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Hedge Fund Targets Dow

Activist Investor: Third Point wants big chemical maker to split in two

by Alexander H. Tullo
January 27, 2014 | A version of this story appeared in Volume 92, Issue 4

Dow Chemical’s value lags behind the broader market over the long term. NOTE: Index based on monthly closing prices of shares. Dividends are not included. SOURCES: C&EN, Yahoo Finance
A line graph compares the S&P 500 with stock in Dow Chemical.
Dow Chemical’s value lags behind the broader market over the long term. NOTE: Index based on monthly closing prices of shares. Dividends are not included. SOURCES: C&EN, Yahoo Finance

A hedge fund run by billionaire investor Daniel S. Loeb has purchased a large stake in Dow Chemical and wants the company, the largest chemical maker in the U.S., to break itself into separate commodities and specialties firms.

The fund, Third Point, didn’t disclose the size of its stake, saying only that Dow is currently its largest investment. However, published reports value the fund’s interest in Dow at $1.3 billion.

Loeb has lit fires under the feet of corporate executives before, most notably at Sony and Yahoo. Since its inception in 1996, Third Point has reported average annual returns of 18%.

The hedge fund’s gripe against Dow is anemic performance. “In April 1999, nearly 15 years ago, an investor could have purchased Dow shares for the same price that they trade at today!” Third Point wrote to investors. “These results reflect a poor operational track record across multiple business segments, a history of under-delivering relative to management’s guidance and expectations, and the ill-timed acquisition of Rohm and Haas.”

Credit: Steve Marcus/REUTERS/Newscom
Daniel S. Loeb, founder of Third Point LLC
Credit: Steve Marcus/REUTERS/Newscom

Andrew N. Liveris has been Dow’s CEO since late 2004. Third Point is particularly critical of Liveris’s strategy in petrochemicals, which Loeb asserts allows basic chemicals to “subsidize” businesses downstream. This strategy is “misaligned with the changed landscape” of low-cost raw materials from shale. Instead, the firm should be focused on reducing costs and fine-tuning operations, which, the hedge fund claims, can unlock billions in profits.

Third Point is recommending that Dow explore putting its petrochemical-oriented operations into a new company. These businesses generated $38.7 billion in revenues in 2012, 68% of Dow’s total sales. The remaining specialties company would consist largely of former Rohm and Haas assets and Dow AgroSciences.

Credit: UPPA/ZUMApress/Newscom
Dow Chemical CEO Andrew Liveris
Credit: UPPA/ZUMApress/Newscom

Dow is already moving its chlorine and derivatives operations into a separate company that would have about $5 billion in annual revenues. In 2009, Dow planned to exit petrochemicals by creating a joint venture with Petrochemical Industries Co. of Kuwait, but that deal fell through.

In a statement, Dow pledged to maintain an “open dialogue” with shareholders but defended its strategy. “We believe our investments have yielded sustainable value for our shareholders and will continue to in the near and long term.”

Charles Neivert, a stock analyst with Cowen & Co., is intrigued by the idea of a split at Dow, but he thinks the petrochemical business is the keeper. “Dow’s recurring attempts at transformation have resulted in a misallocation of resources over a long period of time, creating a situation where almost every segment substantially under-earns its potential,” Neivert wrote assessing Loeb’s plan. “We see the greatest earnings capture in its petrochemical business. Dow should sell everything else.”

Shareholders seem receptive to Loeb’s idea. After news of the Third Point stake broke on Jan. 21, Dow shares climbed 6.6% to close at $45.93.



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