Dow, DuPont merger plan: A new era of activist investing

Dow Chemical (DOW – Get Report) and E. I. DuPont de Nemours (DD – Get Report) on Friday announced plans to merge the two iconic businesses into a chemicals giant valued by the market at about $130 billion.

DuPont and Dow Chemical, which both have operations in the United Kingdom, have agreed to merge in a deal valuing the enlarged firm at £85billion.

However, the aim is, 18-24 months after the merger is completed, to separate out the combined Dow-DuPont businesses into three spin-offs – in agriculture, materials science, and speciality products.

Besides DuPont Nutrition & Health, the planned specialty products company also would include DuPont’s Industrial Biosciences, Safety & Protection, and Electric & Communications as well as the Dow Electronic Materials business.

Nonetheless, the announcement – which will see Dow shareholders take over 52% of the combined company, and DuPont investors 48% – failed to support the companies’ shares, which had already risen in anticipation of the tie-up. DuPont CEO Ed Breen will be CEO of the new company and Dow Chemical CEO Andrew Liveris will be executive chairman.

“When I look and DuPont and Dow, I see businesses that fit together like hand in glove”, Breen told reporters, according to the USA Today.

As a result, the company is cutting 10 percent of its global workforce, including employees and contractors, a move expected to cut costs by $700 million.

The materials company will fold in the automotive units of both Dow and DuPont, in addition to their performance-materials divisions and other units, to create a $51 billion-a-year company. The merger one of the biggest of the year will allow Dow and DuPont to rejig assets based on the diverging fortunes of their businesses that make agriculture chemicals and plastics.

Dow is based in Midland, Mich., while DuPont is headquartered in Wilmington, Del.

Similarly, DuPont Chairman and CEO Edward Breen said on the occasion: “This is an extraordinary opportunity to deliver long-term, sustainable shareholder value through the combination of two highly complementary global leaders and the creation of three strong, focused, industry-leading businesses”.

The agrichemical company is expected to generate $19 billion through the sale of seeds and chemical insecticides to the agricultural industry.

Andrew Liveris, Dow’s chairman and CEO, will lead the Material Science Committee. Breen, 59, will oversee the other two divisions.

“The bigger and more transformative the deal, the more likely it will in fact affect competition in some fashion, even with a remedy”, Grunes said. “Our initial take is, given the commodity nature of Dow’s business and the resulting low barriers to entry, the valuation is not obviously attractive”, said Grayson Witcher, portfolio manager at Mawer Investment Management Ltd. DuPont, part of the Dow Jones industrial average, closed down 5.5 percent to $70.44 on Friday.

After the merger, the company plans to divide into separate entities.

The companies have two of the best-known names in American corporate history.

Under the terms of the merger, Dow shareholders will receive a fixed exchange ratio of one share of DowDuPont for each Dow share, and DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in DowDuPont for each DuPont share. Dow also will assume full control of silicone products maker Dow Corning, its joint venture with Corning Inc.

In their statement, the companies said they would have a combined market capitalization of about $130 billion. The combined adjusted revenue was about $13 billion in 2014.

The Material Science Company will consist of DuPont’s Performance Materials segment and Dow’s Performance Plastics, Performance Materials and Chemicals, Infrastructure Solutions and Consumer Solutions segments.

Dow was founded in 1897 by Canadian-born chemist Herbert Dow to produce bleach using new technology he had developed to extract chlorine from brine.