After competing against each other for decades, agriculture, chemicals and materials giants
DowDuPont is being pitched as a way to combine complimentary operations in agriculture, materials and specialty products, increasing their scale and uncovering billions in cost synergies. Those benefits are then expected to pay off when DowDuPont splits into three separate publicly traded businesses, freeing them to operate independently. The move comes amid a dramatic change in the earnings outlook for both companies, due to a slowing of emerging market growth and the strengthening of the U.S. dollar. And it come as both Dow and DuPont have faced significant pressure from activist hedge fund investors.
Ellen Kullman, former CEO of DuPont, surprised Wall Street in October by retiring just months after defeating activist hedge fund Trian Partners in a hotly contested proxy battle. Her exit came amid continued pressure from Nelson Peltz's Trian and disappointing earnings weakened by currency movements and the slowdown in emerging markets.
For its part, Dow Chemical reached a standstill with Dan Loeb's Third Point Management last year, after the hedge fund firm sharply criticized corporate expenses and some parts of the company's conglomerate strategy.
In response to activist pressure, both DuPont and Dow Chemical have sharply cut costs and jettisoned businesses. Only months ago, DuPont spun off its performance chemicals business, Chemours, completing what then CEO Kullman and its board characterized as a multi-year turnaround. This morning, DuPont bolstered a cost savings initiative begun under Kullman by $700 million annually, however, it also warned investors of a further earnings hit from the strengthening dollar.
Friday's merger goes a dramatic step farther, amounting to a sudden shift in strategy that brings into the equation all of the risks inherent in large M&A activity. It hopes to smash both companies together, finding new advantages of scale and synergy before breaking them apart. The deal comes at a time when many investors would rather bet on focused businesses, instead of conglomerates with operations that balance each other.
The combined DowDuPont is expected to generate $3 billion in annualized cost synergies within 24-months of a close of a merger. Both companies see the ability to realize a further $1 billion in operating synergies.
DowDuPont will then split into three publicly traded companies within two years: an agriculture company with combined pro forma revenues of $19 billion, a material science company with revenues of $51 billion, and specialty products company with revenues of $13 billion. These businesses, DowDuPont says, will be hold new found scale advantages, and have the benefit of a clear focus and distinct capital structure, potentially making them easier to understand for investors.
The new strategy comes amid a sharp cyclical downturn in many of Dow and DuPont's critical end markets as emerging market demand slows. This changing economic landscape has not only cut into sales growth, it's created sharp currency swings that have detracted as much as 20% from earnings in 2015.
DuPont shareholders and Dow Chemical shareholders will 50% of the combined company. Dow Chemical shareholders will exchange their stock on a one-for-one basis, while DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in DowDuPont for each of their shares.
Dow Chemical CEO Andrew Liveris will become executive chairman of the DowDuPont board, while DuPont's recently appointed CEO Ed Breen will lead the combined company.
"Ed and I checked our egos at the door," Liveris said at the end of an hour-long call with investors. Liveris characterized the merger as the culmination of decade-long aspiration to combine the two companies, and said it would change the industries they operate in. "To put two companies together that have storied names, put the two names physically together, and then to address their futures is our job in front of us," he added.
"Maybe this was unique time in the history of both companies where we could pull this off. But I think we've created a very attractive path forward for our shareholders. We got to do a 50/50 deal. We got a very tax-efficient way to do it. We are creating three unbelievably focused world-leading platform companies out of this. And so, the strategic nature of what we could pull off was incredible," Breen said.
Dow shares fell more than 2% in early trading, while DuPont shares fell nearly 5%. Shares in both companies rallied around 10% on Wednesday as reports of a deal surfaced.
The merger is expected to close in the second half of 2016, subject to regulatory approvals. Klein and Company, Lazard, and
