Dow Chemical and DuPont Deal Is a No-Brainer (DD, DOW)

Dow Chemical and DuPont Deal Is a No-BrainerAs much as people might wax elegiac for the end of the storied industrial names, the possible mega-deal between Dow Chemical (DOW) and Dupont (DD) makes too much sense for DOW or DD stock holders for it not to happen.

That’s because the idea of then breaking up the merged $120 billion enterprise into three smaller, more focused companies solves so many problems at once.

In a world of slow growth and low commodity prices, Dow Chemical and DuPont can’t grow fast enough for the market.

Lumbering bureaucracies and sky-high costs are unsustainable when bottom lines are so dependant on expense reduction to boost growth. At the same time, as the saying goes, you can’t cut your way to growth.

It should also put an end to the barking of activist investors Nelson Peltz and Daniel Loeb, who hold big stakes in DD stock and DOW stock, respectively. Score one for them.

The deal would be a rare merger of equals. Dow Chemical and DuPont each have market capitalizations of about $60 billion. The key step is what comes after.

The company would then be broken up into enterprises focusing on agriculture, chemicals and materials.

Smaller, more nimble and cost-effective companies could better compete on a global stage where revenue growth is incremental at best. As currently constructed, these companies need to fend off rivals in disparate industries all at once.

Among others, DuPont alone has to contend with Dow, Syngenta (SYT) and Monsanto (MON) in agriculture, BASF (BASFY) in materials and Dow again in chemicals. Being active in too many businesses splits a company’s focus and resources.

Dow Chemical & DuPont Get With the Times

Hey, there’s a reason why conglomerates fell out of favor a long time ago: It allows the sickly businesses to drag down the healthy ones. For example, lower energy costs have been a boon to chemicals and materials companies, but the rout in commodity prices is clobbering agriculture businesses.

Furthermore, consolidation may be the only option for companies toiling in slow-to-no growth industries. If the revenue is just not there, building economies of scale is an attractive way to please restive shareholders.

But the biggest argument for the deal is a global macroeconomic slowdown that could very well be the new normal.

China’s economy isn’t returning to double-digit growth rates. Indeed, it’s only slowing down. The knock-on effects are being felt everywhere.

Take Brazil, a huge drag on agriculture from low prices, hurting demand for pesticides and seeds. The recession in the continent-sized country isn’t lifting anytime soon.

Oh, and when will the dollar come back to earth?

Further cost cuts are insufficient in such an environment. That’s why Peltz was pushing for DuPont to split off the agriculture business last year.

Shareholders are probably better served by this deal. Heck, it should help investors in these sectors in general. Mergers and acquisitions boost share prices and investors will certainly be looking for other tie-ups. Monsanto and Syngenta, presumably, don’t want to stand pat.

Suffering shareholders in Dow and DuPont stock were rewarded with huge gains on the news, but the real payoff will come later when the constituent companies can generate solid returns over the long haul.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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