All the evidence suggests that most mergers fail to deliver the promised value. So those who propose them, especially when they involve such critical companies for the US and global economy as Dow Chemical and DuPont, must expect some hard questions to be asked.
Here are my 5 top questions in logical order – Why?, What? How? When? and Will it be worth it?:
Why is the deal being suggested? A close reading of the merger proposal, as described in the press release, provides no grand vision for the deal. Instead, the driver seems to have been pressure from two recent shareholders – Daniel Loeb’s Third Point at Dow, and Nelson Peltz’s Trian at DuPont. Each currently own around 3% of their target company’s shares. 2 headlines in the Wall Street Journal, no soft touch in financial matters, tell the story:
- Dow, DuPont deal cements activist rise, subtitled, “Merger plan heralds arrival of new era of activist investing”
- Dow-DuPont merger: the shrinking of American ambition, subtitled, “Dow-DuPont merger: better living through layoffs”
What type of merger is this? Successful mergers, the minority, create value by creating critical mass in specific market sectors. The others, which normally fail, simply add scale for scale’s sake. This merger mixes the 2 outcomes: its first stage is simply to add scale by creating the largest chemical company in the world. Then Stage 2 aims to align with the first outcome by creating 3 new world-scale businesses – in agriculture, specialty chemicals and commodities/materials. So it is hard to judge the likelihood of success, given the lack of detail on the new businesses’ portfolios and their market positioning.
How difficult will it prove to achieve the promised results? High-powered integration teams have already been assembled to start mapping out the process to be followed, and to identify which bits of the businesses will go where. Other teams will focus on the mechanics – the tax and organisational issues, regulatory and political risk, and confirm the timescale for Stages 1 and 2. Armies of consultants will be drafted in to help – although most will have no real understanding of either business or its component parts. So we can only guess at the results that will be achieved.
When will all this take place? Dow’s less complex acquisition of Union Carbide took 18 months from August 1999 – February 2001 to complete, and its initial failure to produce the expected results led to the firing of CEO Mike Parker in 2002. The current plan envisages the more complex Dow-DuPont merger could take up to 3 years:
- 2016 will be occupied in working out what to do, and identifying the barriers that need to be overcome
- 2017 will be focused on implementing the merger of the 2 companies, and finalising plans for Stage 2
- 2018 will see the separation of the 3 businesses, who will then need to do more M&A to tidy up their portfolios
Even this timetable could prove over-optimistic if unexpected challenges emerge as details of the deal are finalised.
Will it be worth it? Given the above, it is hard to see why anyone would want to spend the next 3 years engaged in this exercise. The $3bn/year of claimed synergies sounds a lot at first glance – but then there is the cost of achieving those synergies. The army of lawyers, tax experts, investment bankers, other advisers and consultants won’t come cheap – total costs could easily reach several $bns over the 3 years- and then there are all the costs of integration such as the IT systems, without which the new companies will be unable to properly function. Plus the whole issue of integration risk, which cannot be ignored in a deal of this size and complexity – Dow and DuPont have radically different cultures, and there will also be a lot of different regulators to keep happy.
On Wednesday, I will look at the hidden costs of this proposed merger – those that never figure in the analyst reports. The most critical is that both managements will inevitably become internally focused for the next 2 – 3 years, due to the need to develop and implement the Stage 1 and Stage 2 processes. They have already spent 4000 hours putting together just the 7-page outline document. This means both companies will risk becoming reactive to external developments, rather than pro-active, at a time when chaos is beginning to reign in feedstock and product markets.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 62%
Naphtha Europe, down 56%. “Naphtha remains well supported by exports to Asia, although long-range vessels are in short supply because of slow discharge of distillates imports.”
Benzene Europe, down 57%. “The usual upturn in consumption expected in January could be dampened by the wider economic unease”
PTA China, down 43%. “Downstream polyester market had started reducing operating rates beginning from the second week of December.”
HDPE US export, down 37%. “Ample supplies with little trading activity”
¥:$, down 18%
S&P 500 stock market index, up 3%