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DowDuPont Is C&EN’s Company Of The Year

The $130 billion merger is too big to ignore

by Alexander H. Tullo
December 29, 2015 | A version of this story appeared in Volume 94, Issue 1

C &EN’s choice for 2015 Company of the Year was to be the product of weeks of careful deliberation. We compiled a short list of firms that ought to be recognized for their noteworthy accomplishments. After much discussion, we winnowed the list down to a couple of final candidates.

Then we threw it all out the window on Dec. 11, when Dow Chemical and DuPont announced they would merge. The obvious choice for Company of the Year since that day has been a firm that won’t exist until well into 2016: DowDuPont.

Schematic showing layered packaging materials that will be made by DowDuPont that combine Dow’s and DuPont’s polymers.
Polymers made by Dow and DuPont’s $51 billion materials science company will literally be touching each other in packaging. Two examples are shown here.
EVA = ethylene-vinyl acetate. LDPE = low-density polyethylene. LLDPE = linear low-density polyethylene.

The transaction is big. Not only that, it will remodel vast swathes of the chemical industry, including polymers, electronics, and agriculture, by creating formidable competitors in each of these fields. And although the transaction is being billed as a merger of equals, DowDuPont could represent the final chapter in the 213-year history of DuPont, the smaller of the two firms.

To those watching the chemical industry, the notion of a Dow-DuPont merger has long been more of a punchline than a serious idea. Any time someone said “when Dow merges with DuPont,” it meant something like “when pigs fly” or “when hell freezes over.”

They are two very different companies. DuPont dates back to 1802, when Eleuthère Irénée du Pont de Nemours established gunpowder mills on the banks of the Brandywine River in Delaware. The company has since played a central role in industrializing the U.S.

It was an early backer of General Motors. It was one of the first companies to establish a professional R&D organization. DuPont’s researchers created household names like nylon, Teflon, and Kevlar—all of them “better things for better living through chemistry.”

Dow Chemical is the upstart by comparison. Founded in 1897 as a bromine maker in Midland, Mich., it furnished the post-World War II American prosperity with materials such as Styrofoam, Saran wrap, and polyethylene. Over the years, it has helped push the chemical industry toward greater scale and globalization.

Dow’s chief executive officer, Andrew N. Liveris, had been putting the two companies together in his head for years, but DuPont CEO Ellen J. Kullman wouldn’t entertain the idea. Opportunity came in the form of Nelson Peltz, an activist investor who for the past two years had been trying to break DuPont up.

Peltz attempted to install himself and three other directors on DuPont’s board at the firm’s annual meeting in May 2015. He was beaten back, largely by DuPont retirees and other individual shareholders.

However, a bad earnings forecast at DuPont led to Kullman’s resignation in October. Edward D. Breen, the ex-Tyco CEO who had been appointed to DuPont’s board in February, took over and immediately began talking with Liveris about a merger.

The company they are putting together is massive—some $130 billion in market capitalization and $83 billion in annual sales.

Heat map showing Dow and DuPont’s levels of development in various areas of agriculture.
Dow and DuPont’s $19 billion agriculture firm will have strengths in seeds, insecticides, and herbicides.SOURCE: Dow

Yet DowDuPont won’t be around for long. It will merely be a staging ground for the next step in a plan hatched by Liveris and Breen to dole out their businesses into three new entities: an agricultural chemicals and seeds firm, a materials science company, and a specialty products maker.

The agriculture combination is the least surprising element of the merger and was probably one of the catalysts for discussions. With declining crop prices and weakness in emerging markets, agricultural chemical makers have been seeking to consolidate. Monsanto, the market leader, had already attempted an unsolicited $45 billion bid for rival Syngenta.

Liveris and Breen both told analysts in October that they were open to transactions in agriculture. They might already have been talking to each other about a bigger deal.

Their two agriculture units complement each other about as well as any two businesses in the sector could. Dow’s business is mostly chemicals; DuPont’s is mostly seeds. DowDuPont will be balanced in both.

Its $19 billion per year in agriculture-related sales will put it about $4 billion ahead of rival Monsanto. But that might not last long. The Dow-DuPont merger will undoubtedly touch off deal discussions elsewhere in agriculture. A resurrected Monsanto-Syngenta deal would easily knock DowDuPont off its perch, as would a transaction between Monsanto and BASF or Bayer.

The $51 million materials science company will look a lot like the old Dow but with the addition of DuPont’s polymers businesses. Liveris will have oversight of this company. It might even emerge having headquarters in Midland, retaining the Dow name in some way. “What we have been telling people right now is that Dow is going to be here in Midland,” Dow’s chief operating officer, James R. Fitterling, tells C&EN.

The integration between Dow’s massive petrochemical operations and downstream polyethylene and elastomers businesses is preserved in the materials science firm. The acrylic acid and derivatives businesses that Dow acquired as part of its 2009 Rohm and Haas purchase are here as well.

We are trying to make sure [the firms] are low cost ... but we’re not trying to starve the machine.

The DuPont polymers business makes ethylene copolymers and engineering polymers. It’s a major supplier of materials such as Bynel and Surlyn resins for multilayer packaging. Dow makes polyethylene and packaging adhesives.

Dow appears to be doubling down on a market trend. More and more of the plastic packaging appearing on grocery store shelves is made of multilayered films that incorporate different materials, each imparting performance attributes such as oxygen impermeability or printability.

DuPont’s engineering polymers business is a major supplier of resins including nylon and polybutylene terephthalate for automotive applications. Dow has a stake in the auto industry through products like its Betamate adhesives, used as an alternative to welding in automotive structures such as the aluminum body of Ford’s F-150 pickup truck.

The materials science company is also designated as the future home of Dow Corning’s silicones business. The same day that Dow disclosed its merger with DuPont, it also unveiled the $4.8 billion purchase of Corning’s half of the 72-year-old joint venture.

Dow Corning is the world’s largest silicones company with about $6.2 billion in annual revenues. It also has headquarters in Midland. “Dow is uniquely positioned to access quick synergies,” Liveris told analysts. He thinks Dow could reduce Dow Corning’s costs by $300 million. And he expects additional earnings to stem from the companies’ shared presence in auto, personal care, and construction markets.

The $13 billion specialty products business is the most likely spin-off company to launch under the DuPont name. Breen will oversee this business as well as the agriculture company. DuPont’s Breen has promised that this company will establish headquarters in Wilmington, Del.

Checklist showing Dow’s and DuPont’s strengths in various specialty products areas.
More than 30% of the specialty products firm’s $13 billion in revenues will come from electronic materials.

The specialty products company will combine electronics materials businesses from both parents into a $4 billion franchise. Dow’s business, which originated for the most part with Rohm and Haas, is strong in materials for chip production, particularly the chemical mechanical planarization pads used to smooth out silicon wafers.

DuPont’s strength is in electronics areas other than chip fabrication. It has a strong business in materials for solar panels such as encapsulants and metallization pastes. Its Tedlar polyvinyl fluoride film has become the standard material for photovoltaic backsheets.

The other businesses in the specialty products company will come from DuPont. These include DuPont’s nutrition and health segment, largely made up of products such as probiotics that came from DuPont’s 2011 purchase of Danisco. The company will also house DuPont’s industrial biosciences unit, which developed a fermentation route to 1,3-propanediol.

DuPont’s safety and protection business is going to the specialty products firm as well. Several of DuPont’s household names, including Tyvek, Corian, Kevlar, and Nomex, reside in this unit.

These are all materials, and yet they were not included in the materials science company. Tyvek, a polyolefin fabric that seals houses from moisture, would complement materials science products such as Dow’s Great Stuff and Styrofoam. Perhaps peeling the safety and protection business away would have left the specialty products firm without needed critical mass.

The company will need all the cohesion it can get. Because the specialty products firm is a looser collection of businesses than the two other firms earmarked for spin-off, John Roberts, a chemical stock analyst with UBS, called it “RemainCo” in a note to clients. He thinks the diversifed company could come under pressure to break up.

“We can’t help but think that the DuPont name could be headed the way of other iconic chemical names like Union Carbide, Imperial Chemical Industries (ICI), and Rhône-Poulenc,” he wrote.

Reservations about the deal are at a fever pitch in Delaware, where people are worried that Dow will roll everything up and move it to Midland or that the old DuPont will be downsized into nonexistence. “This is a loss which is almost incalculable, if it were to happen in its entirety,” former governor Mike Castle told the News Journal of Wilmington.

Such fears are already materializing. DuPont is quietly disbanding Central Research & Development, one of the world’s most prestigious corporate research organizations (see page 7).

That move comes mere days after both DuPont and Dow downplayed cuts to R&D in connection with the merger. “What we don’t want to do is affect the future growth of these businesses,” Breen told analysts. Fitterling explained to C&EN that the three spin-off firms need enough R&D heft to help maintain leadership positions in their fields. “We are trying to make sure they are low cost and they’re efficient, but we’re not trying to starve the machine,” he says.

The dismantling of Central Research is technically part of the separate layoff of 10% of DuPont’s 54,000 employees, a move meant to save $700 million annually. The job cuts, it appears, aren’t the result of the merger but rather are meant to pave the way for it.

DowDuPont is a no-brainer for Company of the Year. But is the merger a good thing? The two companies complement each other in important areas. Hedge and mutual fund managers such as Nelson Peltz like the deal. Dow and DuPont brass are looking forward to it. But in the eyes of the rank and file of the two firms, chances are the deal looks a whole lot better from Midland than it does from Wilmington. ◾


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