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The unseen costs of a Dow-DuPont merger

Chemical companies
By Paul Hodges on 16-Dec-2015

DowDuPontaThe unseen costs of the proposed Dow-DuPont merger are certain to be much larger than those we can currently describe.  Both companies will effectively be more reactive to external developments, rather than pro-active, due to the internal focus that will be required to develop and implement the merger and divestment processes.  This cost could well be large, given today’s chaotic world of feedstocks and product demand.

Just think for a moment about what is going to happen.  These 2 great businesses will require many of their best and brightest people to ignore what is happening in the outside world – the collapse in the oil price, China’s New Normal direction, major fluctuations in currencies and interest rates, climate change developments after COP 21 – and instead divert their focus internally onto an endless stream of “Who does What” type questions.  The chart above, from the Wall Street Journal, gives a taste of the complexity involved.

How many opportunities will be missed as a result?  How many problems will be ignored?  There must be a major cost from having so many key people being distracted from their real purpose over such an extended timeframe. These are the costs that are always conveniently ignored when plans of this kind are proposed.  Even supposing the promised $3bn/year of savings will be achieved – how much more value could have been created by simply allowing people to run the existing businesses without such major distractions taking place all around them?

And, of course, deliberately, I have left the really critical issues till last.  Most so-called “activists” believe that businesses can effectively be run by spreadsheet – one even said to me once, that he didn’t see the point of having a CEO.  Instead, they focus on refining the algebraic formulas that will supposedly drive delivery of the numbers.  But life is rarely that simple, particularly when the outside world is as uncertain as today:

  • Farmers are already complaining about a potential loss of competition amongst their suppliers – and their worries are understandable, given that their incomes are already in decline as commodity markets collapse.
  • Suppliers will also be more reluctant to invest in joint development of new products, once cost-cutting emails demanding price reductions start arriving in their InBoxes
  • Employees know that the word “synergy” is code for job losses, and are well aware that these will likely increase quite quickly to demonstrate early success to Wall Street

Competitors, of course, will be laughing all the way to the bank.  Christmas has come early for them, and will keep coming for the next few years.  They will know they now have an inbuilt advantage, no matter how difficult things might become as the Great Unwinding continues, as Dow and DuPont move into semi-reactive mode for the duration.

Back in July 2008, I expressed major concern over the proposed merger of Lyondell and Basell – and within 6 months, my fears were confirmed by their $22bn bankruptcy.  Dow and DuPont will not go bankrupt in this way.  But my experience at ICI, and since then, leads me to worry that both companies will be weakened by the 3 years of internal upheavals that now appear to be inevitable.

And I am not alone in my concerns.  One senior chemical company executive contacted me this week, after reading Monday’s post, to give his experience of a similar large-scale merger:

Our CEO did a very good job on the integration front and delivered the synergy savings promised to the investors.  But the cost and distraction of the “armies of consultants” was huge.  The entire management became introverted, with the result that our momentum of growth more or less evaporated and we came to rely on the savings to keep our profitability even flat.