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Dow and DuPont Approach Merger and Spin-Offs from Positions of Strength

Posted on August 11th, 2017 by in Chemicals Industry News and Analysis

DowDupont

The DowDuPont merger and subsequent spin-offs are all about value creation: value for shareholders and value for customers. And, not unsurprisingly, the clamor for more is growing louder, as the short-term gains expected from the series of transactions possible following the merger are scrutinized.

The fiduciary duty of Dow and DuPont board members is to establish the new companies to continue to deliver value from the products they make with the support of adequate investment in people, products and production facilities. Their job will not be made any easier as arguments and counter arguments swirl in the post-merger aftermath – the merger is expected to close sometime this month.

On the plus side, DowDuPont will hit the ground running. Chemical companies are performing strongly in competitive but tight markets. Volume growth, particularly for the sort of sophisticated materials that both companies make, is underpinned by expanding world economies.

Both Dow and DuPont and Dow produced strong, consensus-beating second quarter financial results. In a favorable chemicals and materials market environment, they would be expected to be performing close to the top of their game. A good level of operating performance might be expected for the remainder of the year as long as there is no collapse in the oil price or in customer confidence.

It has been possible to use the time between the merger announcement and now well. Dow has been investing heavily in new, advantaged, shale-based US Gulf Coast production. The big Sadara joint venture in Al Jubail, Saudi Arabia, has largely come on-stream.

That project, particularly, first envisaged a long time ago, illustrates the sort of chemicals investment timescales that can never sit well with investors. While they tend to have short or relatively short investment horizons, chemical industry investment decisions made now will generate cash for their owners for decades to come.

The same can be said of the sort of integrated product lines that will underpin the new Dow Chemical as it emerges from DowDupont and, indeed the smaller specialty chemicals companies. The portfolios will require investment in research and development, marketing, sales, and information technology, including the new aspects of digital technologies that will be required to drive value creation and growth.

Some of the more aggressive investment funds have set their sights on Dow Corning and the silicones businesses just integrated into Dow Chemical. Here is new, fertile ground for public debate and investor pressure.

Dow Chemical stressed last week that Dow Corning fits hand-in-glove with materials science. The silicones and siloxanes it makes have opened up new market opportunities in Dow’s electronic solutions and consumer materials segments.

The Dow mind set has helped boost Dow Corning’s bottom-line growth, according to Dow executives last week. Dow talks now about its key building block chemicals being ethylene, propylene, and silicone.

“The power of our key building blocks of ethylene, propylene, and silicone is amplified by our market-back approach and by leveraging the complexity of molecular and physical integration,” said chief operating officer (COO), Jim Fitterling, in a conference call.

Fitterling

The timescale of the post-merger spin-offs are not known yet and there has been a criticism of the decision to involve consultants McKinsey in the portfolio analysis that will underpin the final decision-making process.

DuPont has said that the boards of both companies support a comprehensive portfolio review. “Dow and DuPont leadership are committed to maximizing the tremendous value-creation potential of the merger and anticipated spins,” it said in a statement. “If the results of our review demonstrate there is net greater long-term value creation to be realized through a change in the portfolio, it will be pursued.”

And, of course, once created, it will take time for the new companies to become established and to fully understand and realize their full potential.

DuPont gave 2017 market commentary for each of its segments in its Q2 earnings call but said it would be inappropriate to give guidance for DuPont itself, on a standalone basis, for the remainder of 2017. The adjustments to segment results once DowDuPont is created will cloud the picture.

Dow Chemical CEO, Andrew Liveris, said Dow remains well positioned to capture consumer-led demand. “Our track record of disciplined execution and outperformance these last several years underscores the resilience, agility and value creation power of our business model,” he added.

“Looking forward, our team remains focused and disciplined, with a sharp execution mind set on the successful close of our merger with DuPont, rapid achievement of the synergies and realizing the value-creation of the intended companies, as well as a strong focus on delivering the materials science company, with a portfolio that will be unrivalled versus its peer group.”

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All opinions shared in this post are the author’s own.

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