Chemical group Crompton Corp. (CK) will acquire smaller rival Great Lakes Chemical Corp. (GLK) for $1.54 billion, creating the third-largest U.S. specialty chemicals company, the companies said on Wednesday.

The friendly, all-stock transaction will create a company with revenue of more than $4.1 billion and a market capitalization of nearly $3.2 billion, ranking it third in the United States after Rohm & Haas (ROH) and Engelhard (EC).

Analysts said the businesses were a good fit to take advantage of an upturn in the chemicals industry, sending Great Lakes shares up about 19 percent in early Wednesday trading while Crompton shares gained almost 10 percent.

"The businesses do fit strategically," analyst James Chen from Fulcrum Global Partners said. "When things are going strongly in an industry you are going to see more merger activity and there could be more to come."

Robert Wood, Crompton's chief executive, president and chairman who will hold the same roles in the combined company, said the transaction would create a global leader in plastic additives that are used to color or reinforce materials.

"We expect to generate organic revenue and profit growth sooner and more surely than either company was likely to do alone," Wood told a conference call.

He said the deal had been discussed several times in the past but the conditions never seemed right until now, with an upturn in the chemicals business cycle as the supply/demand balance for many chemicals tightens worldwide.

Under the deal, each Great Lakes share will be swapped for 2.2232 shares of Crompton, which values Great Lakes at $29.92 per share, a 10 percent premium over Tuesday's closing price. Great Lakes share rose 18.5 percent to $32.05 early Wednesday.

Crompton shares, which closed at $13.46 on the NYSE on Tuesday, rose 8.5 percent to $14.60 in early trading.

Including about $250 million of Great Lakes net debt and minority interest to be assumed by Crompton, the transaction is worth $1.8 billion, the companies said.

The combined company will be owned 51 percent by Crompton shareholders and 49 percent by Great Lakes shareholders with five directors from each side joining Wood on the board.

The deal, which needs approval of regulatory authorities and shareholders, is expected to close by mid-year.

The combined company will hold leading positions in high-value specialty chemical niche businesses, including plastic additives, petroleum additives, flame retardants and pool chemicals. It will also have strong positions in castable urethanes and crop protection chemicals.

"It takes us a long way toward our goal of holding leading global positions in true value-added specialty chemicals businesses," said Wood, who added his goal was to achieve a return on capital of around 15 percent to 20 percent.

Karen Osar, who will be the chief financial officer, said the merger should result in recurring annual cost savings of $90 million to $100 million, with 85 percent achieved in 2006.

She said $65 million of these savings would come from organizational changes but she did not say how many jobs would be cut from the combined work force of 8,500.

The deal is expected to be accretive to 2006 earnings per share for the Middlebury, Connecticut-based company, although Osar said it would be mildly dilutive for 2005 on Wall Street estimates for both companies.

The deal will result in one-time pretax closing costs of up to $40 million and integration costs of $90 million to $100 million.

In 2004, Crompton posted revenue of $2.55 billion and a net loss of $34.6 billion, while Great Lakes had revenue of $1.6 billion and net income of $62.9 million.