Extending a massive wave of mergers and acquisitions this year, E I Du Pont De Nemours (DD) — you know it better as just DuPont — and Dow Chemical (DOW) have decided to team up as well.
Owners of Dow stock and DuPont stock may not want to get too comfortable with the impending mega-company, however, as the two outfits have already planned to split into three different publicly traded units not long after the merger is completed.
Whether or not the end products of all the financial maneuvering will be worth the effort remains to be seen. Both DD and DOW jumped earlier in the week on the vague prospect the two companies would become one, but once the deal became official this morning, both stocks tumbled.
Could the pullbacks simply stem from the fact that commodity prices are getting hit hard again today, or is the weakness from DuPont and Dow stock a hint that investors think all this corporate reconfiguration is going to cause more problems than it solves?
Dow and DuPont to Merge
The pairing of the two companies will actually lead to the creation of a whole new company called DowDuPont (zero points awarded for a creative new name).
Current owners of DuPont stock will receive 1.282 shares of the new company for each of their shares, and current owners of Dow stock will simply see their DOW shares swapped out for the new company’s equity. That ratio is an equitable one, reflecting the relative ownership investors presently enjoy.
Dow CEO Andrew Liveris said of the union “This merger of equals significantly enhances the growth profile for both companies, while driving value for all of our shareholders and our customers.”
To put that value into specific, numerical terms, the chemical companies jointly expect to see $3 billion in saving plus another $1 billion in sales synergies.
For perspective, over the past four reported quarters, Dow Chemical has turned $51.7 billion worth of revenue into $4.5 billion worth of net income, while DuPont has driven $32.2 billion in sales and booked net income of $3.16 billion in profits for the same timeframe.
Combined, the math works out to joint sales of $83.9 billion and income of $7.66 billion … net profit margins of 9.1%. The suggested synergies would crank the top line up (ceteris paribus) to $84.9 billion and lift the bottom line to $10.66 billion, translating into net margins of 12.6%. That’s a compelling number for the chemical industry.
And yet, it’s a number and degree of optimism investors may or may not want to get used to, as within two years the combined company aims to break into three highly focused ones that will cleanly separate DowDuPont’s agricultural, specialty and materials business lines.
That impending split calls into question the necessity of combining the two chemical companies in the first place.
Here We Go Again
The announcement was made with the echoes of the June spinoff of Chemours (CC) from DuPont still ringing, at least temporarily pushing DuPont away from its then-stated benefit of “…now [being] fully focused on markets where our science gives the company a distinct competitive advantage, enabling DuPont to drive higher, more stable growth.”
Granted, it can be a tricky catch-22. With size comes scale and marketing muscle, while focus makes a company fiercely competitive. There is no single right answer to the question of whether or not one large company is better than three smaller, focused organizations.
Bolstering the notion that chemical company CEOs don’t really know if they want to expand or contract was this morning’s news that Dow was acquiring the portion of a partnership with Corning (GLW) that it didn’t already own.
Indeed, in light of the strangely terminal plans to unite Dow and DuPont only to break them up again though — on top of the fact that recently spunoff Chemours may become the linchpin of a chemical roll-up strategy itself in addition to the Corning news — owners of DuPont and Dow stock may quietly be wondering if the companies’ respective CEOs see their outfits as properties in a game of Monopoly rather than entities that must remain competitive and efficient.
In other words, sometimes it’s best not to fix what isn’t clearly broken. The planned breakup may well pan out, but the complexity of the plans could end up being problematic.
Bottom Line for DuPont and Dow Stock
The bearish response from DD and DOW shares may be a reflection of that concern … worries that a reconfiguration of all the operations under each company’s umbrella will ultimately do more harm than good.
That’s not to say current owners of DuPont and Dow stock won’t ultimately be better off once the combined company splits up again into agricultural, specialty and materials ventures, but it could be years down the road before post-spinoff stability is achieved.
In the meantime, suggested synergies have a funny way of being elusive once accountants leave the theoretical world and enter the real one.
These stocks (and the eventual shares of DowDuPont) may be more trouble than they’re worth for the time being, particularly in light of the fact that both DuPont stock and Dow stock are still at impressive prices despite today’s pullback.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
