Sept. 15 (Bloomberg) -- BASF SE, the world's largest chemicals company, agreed to buy Ciba Holding AG for 6.1 billion Swiss francs ($5.5 billion) to better compete in the market for paper additives by increasing scale.

BASF will pay 50 francs in cash for each Ciba share, 32 percent more than the closing price on Sept. 12, the Ludwigshafen, Germany-based company said in today. Shares of Basel, Switzerland-based Ciba climbed 29 percent to 49 francs.

Chief Executive Officer Juergen Hambrecht is betting the creation of the No. 1 specialty chemicals supplier will help salvage BASF's paper division, hurt by sliding demand and higher raw-material costs. A ``far-reaching'' revamp is planned as Ciba is integrated, Hambrecht said on a call today.

``At first look this is a good price'' for Ciba, said Peter Gachnang, a fund manager at Swisscanto Asset Management in Zurich, which owns about 0.3 percent of the Swiss company. ``It brings synergies in purchasing.''

Ciba climbed 10.54 francs in Zurich trading as of 9:28 a.m. local time. BASF declined 2.9 percent in Frankfurt to 36.73 euros, in line with a general stock decline amid turmoil in credit markets. The Swiss company started trading at 110 francs when it was spun off from drugmaker Novartis AG in 1997.

`Fundamental Problems'

Ciba, which has slumped about two-thirds under Armin Meyer's tenure as CEO and chairman, has suffered falling margins as it struggles to pass on higher oil-derived raw material costs to customers. The price of crude increased to a record of more than $145 earlier this year.

Meyer added 400 million euros ($572 million) in sales from the purchase of Finnish paper chemicals maker Raisio in 2004. Since then, the units have dragged down margins at Water & Paper Treatment, its biggest division, as input costs rose and a global forest-products glut forced papermakers to cut output.

``They're one of the few buyers that could deal with the fundamental problems with Ciba,'' said Paul Satchell, an analyst at ING Groep NV, who rates BASF ``buy'' and Ciba ``sell.'' ``Ciba has problems with raw-material price volatility. That will be mitigated. It is strategic positioning.''

On Aug. 19 Ciba dropped the most since first trading in 1997 after posting an unexpected second-quarter loss on rising material costs and writedowns. Ciba announced a review of its Water and Paper Treatment division, which had annual revenue last year of 2.53 billion francs, or 39 percent of the total. The company booked 595 million francs in writedowns at the division after jettisoning profitability targets.

Consolidation

The Swiss company became a leader in water treatment with its $2.3 billion purchase of U.K.-based Allied Colloids Plc in 1998. Ciba transforms crude oil derivatives such as ethylene into pigments, plastic additives and dyes. The company is the world's biggest maker of colors for plastics. It had to sell the root of its business, the textile dyes division, in 2006 because of increased competition from Asia.

The move follows Dow Chemical Co.'s acquisition of Rohm & Haas Co. for $18.8 billion in July, adding a more lucrative business supplying electronics materials and adhesives. BASF has also made similar moves to diversify, purchasing Engelhard, the U.S.-based inventor of the catalytic converter, in 2006.

``With the acquisition of Ciba, BASF is strengthening its portfolio and expanding its leading position in specialty chemicals with products and services for a variety of customer industries,'' the German company said in the statement.

Goldman Sachs Group Inc. analysts downgraded Ciba stock on Sept. 12, saying the Swiss chemicals maker faces ``significant'' challenges and a takeover bid by a larger company is unlikely.

``Against the backdrop of increasingly challenging conditions within our industry, this is a transaction that combines a fair price with an industrially compelling solution for Ciba,'' Meyer said today in the statement. ``By joining with BASF and gaining access to its research, production and marketing platform, we will significantly strengthen Ciba's businesses, especially in the areas of plastics, coatings and paper.''

To contact the reporters on this story: Angela Cullen in Frankfurt at acullen8@bloomberg.net; Antonio Ligi in Zurich at aligi@bloomberg.net

Last Updated: September 15, 2008 04:00 EDT