Massive Merger: DuPont and Dow Agree to Terms

After completing the deal, they plan to split into three companies – one focused on agriculture, one on material science and one on specialty products. It intends to split into three separate firms-one focused on agrochemicals and seeds, another on materials, and a third on specialty chemicals.

The roughly $130 billion corporate marriage, formally announced on Friday, is another super-deal in a record-setting year for mergers and acquisitions.

Executives in both companies have said that the agrichemicals businesses might have some overlap and any sales of assets would be very minor. Both the companies need to merge first and then spinoff to qualify as tax-free transactions in America, affirmed SunTrust Robinson Humphrey analyst James Sheehan. The agreement, under consideration since at least February, comes after two years of pressure from activist investors who argued that shareholders of both companies would realize greater value if they were broken up.

Andrew Liveris, CEO of Dow Chemical, will become executive chairman, while Edward Breen, CEO DuPont, will become CEO and chair. The companies have been struggling to cope with falling demand for farm chemicals due to falling crop prices and a strong dollar even as their plastics businesses have thrived thanks to low natural gas prices. Also within DuPont Nutrition & Health, the BAX system and RiboPrinter system provide food diagnostics products. The company owns the Kevlar brand and previously produced Teflon.

The 118-year old Dow makes plastics, chemicals, hydrocarbons, and agrochemicals.

Formed in 1943, Dow Corning produces silicon-based products for aerospace, automotive and electrical industries.

Seeds and chemical maker Dow Chemical Co (DOW.N) said it would assume full control of Dow Corning, its joint-venture with Gorilla glass maker Corning Inc (GLW.N).

The deal, which the companies expect to close in the second half of 2016, is sure to be scrutinized by antitrust regulators.

The deal “reflects the culmination of a vision we have had for more than a decade to bring together these two powerful innovation and material science leaders”, said Andrew Liveris, Dow’s chairman and chief executive officer.

Now, Heffron and other leaders at the state business roundtable are on the lookout for new industries to fill any void that DuPont’s transition leaves and shore up what he describes as an unsustainable economy. The segment’s combined pro forma 2014 revenue will be around $19 billion, as per the press release. Combined pro forma 2014 revenue for Specialty Products is about $13 billion.

The merger “answers the question as to what would be the first shoe to drop in the ongoing speculation of the Ag industry consolidation”, said Chris Shaw and Herb Hardt, analysts at Monness Crespi Hardt & Co.in NY, in a note Wednesday, before the deal was confirmed.

It could also prompt a renewed flurry of takeover bids for European rivals, with Syngenta AG the most likely target.

Breen took over as DuPont CEO following the abrupt resignation in October of Ellen Kullman, who just a few months earlier fended off a proxy challenge by Trian Fund Management, a hedge fund led by activist investor Nelson Peltz. Heffron says the new agricultural chemicals group may well shift to the Midwest, where Dow is based – though it’s a sector that supplies DE, too.

DuPont and Dow have major footprints all across this region, from DE to New Jersey to Philadelphia to its suburbs The merger would combine two companies that sell agricultural products to millions of farmers around the world, and make a variety of chemicals for consumer and industrial products ranging from electronics, automobiles, and household goods to building materials and safety equipment.

Diana Moss, president of the American Antitrust Institute, said there could be problems in dominance of seed sales.

“You’re nearly creating duopoly in the market, and that’s a problem”, Ms. Moss told Reuters. The board of the new company would have 16 directors, evenly divided between current Dow and DuPont directors.

Klein and Company, Lazard, and Morgan Stanley & Co.