RESEARCH AND DEVELOPMENT

Grace at that time was a highly diversified enterprise, engaged in a variety of domestic and international industrial and commercial activities. It was both an operating and a holding company. Its fields of activity include banking, air and ocean transportation, growing and refining sugar in Latin America, and the manufacture of various agricultural and industrial chemicals. As of December 31, 1954, its assets totaled $375,694,000. For the year 1954, it reported total sales and operating revenues of $413,402,000, and net income after taxes of $14,794,000.

Rare Earths was a small, highly specialized enterprise which had been organized in 1947. Its business consisted of the processing of monazite sands, from which were extracted several commercial products. These products were an optical quality polishing powder, and a chloride and fluoride used principally in glass polishing, metal alloying, lighter flints, and carbon arcs. In 1954, Rare Earths had begun the processing of thorium from monazite sands and had negotiated a substantial contract with the Atomic Energy Commission for processing substantial tonnage of monazite for extraction of thorium and of mixed rare earth salts for delivery to the strategic stockpile of the United States Government. Total assets as of December 31, 1954, were valued at $387,000. Sales in the year 1954 had totaled $307,000, and the company had sustained an operating loss of $60,000.

While the roll of research and development is not clear cut, it is evident that technological know-how and adaptation were critical to successful production. Rare Earths possessed this specialized knowhow, which led to a lucrative contract with the Atomic Energy Commission, but lacked the necessary capital to expand. The technology established by Rare Earths was an essential requirement for any enterprise desiring to enter the field. Grace had no shortage of capital, and had sufficient interest in the commercial potentialities of this relatively obscure field to justify the acquisition.

9. Joy Manufacturing Co. acquisition of Craig Bit Co., Ltd.

In March 1952, Joy Manufacturing Co. acquired a majority stock interest in Craig Bit Co., Ltd., in exchange for 8,686 shares of Joy common stock plus a cash payment of approximately $50,000.

Joy at the time was one of the ranking producers of mining machinery and equipment largely used in underground mines. It also made and sold various types of equipment to the construction, petroleum, marine, and other industries. Its total assets as of September 30, 1951, were $58,396,000. Net sales for the year ending December 1951 were $70,007,000, with net income after taxes totaling $5,060,000.

Craig, a Canadian corporation, was engaged primarily in the manufacture of a line of bits, shanks, and tungsten-carbide tipped drill steels for the rock-breaking industries generally. Its assets as of December 31, 1951, totaled $1,074,000. Total sales in the year 1951 were $592,000 and net income after taxes was $52,000.

Craig's business was complementary to that of Joy, which was particularly interested in a thro-way rock bit which was under patent control by Craig and to which Joy had manufacturing rights in the United States. Joy wished to market bits using some of the features of the Craig bit as well as of Joy's patented reamer-type bit, since it felt that such an improved product would be superior to any similar product then on the market.

It is not clear whether Joy expected further product improvement to result from this acquisition, although such an expectation might have been quite reasonable under the circumstances. Joy's normal practice was to furnish its foreign subsidiaries its patents, shop drawings, and designs, as well as its technical know-how in return. for a reasonable fee. In any case, the acquisition obtained for Joy full use of the patent in which it was interested. It also acquired a modern plant in Canada for the manufacture of products complementary to its own.

10. Link-Belt Co. acquisition of Syntron Co.

In November 1955, Link-Belt Co. acquired all the outstanding common stock of Syntron Co. in exchange for 134,433 shares of LinkBelt common.

At the time of acquisition, Link-Belt was principally engaged in the manufacture and sale of a widely diversified line of mechanical power transmission and materials handling machinery, and was one of the largest producers in this field in the United States. Included in its product lines were roller-chain drives, ball and roller bearings, sprocket chains, silent chain drives, speed reducers, variable-speed transmissions, and similar items; coal tipples and working equipment, coal- and ash-handling equipment, cranes and shovels, draglines, foundry equipment, conveyors and conveyor systems, water-treating equipment, food-processing equipment, sand- and gravel-working equipment, crushers, hoists, towers, unloaders, dumpers, and other types of materials handling equipment chiefly for industrial users. Materials-handling machinery accounted for about 55 percent of total sales, mechanical power transmissions for about 41 percent, and other products accounted for the balance.

Total assets of Link-Belt as of May 31, 1955, were $66,724,000. For the year 1954 total net sales were $111,219,000, and net income after taxes was $5,448,000.

Syntron was also engaged in the manufacture and sale of a diversified line of products. These included industrial vibratory equipment, rectifier cells and stocks, and power units; portable power tools, shaft seals, concrete equipment such as floats, vibrators and breakers, and miscellaneous allied equipment. Vibratory equipment accounted for 65 percent of total sales, and rectifier cells and stocks and power units for another 14 percent, with parts feeders and other items making up the balance.

Total assets of Syntron as of May 31, 1955, were $4,682,000. Net sales for the year ending March 31, 1955, totaled $7,858,000 and net profits after taxes were $607,000.

Both companies stressed research, engineering, and development activities. Link-Belt was continually engaged in development of products to meet the specialized needs of particular customers and to improve product design. Syntron had a relatively large engineering and development department, and had recently developed a diesel pile hammer, a self-contained unit operating on diesel oil from the fuel tank in the hammer and requiring no auxiliary power equipment. Completed tests had indicated to Syntron certain advantages of this new product over steam hammers, and production on an initial scale was already underway. In addition, Syntron, in cooperation with another company, had been engaged in developmental work on fitting

a rotary drill bit with an electric hammer for use in drilling oil wells. It owned a number of patents and patent applications on inventions incorporated in its products.

The joining of the technical forces of these two concerns could be expected to yield research and development benefits across the entire range of industrial products in which they were interested. Research and development were fundamental to the success of both enterprises, and constituted a factor of some importance in the rationale of the acquisition.

11. Merck & Co., Inc., acquisition of Sharp & Dohme, Inc.

In April 1953, Merck & Co. acquired the common and preferred stock of Sharp & Dohme, Inc., in exchange for common and preferred stock of Merck in an agreed-upon ratio of exchange.

Merck at the time of the acquisition was one of the leading companies in the development, manufacture, purchase, and distribution of fine and medicinal chemicals. Its most important products were vitamins, hormones, and antibiotics, sales of which accounted for more than two-thirds of its total business. Merck was one of the larger manufacturers of penicillin, streptomycin, and dihydrostreptomycin. Total assets as of December 31, 1952, were $112,347,000. Net sales for the year 1952 totaled $105,719,000, on which was earned a net profit after taxes of $8,409,000.

Sharp & Dohme was an old established firm engaged in the development, processing, and marketing of pharmaceutical and biological products. More than 75 percent of its sales consisted of specialty products rather than standard preparations, and most of these products were for use under the direction of physicians, and by dentists, pharmacists, hospitals, and veterinarians rather than for sale to the general public. Total assets as of December 31, 1952, were $46,071,000. Total sales in the year 1952 were $50,400,000, and net profit after taxes, $3,901,000.

In the fields served by both Merck and Sharp & Dohme it was recognized that the profit margin on new products was higher than on older groups, and that the profit on products developed by a particular company and identified exclusively with it tends to be more stable than on products of a general manufacture. For financial as well as competitive reasons, therefore, both companies placed considerable stress upon research and development activity. Expenditures for research and development by Sharp & Dohme in 1952, for example, were about 3.8 percent of total sales.

It was expected that the merger, by joining the research and manufacturing resources of Merck in the field of chemicals with the development and marketing resources of Sharp & Dohme in the field of pharmaceuticals, would provide an efficient and economical means of needed integration for both companies. Merck's sales had jumped by more than 50 percent since 1948, primarily as a result of the introduction of new products attributable to work done in its research and development laboratories. With the rapid development of new medicinals, Merck was interested in acquiring developmental, processing, and marketing facilities in the pharmaceutical field, particularly for specialty products growing out of its research activities. This rapid development in the medicinals field also made it desirable for Sharp & Dohme to have access to extensive research facilities and to

production capacity for new chemical products resulting from research.

The type of integration involved in this acquisition was perhaps more of a vertical than a truly diversification nature. In any event, the research and development factor was of vital importance in the business success of both companies and received strong attention in the rationale of the transaction.

12. Monsanto Chemical Co. acquisition of Lion Oil Co.

In September 1955, the Monsanto Chemical Co. acquired all the outstanding stock of Lion Oil Co. in exchange for 4,636,373 shares of Monsanto common stock.

Monsanto at that time was the sixth largest chemical company in the United States. Its total assets as of June 30, 1955, were carried at $402,831,000. Total sales for the year 1954 were $341,823,000, and net income after taxes was $23,700,000. Monsanto was engaged in the manufacture and sale of a wide range of organic and inorganic chemicals, including various heavy chemicals, intermediates, plastics and plasticizers, phosphorous compounds, medicinals and fine chemicals, rubber chemicals, insecticides, herbicides, fungicides, wood preservatives, solvents, synthetic detergents, lubricant and fuel additives, functional and industrial fluids, paper chemicals, and products packaged for retail sale (e. g. "All").

Lion was an important producer of petroleum and petroleum products. It owned and operated oil and gas properties and produced crude oil and natural gas. Its refineries manufactured gasoline, kerosene, naphtha, tractor fuel, diesel fuel, heating oil, burner oil, heavy fuel oil, lubricants and greases, asphalts for roofing, paint, insulation and paving, road oils, rust preventatives, herbicides, casinghead gasoline, butane, and propane. In addition, it was one of the Nation's leading producers of anhydrous ammonia and of various nitrogenous fertilizer materials. The total assets of Lion as of June 30, 1955, were $156,447,000. Its total sales in the year 1954 were $98,585,000, and its net income after taxes, $11,071,000.

A large and increasing share of Monsanto's business was in the field of petrochemicals. Monsanto was interested in broadening its raw material sources to include petroleum, inasmuch as one-half of its raw material consumption consisted of natural gas, petroleum fractions, and products which are or can be obtained from petroleum. The entire chemical industry was becoming increasingly based upon oil and gas, as indicated by the fact that in 1954 more than one-fourth by weight of all chemicals produced in the United States derived from petroleum raw materials. Monsanto already had an important stake in the petrochemical field by dint of its position as a large-scale manufacturer of styrene, vinyl chloride, acrylonitrile, and methanol. In addition it was a large-scale purchaser of petrochemicals for further processing in its own plants. Thus, Lion represented an important source of raw materials for Monsanto, including petroleum-based materials which were not yet produced by Lion but which could be developed for chemical use from byproducts and fractions of petroleum used by Lion primarily for heat value.

While Lion's research facilities had theretofore been rather limited, research, development, and experimental work had received strong emphasis by Monsanto, which in 1954 had devoted about 3 percent

of its total net sales to such activity. It was felt that combining the research organizations of both companies would facilitate development of new products with ready market outlets, either in terms of consumption within the new enterprise or by distribution through an established chemical sales organization. The screening and application testing and research facilities of Monsanto would be available for Lion products, and there would be available for screening by Lion a multitude of chemicals developed by Monsanto. Lion would also be in a position to utilize a great deal of specialized research equipment, including spectroscopes, electronic microscopes, high-pressure equipment and electronic-computing equipment which it did not previously possess.

On the other hand, Lion had valuable technical experience in dealing with huge continuous processes involving large volumes of liquids and gases, and with reactions common to the petroleum industry, such as catalytic cracking, reforming, and alkylation. Lion's production of ammonia not only would provide a captive source of supply for Monsanto consumption but would also give Monsanto a nitrogen base for the development of new synthetic chemicals such as organic amines and other nitrogen petrochemicals.

It was also expected that joint operation of the two companies would facilitate cross-stimulation of their research organizations because of the complementary, yet overlapping, nature of their technical personnel. Monsanto employed organic chemists, physical chemists, biochemists, physicists, chemical engineers, chemical-sales and market-development specialists, and entomologists, plant pathologists, and other agricultural chemical specialists. Lion had geologists, petroleum engineers, chemists and chemical engineers.

By and large, it was expected that the merger of the two companies, and the concomitant joining of their respective abilities in research, development, and engineering, as well as in production and marketing, would provide a sound means of diversification for both companies and would facilitate the development of new products in the industrial fields served by both. The research and development factor received prominent attention throughout.

13. Smith-Corona, Inc., acquisition of Kleinschmidt Laboratories, Inc. In August 1956, Smith-Corona acquired all of the outstanding common stock of Kleinschmidt Laboratories, Inc., in exchange for 70,000 shares of Smith-Corona common.

Smith-Corona is one of the leading producers of typewriters in the United States. It makes and sells office and portable typewriters, adding machines, cash registers, duplicating machines, carbon paper, typewriter ribbons, and various related products. Its total assets as of June 30, 1956, were $29,759,000. Total net sales for the year ending on that date were $36,922,000 and net income after taxes was $1,456,000.

Kleinschmidt was engaged primarily in the development, engineering, design, and production of printing communication equipment for the United States Army Signal Corps. Its assets as of December 31, 1955, totaled $5,552,000. Net sales for the year 1955 totaled $7,214,000, and income after taxes was $394,000.

Kleinschmidt Laboratories was built upon successful research and invention in the field of printed communications. The founder had