Commentary

Dow, Dupont May Be Mixing, Matching And Breaking Up

Dow Chemical and Dupont are said to be hammering out the details of a merger that could be announced as early as today. The usual caveats about volatile elements sometimes not mixing as intended apply to the late-stage discussions. The “merger of equals” would create a company with a market value of $120 billion.

It’s likely the deal “would be followed by a three-way breakup of the combined company,” sources tell the Wall Street Journal’s David Benoit, Dana Cimilluca, Dana Mattioli and Jacob Bungethey, who broke the story last night. 

“Dow’s chief executive Andrew Liveris is expected to be executive chairman of the new company, with DuPont CEO Edward Breen keeping that title,” they write. “Even if the two sides manage to agree, there is no guarantee antitrust regulators would bless the union or that the breakup plan would address any such concerns.”

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Breen, the former CEO of Tyco who has been dubbed a “breakup expert,” was named permanent CEO of Dupont a month ago after serving as interim CEO for a month following Ellen Kullman’s retirement in October. Kullman fought hard to keep the company intact, Valentina Zarya reported for Fortune.  

As for Dow, “the news may not be a total shock,” reports Matthew Dolan for the Detroit Free Press, because “CEO Andrew Liveris has been remaking its business over the past few years.” In an analysts’ call in October, Liveris did not anticipate any mergers and acquisitions short term but, Dolan writes, “said the company been engaged in general talks with other players in the agribusiness sector about potential tie-ups.”

A deal would not only face regulatory scrutiny in the U.S. but also in other countries, Reuters’s Greg Roumeliotis, Shubhankar Chakravorty and Ankush Sharma point out. But it “would allow the two U.S. companies to rejig their assets based on their diverging fortunes. Their plastics and specialty chemical businesses have benefited from lower energy costs, while their agrochemicals divisions have struggled to cope with weak demand for crop protection products.”

Dow was founded in 1897 as a bleach producer in Michigan and produces “a slew of plastics and agricultural chemicals”; DuPont was born in 1802 in Delaware as a gunpowder manufacturer and “claims innovations such as Kevlar and Teflon,” Leslie Picker and Michael J. de la Merced report in the New York Times.

Dow recently ended a battle with Daniel S. Loeb and his Third Point hedge fund by adding four independent directors. DuPont, meanwhile, “successfully fended off a board challenge” by Nelson Peltz and his Trian Fund Management, they report.

Both activist investors “argued that the chemical makers they were targeting suffered from corporate bloat and missed financial earnings targets,” Picker and de la Merced write. “The two companies argued that they were taking steps to trim excess costs and improve their operations, as well as buy back shares and increase stock dividends.”

“A merger of Dow and DuPont would seem to fly in the face of the activists’ strategy,” according to Ed Crooks and James Fontanella-Khan in Financial Times. “However, a three-way break-up of the merged group could allow the creation of more focused businesses, concentrating on areas such as specialty chemicals or petrochemicals.”

The potential combination of the rivals is indicative of overarching developments in the marketplace, several observers point out, albeit in different ways.

“A few years ago, Dow Chemical would either have bought DuPont, or decided the regulatory hurdles were too high and given up,” writes Bloomberg Gadfly columnist David Fickling. But “it’s not hard to see the advantages” of the marry-and-break-up deal they are contemplating.

“Bringing together Dow and DuPont's agritech units immediately creates the world's second-biggest player behind Syngenta, according to data compiled by Bloomberg. Add DuPont's $3.29 billion nutritional-additives business, and it would take the lead,” Fickling writes. “The leftovers look pretty appetizing, too.”

In a commentary, the Wall Street Journal’s Dennis K. Berman writes that “it’s as if these two companies — absolute bedrock of U.S. industrial might — have given up faith in themselves and their futures,” and he suggests that it’s indicative of a wide-spread malaise.

“Self-confidence seems to brim only in Silicon Valley. Across the American business world, the goal is to cut costs, consolidate, do more with less,” Berman laments. “This is not an America playing to win. It’s an America playing not to lose.”

On a quarterly basis.

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