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An Industry In Spin Cycle

Chemical companies look to restructuring as a way to clean themselves up

by Alexander H. Tullo
December 21, 2015 | A version of this story appeared in Volume 93, Issue 49

To hear Dow Chemical Chief Executive Officer Andrew N. Liveris tell it, the recently announced merger of Dow and DuPont was something he wanted to do for years, long before he started getting hounded by activist investor Daniel S. Loeb to split Dow along commodity and specialty chemical lines.

Liveris approached DuPont CEO Edward D. Breen soon after Breen took the helm at DuPont in October. Breen had considered such a deal as a director since February and moved quickly in the negotiations.

Nelson Peltz, the activist investor who has been hectoring DuPont to break apart, appears to be a deal backer. His Palm Beach, Fla., estate was reportedly a venue for a round of deal talks. And Loeb-appointed directors on Dow’s board are backing the deal, although Loeb himself wants Liveris ousted.

Although activist investors can’t take all the credit for the future DowDuPont—and its planned breakup into three specialized firms—it is clear that they were, at the very least, an important constituency. Indeed, activist influence is being felt throughout the chemical industry. Two other large firms, Air Products & Chemicals and Ashland, are also shedding businesses at the behest of activist investors.

Activist investors are able to leverage a small, often less than 5%, stake in a company into outsized influence by forming alliances with institutional investors such as mutual funds. If management doesn’t comply with their suggested reforms, the activists attempt to install new board directors or have company leaders ousted.

“Generally speaking, activists are attracted to companies when they see underperformance relative to the peer group,” says Vijay Sarathy, a partner at the consulting firm Pricewaterhouse­Coopers. “Their hypothesis is that a lack of portfolio coherence is an important cause for such underperformance.”

Air Products, for example, is the last industrial gas company with a substantial chemical business. Pushed by activist William Ackman, Air Products CEO John E. McGlade departed last year. McGlade was replaced by Seifi Ghasemi, who earlier had broken up Rockwood Holdings. After only a year in office, Ghasemi announced a plan to spin off Air Products’ specialty chemical unit as Versum Materials.

Dow and DuPont put up more of a fight. In the case of DuPont, Ellen Kullman, the firm’s CEO until recently, favored only the carve-out of Chemours, not the more extensive corporate breakup that Peltz envisioned. Peltz tried to get four directors onto DuPont’s board but was smacked down at the firm’s annual meeting in May.

Kullman’s victory was short-lived. Soon thereafter, the company announced a disappointing earnings outlook, and she stepped down. Breen, her successor, immediately started talking to Liveris.

Activist investors can’t be blamed for all the structural changes happening in the chemical industry. The year’s biggest spin-off is Covestro, Bayer’s former polyurethane and polycarbonate business, which generated $15.5 billion in sales in 2014. Bayer’s managers decided on their own to get rid of the underperforming unit to focus on pharmaceuticals and crop protection. The German firm took a similar step in 2004 when it spun off its industrial chemicals business as Lanxess.

Introspection, Sarathy says, has caught on as a trend in the chemical industry. “Increasingly, companies are turning the activist lens onto themselves,” he says. “Just because an idea comes from activist investors doesn’t mean it is a bad idea.”


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