I guess I can make a pun about buying the Dow, literally, in the form of the Dow Chemical Co (NYSE:DOW) and E I Du Pont De Nemours And Co (NYSE:DD). But I’m actually here to discuss the merger between these two companies, which is being held up by a bunch of foolish regulatory bodies in the European Union and elsewhere. It’s irksome that a merger between two U.S. companies should have to receive approval by Europe, but that’s the game.
So, should you buy, sell, or short DuPont stock?
First, you have to understand the reasons and plan for this merger, at least from the perspective of DD. DuPont stock had been struggling with an annualized revenue decline of almost 5%. Free cash flow margins were negative, to the tune of almost 30%. DD cut its dividend, and lowered projections.
Despite some impressive expense cuts in SG&A, the $1.5 billion in trims did not offset the nearly $4 billion in revenue declines from fiscal year 13 to FY15.
The Reason for DuPont Stock’s Challenges
Much of the challenges with DuPont stock can be traced to lackluster management. DD just stopped innovating and changing with the times. There was far too much money wasted on useless capex. Then came the unfortunate deaths. This came on top of tough forex rates. But ultimately, there just wasn’t any vision for this legacy company under Ellen Kullman, and it took an ugly proxy fight and subsequent messes to kind of shake the company awake.
Meanwhile, Dan Loeb was engaging in his typical activist behavior at Dow Chemical. Between him and the activists at DuPont, the merger came about.
When it is completed, there will be a powerhouse science company with a market cap of around $120 billion. However, in the 18 months or so after the merger, DD stock would split into three separate companies.
DuPont has an agriculture segment, electronics & communications segment, a nutrition and health segment, a performance materials segment and a safety and protection segment. There’s a degree of overlap in that DOW runs an agricultural sciences division, a consumer solutions segment, infrastructure solutions division, performance materials and chemicals and performance plastics division.
We call them “science” companies, though, only because people freak out needlessly if we call them what they really are, which are chemical companies.
Now, there is some good news for DD stock. These two companies merging would give shareholders a stake in a massive conglomerate from which they would then get three different stocks after they are all spun off. That means investors can pick and choose which of these they want to hold.
There’s another good cost savings move coming, which is that DD will no longer pay into its employee pension plan. In fact, those under 50 will not receive medical benefits in retirement. This will save huge sums of money and is not even related to the merger. Some 25% of Fortune 500 companies have done the same, because pension obligations simply are not being met by contributions. That’s great for DuPont stock investors.
The question now is what to do about DD stock.
Bottom Line on DD Stock
First, if you hold DuPont stock, I suggest you probably continue to hold it. You will have a lot more flexibility if the merger goes through. I suspect it will. Generally speaking, mergers don’t get blocked very often. Then you can pick and choose which of the three spin-offs you want to keep.
I would not short DuPont stock in the hope of a merger being blocked. There’s just too much risk associated with this strategy, at least for my taste.
However, I would not buy DD stock here, either. As a Dow Jones stock, it will always have a certain following, but there’s just no sense in buying it when it will either be split up in a merger anyway, or fall in price if the merger fails.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.