin estimates
for the other divisions are 19.3% for Fine & Industrial
Chemicals, 17.4% for Health & Nutrition and 15.0% for
Construction Chemicals.

The operating profit input runs from our divisional

EBITDA and EBIT totals.
We have assumed no exceptional charges, but have

estimated charges of PLOOLRQDQG million in
2001 for restructuring and synergy benefits, respectively.
For simplicity, we assume that our disposal forecasts for

2001 and 2002 have no net impact on the P&L.
The interest charge is in two components: a component

modelled on average net debt; and a fixed charge of
around 6% on pension liabilities.
We estimate the group tax rate at around 40% in 2000,

but this should benefit by 2-3 percentage points from the
German tax reforms. We have assumed a tax rate of
37.5% going forward.
We have assumed an average dividend payout ratio of

45% of net income, and that the payout for 2000 will be
similar to that for 1999.
Our net income forecasts indicate a result for 2000

similar to that for 1999, then growth of 25% in 2001,
14% in 2002 and 11% in 2003. This translates into a
CAGR of 16% over 2000-2003. This net income growth
estimate is also reflected in our EPS CAGR estimate
(calculated number of shares of 205.62 million).
Degussa cash-flow assumptions
Page 79
inflows) 20-25% from disposing of these

substantial portions of sales.
We have assumed the exceptional charges in the P&L

are reflected as cash exceptional charges in 2001 (the
same year).
We forecast net debt should be around ELOOLRQDWWKH

end of 2000. Following the disposals assumed for 2001
and 2002, we estimate net debt will fall to PLOOLRQ
by 2001 and that by the end of 2002, Degussa should be
in a net cash position of ELOOLRQWKHVHQHWGHEW
figures exclude pension liabilities).
We have modelled Degussas depreciation charge going

forward as a percentage of sales, and also looked at the
result as a percentage of fixed assets.
Our capital expenditure forecast is modelled as a

percentage of sales and is also compared to depreciation.
We expect capital expenditure in 2000 to be broadly
similar to that in 1999 around the ELOOLRQOHYHO
and we expect the absolute level of spending to fall over
the next few years, reflecting completed disposals. In
the long run, we expect Degussa will invest at 1.20-1.25
times depreciation, representing around 6% of sales.
Degussa balance sheet assumptions
Our fixed-asset forecasts are driven by capital

expenditure and depreciation.
Working capital is driven by the balance sheet in our

assumptions, and is monitored as a percentage of sales.
From levels in 1999 of around 22%, we expect the ratio
of working capital/sales to improve slightly over the next
few years, although as the specialty chemicals balance of
Degussa improves, working capital requirements may be
slightly greater.
Intangible assets are driven by goodwill amortisation

(which, as we have assumed no further acquisitions,
remains unchanged from its estimated 2000 level). We
have assumed that the non-core assets account for a
negligible part of goodwill amortisation.
We have reduced our estimates of the asset base in 2001

and 2002 to reflect the substantial disposals we expect in
those years, by subtracting a percentage of 2000 assets
equivalent to the percentage of group sales represented
by the divested operations.
Our disposal model assumes that Degussa sells dmc2 and

ASTA Medica in 2001 (cash inflow of ELOOLRQDQG
sells Phenolchemie and Dental in 2002 (cash inflow of
We estimate that the average ROCE improves from the

8.1% achieved in 1999 to 9.1% in 2000, advancing to
10.4% in 2001, 12.4% in 2002 and 14.3% in 2003.
We estimate an average ROE of 11.2% in 2000 (versus

around 13% in 1999), rising to 13.6% in 2001, 14.3% in
2002 and 14.5% in 2003.
ELOOLRQ
We have assumed conservatively that Degussa receives

only a minority of the working-capital benefits (cash

Page 80
Exhibit 119
Degussa AG: Profit & Loss Account, 1999-2005E

1999A1
2000E
2001E
2002E
2003E
2004E
2005E
16,101
(11,606)
4,495
27.9
17,658
9.7
15,046
11.0
(11,837)
5,821
33.0
15,667
-11.3
14,330
-4.8
(10,427)
5,240
33.4
12,687
-19.0
12,687
-11.5
(8,346)
4,340
34.2
12,403
-2.2
12,403
-2.2
(8,159)
4,245
34.2
12,861
3.7
12,861
3.7
(8,473)
4,388
34.1
13,338
3.7
13,338
3.7
(8,801)
4,537
34.0
(2,125)
(765)
(520)
31
272
(2,331)
(839)
(624)
31
250
(2,068)
(744)
(553)
32
250
(1,675)
(602)
(448)
33
250
(1,637)
(589)
(438)
33
250
(1,698)
(611)
(454)
34
250
(1,761)
(633)
(471)
35
250
1,879
106
828
2,129
136
892
2,193
136
867
2,138
136
799
2,171
136
782
2,264
136
798
2,361
136
814
945
1,101
1,190
1,203
1,252
1,331
1,411
Interest Expenses
Interest as % of Av. Net Debt
Other Income (Expenses) - Net
(126)
5.8
(67)
(176)
6.3
(137)
(105)
6.0
(137)
16
5.8
(137)
79
5.3
(137)
121
5.3
(137)
161
5.3
(137)
Net Financing Costs

Interest as % of Av Net Debt
Incl. Pensions
(237)
(313)
(243)
(121)
(58)
(16)
24
5.2
6.0
5.9
5.8
6.6
20.2
3.5
Non Recurring Items

Other Exceptional Costs
(33)
0
0
0
(275)
(45)
0
0
0
0
0
0
0
0
Pretax Profit
Pretax Profit (post Exceptionals)
709
676
788
788
947
627
1,081
1,081
1,194
1,194
1,314
1,314
1,435
1,435
(225)
31.7
(313)
39.7
(355)
37.5
(405)
37.5
(448)
37.5
(493)
37.5
(538)
37.5
Profit after Tax

Profit after Tax (post Exceptionals)
Minority Interests
484
451
(4)
475
475
(4)
592
272
(4)
676
676
(4)
747
747
(4)
822
822
(4)
897
897
(4)
Net Income
Net Income as Reported (post Excep)
Net Income Ex .Minorities
Net Income Ex/ Minorities (post Excep)
480
447
484
451
471
471
475
475
588
268
592
272
672
672
676
676
742
742
747
747
818
818
822
822
893
893
897
897
PLOOLRQ
Sales
Sales Growth (%)
Sales Excluding PM trading
Sales Growth (%)
Cost of Sales
Gross Profit
Gross Margin (%)
Selling Expenses
General & Administrative
R&D
Associated Companies
Other Income
13,549
EBITDA
Amortisation
Depreciation
EBIT pre Exceptionals
Income Tax
Rate (%)
Contd...

Page 81
Exhibit 119
Degussa AG: Profit & Loss and Per-Share Data, 1999-2005E ...Contd
1999A1
2000E
2001E
2002E
2003E
2004E
2005E
EPS Pre Excep. Items & Charges

EPS Post Excep. Items & Charges
Fully Diluted EPS
CEPS Pre-Excep Items
CEPS
2.33
2.17
2.17
6.88
6.72
2.29
2.29
2.29
7.29
7.29
2.86
1.30
1.30
7.74
6.18
3.27
3.27
3.27
7.81
7.81
3.61
3.61
3.61
8.08
8.08
3.98
3.98
3.98
8.52
8.52
4.34
4.34
4.34
8.96
8.96
5-Yr EPS Growth (%)
11.2
13.6
3-Yr EPS Growth (%)
11.9
16.4
11.6
10.0
DPS ( P
Dividends ( PQ
% Distribution of Net Profits
1.05
215.90
45.0
1.15
235.54
50.0
1.29
264.64
45.0
1.47
302.27
45.0
1.62
334.08
45.0
1.79
367.88
45.0
1.95
401.78
45.0
No of Shares (million)
Fully Diluted (million)
205.62
205.62
205.62
205.62
205.62
205.62
205.62
205.62
205.62
205.62
205.62
205.62
205.62
205.62
1. Pro-forma Degussa AG using the companys estimate


Page 82
Exhibit 120
Degussa AG: Divisional Breakdown, 1999-2005E

(
PLOOLRQ
Sales
Health & Nutrition
Coatings and Advanced Fillers
Specialty Polymers
Other businesses (infracor, etc)
Discontinuing (Non Core)
Corporate
Other (PM Trading)
Total Group Revenues
Total Group Excl. Other /
PM trading
Total Core
1999A1
2000E
2001E
2002E
2003E
2004E
2005E
806
1,537
1,363
1,001
2,163
1,243
546
4,890
0
2,552
16,101
950
1,683
1,489
1,126
2,341
1,386
680
5,389
0
2,612
17,658
1,015
1,752
1,576
1,187
2,466
1,454
696
4,183
0
1,337
15,667
1,067
1,817
1,649
1,233
2,568
1,515
712
2,126
0
0
12,687
1,124
1,883
1,712
1,277
2,665
1,576
729
1,438
0
0
12,403
1,184
1,948
1,776
1,325
2,767
1,641
746
1,475
0
0
12,861
1,248
2,015
1,845
1,372
2,873
1,708
764
1,513
0
0
13,338
13,549
8,659
15,046
9,656
14,330
10,147
12,687
10,560
12,403
10,966
12,861
11,387
13,338
11,826
0
0
0
0
0
0
0
0
0
0
17.8
9.5
9.3
12.5
8.3
11.6
24.5
10.2
9.7
11.5
6.9
4.1
5.8
5.3
5.3
4.9
2.4
(22.4)
(11.3)
5.1
5.1
3.7
4.6
3.9
4.1
4.2
2.3
(49.2)
(19.0)
4.1
5.3
3.6
3.8
3.6
3.8
4.1
2.4
(32.4)
(2.2)
3.8
5.3
3.5
3.8
3.8
3.8
4.1
2.4
2.6
3.7
3.8
5.4
3.5
3.8
3.6
3.8
4.1
2.4
2.6
3.7
3.9
5.4
7.3
8.9
8.5
7.6
10.0
9.8
4.5
6.8
8.1
5.4
7.2
8.8
8.5
7.5
9.9
9.7
4.5
7.0
8.0
5.3
7.1
8.7
8.4
7.5
9.8
9.6
4.4
7.4
8.0
5.2
7.0
8.5
8.2
7.3
9.6
9.5
4.4
7.4
7.8
5.1
6.9
8.3
8.0
7.2
9.4
9.3
4.3
7.3
7.6
5.0
6.7
8.2
7.9
7.0
9.2
9.1
4.3
7.1
7.5
51.4
122.7
132.1
96.2
178.0
138.4
66.9
242.3
1028.0
785.7
54.4
126.5
138.4
100.3
185.7
143.7
67.8
186.2
1002.9
816.7
56.6
129.8
143.3
103.2
191.4
148.2
68.7
93.7
934.9
841.2
58.4
131.8
145.8
104.7
194.7
151.2
68.9
62.7
918.2
855.5
60.3
133.7
148.3
106.5
198.0
154.2
69.1
63.7
933.8
870.1
62.3
135.5
150.9
108.1
201.5
157.3
69.4
64.7
949.7
885.1
Sales Growth (%)

Health & Nutrition
Specialty Polymers
Services & Other
Discontinuing (Non-Core)
Total
Total Continuing
Depreciation & Amortisation as % of Sales

Health & Nutrition
5.5
7.4
9.0
8.6
7.7
Specialty Polymers
10.1
Other Businesses
10.4
4.5
Total
6.9
Total Core
8.2
Health & Nutrition
Specialty Polymers
Other Businesses
Total
Total Core
44.1
113.2
122.1
86.3
166.1
125.3
57.0
219.8
934.0
714.1
Contd ...

Page 83
Exhibit 120 (...contd)

1999 A1
2000E
2001E
2002E
2003E
2004E
2005E
EBITDA
Health & Nutrition
117
224
235
204
459
Specialty Polymers
243
Other Businesses (Infracor, etc)
54
443
Total
1,979
Corporate HQ / Charges
(100)
Total after Corporate Charges
1,879
Total Core (after corporate charges)1,436
158
249
271
213
480
263
63
537
2,234
(105)
2,129
1,592
177
263
305
243
522
293
64
424
2,290
(97)
2,193
1,769
193
276
332
263
557
322
65
219
2,227
(89)
2,138
1,919
208
286
350
274
581
340
65
150
2,254
(84)
2,171
2,021
221
295
365
286
605
354
65
156
2,346
(82)
2,264
2,108
235
305
380
297
630
368
65
163
2,441
(80)
2,361
2,198
14.6
14.6
17.2
20.4
21.2
19.6
9.9
9.1
12.3
11.7
16.6
16.6
14.8
18.2
18.9
20.5
19.0
9.3
10.0
12.7
12.1
16.5
17.4
15.0
19.3
20.5
21.2
20.1
9.2
10.1
14.6
14.0
17.4
18.1
15.2
20.1
21.3
21.7
21.2
9.1
10.3
17.6
16.8
18.2
18.5
15.2
20.5
21.5
21.8
21.5
8.9
10.4
18.2
17.5
18.4
18.6
15.2
20.5
21.6
21.9
21.5
8.7
10.6
18.2
17.6
18.5
18.8
15.1
20.6
21.6
21.9
21.6
8.5
10.8
18.3
17.7
18.6
13.9
14.2
15.3
16.8
17.5
17.6
17.7
Operating Profits Pre-exceptional items

Health & Nutrition
73
111
113
118
293
Specialty Polymers
118
(3)
223
Corporate HQ / Charges
(100)
Total EBIT
1,045
Total post Corporate Charges
945
Total Core (post corporate charges) 722
106
126
138
117
302
125
(4)
295.1
(105)
1,206
1,101
806
122
137
166
143
337
149
(4)
237
(97)
1,288
1,190
953
137
146
189
160
366
173
(4)
125
(89)
1,292
1,203
1078
149
154
205
170
386
188
(4)
87
(84)
1,336
1,252
1,165
160
161
217
179
407
199
(4)
93
(82)
1,413
1,331
1,238
172
169
229
189
428
211
(4)
98
(80)
1,492
1,411
1,313
PLOOLRQ
EBITDA Margin (%)

Health & Nutrition
Specialty Polymers
Total
Total after Corp. Charges (incl trading)
Total Core (after Corp. Charges)
Total Group excl. trading
(after corporate)
Contd...

Page 84
Exhibit 120 (...Contd)

(
PLOOLRQ
1999A1
EBIT Margins (%)

Health & Nutrition
9.1
7.2
8.3
11.8
13.5
Specialty Polymers
9.5
Other Businesses (Infracor, etc.)
-0.5
4.6
Services & Other / Corporate Charges
-18.3
Total EBIT Margin
6.5
Total Margin Post-Corporate Charges
5.9
Total Core Margin Post-Corp. Charges 8.3
Total Group Margin Excl.
Other / PM Trading
7.0
2000E
2001E
2002E
2003E
2004E
2005E
11.2
7.5
9.3
10.4
12.9
9.0
-0.5
4.8
-15.5
6.6
6.0
8.3
12.1
7.8
10.6
12.1
13.7
10.3
-0.5
5.1
-14.0
8.1
7.5
9.4
12.8
8.1
11.5
13.0
14.3
11.5
-0.5
5.3
-12.5
10.1
9.4
10.2
13.3
8.2
12.0
13.3
14.5
12.0
-0.5
5.5
-11.5
10.7
10.0
10.6
13.6
8.3
12.2
13.6
14.7
12.2
-0.5
5.7
-11.0
10.9
10.3
10.9
13.8
8.4
12.4
13.8
14.9
12.4
-0.5
5.9
-10.5
11.1
10.5
11.1
10.0
10.3
10.5
7.1
1. Pro-forma Degussa AG using the companys estimates


8.2
9.4
Page 85
Exhibit 121
Degussa AG: Cash-Flow Statement, 1999-2005E

1999A1
2000E
2001E
2002E
2003E
2004E
2005E
Sources of Cash
Operating Profit (Excl. Restructuring) 945
934
Associated Companies (Net of Div)
31
Change in Provisions
143
(Gain)/Loss on Sale of FA
(4)
Other
53
Total Sources
2,102
1,101
1,028
31
0
0
0
2,160
1,190
1,003
32
0
0
0
2,225
1,203
935
33
0
0
0
2,170
1,252
918
33
0
0
0
2,204
1,331
934
34
0
0
0
2,298
1,411
950
35
0
0
0
2,396
Uses of Cash
WC Changes Increase/(Decrease)
Capital Expenditure
Dividends
Financial Charges /Interest
Tax
Exceptional Cash Flows
Other Operating Flows
Total Uses
509
1,044
45
126
225
0
0
1,948
432
1,091
216
176
225
0
200
2,339
(98)
968
236
105
313
275
45
1,844
(139)
793
265
(16)
355
0
0
1,257
(47)
775
302
(79)
405
0
0
1,357
68
817
334
(121)
448
0
0
1,545
70
867
368
(161)
493
0
0
1,636
Net Operating Cash In/(Out)flow
154
(179)
381
913
847
753
760
Acquisitions
Disposals of Fixed Assets
Disposal of Business
Disposals
Preference Issues/Equity Raised
Foreign Exchange
Other Changes in Net Debt
Decrease/(Increase) in Net Debt
(1,265)
210
0
210
0
(1.2)
30.2
(872)
0
0
0
0
0
0
(150.0)
(329)
0
0
0
2,061
0
0
0
2,442
0
0
0
705
0
0
0
1,618
0
0
0
0
0
0
0
847
0
0
0
0
0
0
0
753
0
0
0
0
0
0
0
760
Net Borrowings
(872)
Opening Net Debt per Bal Sheet
1,665
Opening Net Debt incl Pension Prov. 4,013
Closing Net Debt
2,648
Closing Net Debt incl Pension Prov.5,035
(329)
2,648
5,035
2,977
5,364
2,442
2,977
5,364
535
2,921
1,618
535
2,921
(1,083)
1,304
847
(1,083)
1,304
(1,930)
457
753
(1,930)
457
(2,683)
(297)
760
(2,683)
(297)
(3,443)
(1,056)
Average Net Debt

2,157
Average Net Debt incl Pension Prov. 4,524
Average Pension Provisions
2,367
2,813
5,199
2,387
1,756
4,143
2,387
(274)
2,113
2,387
(1,506)
880
2,387
(2,307)
80
2,387
(3,063)
(676)
2,387
237
6.25
176
5.75
137
313
6.00
105
5.75
137
243
5.75
(16)
5.75
137
121
5.25
(79)
5.75
137
58
5.25
(121)
5.75
137
16
5.25
(161)
5.75
137
-24
5.83%
6.25%
6.00%
5.75%
5.25%
5.25%
5.25%
5.23%
6.02%
5.86%
5.75%
6.61%
20.17%
3.49%
Capital Expenditure as % of Sales 6.48%

Capital Expenditure as % of
Sales Ex Trading
7.70%
Capital Expenditure/D&A
1.12
Interest Cover
7.5
Net Operating Cash Before Dividends 199
As a % of sales
1.5
7.25%
6.75%
6.25%
6.25%
6.35%
6.50%
7.25%
1.06
6.3
37
0.2
6.75%
0.96
11.3
617
4.3
6.25%
0.85
(76.3)
1177
9.3
6.25%
0.84
(15.8)
1149
9.3
6.35%
0.87
(11.0)
1087
8.5
6.50%
0.91
(8.8)
1127
8.5
PLOOLRQ
Assumed Interest Rate

Basic Interest Charge
Assumed Pension Prov. interest rate
Pensions Interest Charge
Overall Financial Charge
Interest Rate (P&L Charge %)
Interest rate (P&L Charge
incl Pensions)
5.01
Note: Net debt figures exclude pension provisions

2. Interest cover on financial charges excluding costs on pension liabilities


Page 86
Exhibit 122
Degussa AG: Balance Sheet, 1999-2005E

(
PLOOLRQ
1999A1
2000E
2001E
2002E
2003E
2004E
2005E
5,203
1,681
1,217
5,402
1,752
1,214
8,101
8,368
4,531
1,616
988
0
7,135
4,039
1,480
897
0
6,416
4,032
1,344
897
0
6,273
4,051
1,208
897
0
6,156
4,104
1,072
897
0
6,073
3,554
493
1,234
3,986
493
1,234
0
_____
5,713
_____
14,081
_____
3,497
493
1,005
0
_____
4,996
_____
12,131
_____
2,801
493
913
0
_____
4,207
_____
10,623
_____
2,707
493
913
0
_____
4,113
_____
10,386
_____
2,774
493
913
0
_____
4,180
_____
10,336
_____
2,845
493
913
0
_____
4,251
_____
10,324
_____
1,126
0
0
2,919
0
_____
4,045
_____
92
_____
1,126
0
0
3,272
0
_____
4,398
_____
92
_____
1,126
0
0
3,679
0
_____
4,805
_____
92
_____
1,126
0
0
4,119
0
_____
5,245
_____
92
_____
1,126
0
0
4,602
0
_____
5,729
_____
92
_____
1,126
0
0
5,127
0
_____
6,254
_____
92
_____
2,830
2,387
3,107
_____
8,323
_____
387
2,387
3,204
_____
5,977
_____
(1,230)
2,387
2,856
_____
4,012
_____
(2,077)
2,387
2,984
_____
3,293
_____
(2,831)
2,387
3,159
_____
2,714
_____
(3,590)
2,387
3,336
_____
2,132
_____
568
313
740
_____
1,621
_____
9,944
_____
14,081
_____
22.6%
_____
3,398
_____
12,460
12,116
_____
4,137
3,999
_____
9.1
10.2
11.8
568
355
740
_____
1,664
_____
7,641
_____
12,131
_____
22.3%
_____
956
_____
10,467
11,464
_____
4,490
4,314
_____
10.4
11.6
13.6
568
405
740
_____
1,714
_____
5,726
_____
10,623
_____
22.1%
_____
(662)
_____
8,909
9,688
_____
4,897
4,694
_____
12.4
13.8
14.3
568
448
740
_____
1,756
_____
5,049
_____
10,386
_____
21.8%
_____
(1,509)
_____
8,630
8,769
_____
5,337
5,117
_____
14.3
15.8
14.5
568
493
740
_____
1,801
_____
4,516
_____
10,336
_____
21.6%
_____
(2,262)
_____
8,535
8,583
_____
5,821
5,579
_____
15.5
17.1
14.7
568
538
740
_____
1,846
_____
3,978
_____
10,324
_____
21.3%
_____
(3,022)
_____
8,477
8,506
_____
6,346
6,083
_____
16.6
18.2
14.7
Long Term Assets

Property, Plant & Equipment
Intangible Assets
Financial Assets
Other Assets
Total Long Term Assets
Current Assets
Working Capital
Cash and Equivalents
Pre-paid and Other Current Assets
Short Term Investments
Total Current Assets
Total Assets
_____
5,281
_____
13,382
_____
Equity & Liabilities

Equity
Share Capital
1,126
Treasury stock
0
Additional Paid-In Capital
0
Retained Earnings
2,664
Accum. Other Comprehensive Income
0
_____
Total Equity
3,790
_____
Minority Interests
70
_____
Liabilities
Long Term Liabilities
Long-Term Debt
2,501
Retirement Benefit
2,387
Other Provisions / Liabilities
3,025
_____
Total Long Term Liabilities
7,912
_____
Short-Term Liabilities
Short-Term Debt
568
Income Tax Payable
301
Accruals and Other Current Liabilities 740
_____
Total Short Term Liabilities
1,609
_____
Total Liabilities
9,521
_____
Total Equity and Liabilities
13,382
_____
Working Capital as % of Sales
22.1%
_____
Total Interest Bearing Debt
3,069
_____
Capital Employed
11,772
Average Capital Employed
11,655
_____
Equity (for RoE, incl Minorities)
3,860
Average Equity
3,629
_____
ROCE (%)
8.1
ROCE (%)2
9.0
ROE (%)
13.2

2. Excluding good will amortisation


Page 87

The Americas
Europe
Japan
Asia/Pacific
1585 Broadway
New York, NY 10036-8293
Tel: (1) 212 761-4000
25 Cabot Square, Canary Wharf

London E14 4QA, England
Tel: (44 20) 7513 8000
20-3, Ebisu 4-chome Shibuya-ku,

Tokyo 150-6008, Japan
Tel: (81) 3 5424 5000
Three Exchange Square

Hong Kong
Tel: (852) 2848 5200
4th Floor Forbes Building

Charanjit Rai Marg Fort
Mumbai 400 001, India
Tel: (91 22) 209 6600
BCE Place, 181 Bay Street,

Suite 3700
Toronto, Ontario M5J 2T3,
Canada
Tel: (1) 416 943-8400
Calle Serrano, 55
28006 Madrid
Spain
Tel: (31 91) 412 11 00
23 Church Street
#16-01 Capital Square
Singapore 049481
Tel: (65) 834 6888
The Chifley Tower, Level 33

2 Chifley Square
Sydney NSW 2000, Australia
Tel: (61 2) 9770 1111
Prices of companies mentioned in this report (Closing prices September 15, 2000)
3M (US$ 83.19), A. Schulman (US$ 11.69), Air Liquide ( $N]R1REHO $VDKL&KHPLFDOV580), BASF
( %D\HU %2&9.15), Celanese ( &LED6&6)U&ODULDQW6)U&URPSWRQ86&\WHF
(US$31.00), DSM ( 'X3RQW86(FRODE86(21 (WK\O86)HUUR86*UHDW
Lakes (US$30.38), Henkel (ord) ( +HQNHOSUHI +HUFXOHV86,&,4.16), Laporte (4.15), Linde
( /RQ]D6)U/XEUL]RO86/\RQGHOO860LOOLSRUH863RO\2QH8633*
(US$38.13), Praxair (US$ 37.94), Rhodia ( 5RFKH6)U5|KP +DDV866LJPD$OGULFK86
28.31), Solutia (US$11.94), Valspar, (US$27.19), Yule Catto, (1.90).
____________________________________________________
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MORGAN STANLEY DEAN WITTER

Reuters: DHAG.FE / SKWG.FE Bloomberg: DHA GR / SKW GR

September 19, 2000

Initiating coverage on the new Degussa AG with an Outperform

Degussa AG is being formed by the agreed merger of SKW

We believe Degussa is a great early-stage restructuring story,

Clear path to focusing product portfolio presented by merger

Three-year CAGR in earnings of 16%, on our estimates

Good earnings-growth story with meagre valuation

Price: Abs. and Rel. to Market and Sector

DEGUSSA-HULS AG ORD NPV (Left, Euro)

Net Income ( PQ)

Pretax Profit ( PQ )

Market Cap. ( mn)2

Book Value ( mn, 12/99)

Please refer to important disclosures at the end of this report.

MORGAN STANLEY DEAN WITTER

Degussa AG September 19, 2000

MORGAN STANLEY DEAN WITTER

Summary and Investment Conclusion

industry, higher innovation potential and critical mass,

The creation of a more devolved business organised

The planned merger should improve considerably the

There appears to be a valuation opportunity: the stock

We estimate Degussa will achieve a three-year CAGR

We expect Degussa to be a winner in consolidation.

The intentions of the major shareholders remain

The management team has no track record in merger

We are uncertain about the timing and cost of the

The level of profitability is low currently, but should

We estimate that Degussa AG would be among the

Degussa AG September 19, 2000

MORGAN STANLEY DEAN WITTER

We have looked at the valuation of Degussa AG in a

flow (DCF) valuation; and an examination of the merger

Degussa AG: Leading Global Market Positions, 1999

Health & Nutrition

Global Market Position

concrete additives, tile adhesives,

pectin, carrageenane, gums

Fine & Industrial Chemicals

chemicals for construction

fine chemical intermediates

starting products for agrochemicals

Coatings & Advanced Fillers

building & industrial colorants

transparent plastic materials (Plexiglas)

1. Based on pro-forma 1999 data for Degussa AG

Degussa AG September 19, 2000

Source: Company data, Morgan Stanley Dean Witter Research

MORGAN STANLEY DEAN WITTER

Fine & Industrial

Degussa AG September 19, 2000

Ex Degussa-Huls & SKW

Sales figures 1999 pro forma

MORGAN STANLEY DEAN WITTER

Investment Positives and Concerns

Creation of a pre-eminent global specialty chemicals

motivating for the employees. We note that similar changes

Degussa AG: Leading Positions by Division, 1999

MORGAN STANLEY DEAN WITTER

Degussa AG should be the number-one global producer of

from restructuring to drive forward the share price before the

Merger should improve strategic position of the company