A Merger That Activist Investors Can Love
A Merger That Activist Investors Can Love
The merger talks between Dow Chemical and DuPont leaked on Dec. 8,
aren’t just about putting together a $120 billion deal, an industry
record. It’s about more than possibly creating the world’s largest seed
and pesticide company and the No. 2 chemical company, after Germany’s
BASF. The merger also says a lot about the power of corporate activists
and the growing pressure they and other investors are putting on
corporations to streamline their businesses.
The
talks follow a tumultuous period for both companies. DuPont’s chief
executive officer, Ellen Kullman, stepped down in October, five months
after winning a proxy battle waged by activist investor Trian Fund
Management. At Dow, CEO Andrew Liveris, who led the company’s recovery
from near-insolvency during the financial crisis, has also faced
pressure from an activist shareholder—Dan Loeb’s Third Point.
The
behemoth that emerges would likely break into three
businesses—agriculture, specialty chemicals, and commodity chemicals—to
create more focused companies, according to a person with knowledge of
the matter who asked not to be identified because the information is
private. “This is really what the activist investors of both companies
ultimately wanted, which is to break up these companies into the
component parts that have superior growth opportunities and those that
are more commodity, cyclical type of businesses,” says James Sheehan, an
analyst at SunTrust Robinson Humphrey.
Liveris has aimed to
reshape Dow into a producer of higher-margin products by selling off
volatile, commodity-like businesses; it’s consistently beaten analysts’
earnings estimates since the start of 2014. Yet Third Point last year
campaigned against Dow for failing to meet financial targets and called
for a breakup. Dow let Loeb nominate two members to the board, averting a
proxy fight a year ago, and both sides agreed to a truce set to expire
in mid-December—less than a week after the merger talks came to light.
The
build-and-breakup model reportedly being studied by Dow and DuPont is
increasingly popular. General Electric this fall spent $10 billion
buying Alstom’s gas turbine business. At the same time it spun off its
financial unit, GE Capital, and tried in vain to sell its home
appliances division to Electrolux. Lockheed Martin said in July it would
buy the helicopter maker Sikorsky from United Technologies and then
consider spinning off or selling its own information systems unit. And
Pfizer and Allergan’s recently announced $160 billion marriage would
involve dividing new drugs and older, less profitable ones into separate
businesses.
“It’s not about getting bigger, it’s about becoming
more focused,” Marijn Dekkers, CEO of drugmaker Bayer, said on Dec. 9.
“That is a trend that we have been seeing for a long time. Companies are
saying that it’s difficult to be positioned so broadly.”
Whether
regulators will allow reshufflings to occur is uncertain. Bloomberg
Intelligence analyst Jason Miner says the focus of the antitrust review
may be on the agricultural businesses. Analysts at Helvea-Baader Bank
estimate the combined Dow-DuPont would sell about 16 percent of the
world’s pesticides and be the third-largest supplier of crop chemicals.
Even so, the merged company will still have large rivals such as
Syngenta, Monsanto, and Bayer, Miner says. “It’s much more complementary
than competitive,” he says. “It seems a lot more viable than you would
think from the headline—major U.S. chemical company buys major U.S.
chemical company.”
—With David McLaughlin, David Fickling, Alice Baghdjian, and Sheenagh Matthews
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