DuPont-Dow Merger: Taking the Long View

By David B. Sicilia

SMITH BRAIN TRUST — The proposed DuPont-Dow merger would temporarily combine two of the world’s chemical behemoths, followed by a three-way split. One of the three new companies would produce agricultural chemicals, another would focus on specialty chemicals, the third on plastics and other materials.

Is this a good idea? As regulators and investors contemplate several immediate-term consequences, it is useful to consider the merger through a broader lens. Regulators should insist on the three-way split as a condition of the merger.  But many wonder if they will balk. Merger activity globally is at its highest level since before the Great Depression, and has topped $1 trillion for this year in the U.S. alone, a 60 percent increase over 2014. In his new book, Saving Capitalism, former Labor Secretary Robert Reich points to corporate concentration as a major driver of rising income inequality. So the time seems inauspicious for the combination of two of the world’s largest chemical companies.

Seen from a broad perspective, however, the Dow-DuPont merger on balance makes good sense not only for investors, but for U.S. competitiveness in one of the world’s leading producer sectors.

The two companies are among the oldest and largest in the U.S. chemical sector. DuPont, founded as a black powder maker in Delaware in 1802, grew over the next century to become an explosives monopoly, and founded one of the nation’s first R&D laboratories. Anticipating the end of the world war, DuPont diversified based on its knowledge of cellulose chemistry (protective coatings for the emerging auto industry, artificial leather, others) and — along with GM — invented the multidivisional corporate structure, or M-form. These two hallmarks, advanced R&D and diversification, remain central to the present-day merger question.

Dow, founded in 1897, was originally a bleach and potassium bromide producer in Midland, Mich. It began to diversify during the Second World War, and during the Cold War added plutonium production for nuclear weapons to its growing roster of chemicals.

Both companies, like the chemical industry more broadly, pushed the boundaries of diversification in the 1960s and 1970s. Conglomerates were darlings on Wall Street, and, following the trend, Dow and DuPont moved into many new business lines completely foreign to chemical manufacturing. Dow invested in educational toys, protein foods, graphic systems, electronics and engineered composite systems. DuPont invested about $100 million in a variety of small, highly technical non-chemical ventures and a building materials producer.

One motive for diversification, then as well as today, was that some businesses were becoming commodified and therefore yielding lower returns. Petrochemical plastics were especially problematic, as a postwar industry rush into polyethylene, polypropylene, and polyester glutted the market and drove down prices. 

After conglomeration proved to be misguided, these and many other diversified U.S. firms spun off their unrelated units and refocused on “core competencies” in the 1980s and 1990s.  This was, by and large, a positive trend in American business. Meanwhile, in the chemical industry, globalization intensified, especially at the upstream, commodities end of the business (that is, chemicals that are closer to the raw materials end of the processing stream). Since then, Dow, Du Pont and other U.S. chemical giants have struggled to find an ideal product mix, while generally favoring businesses at the higher-value-added downstream end and shedding their commodities lines.

DuPont sold its artificial fibers textiles businesses to Koch Industries in 2004, and has been expanding its genetically modified foods, engineered materials, and electronics and communications businesses.

Shareholder are interested in the $3 billion in administrative savings that, according to Deutsche Bank, the proposed merger would yield. Such projections of synergistic savings often disappoint. But taking a longer view, shareholders should embrace the merger for how it will position the new companies competitively. For its part, the Justice Department certainly should weigh how much DuPont and Dow currently compete in various market segments, and how the merger would change that, although there is not a great deal of overlap. 

The key issue for investors, managers and regulators, however, should be the market position of the three resulting companies in global, not merely national, markets.

That reality of global competition has posed a conundrum for U.S. multinationals and regulators alike for decades. Should we expect U.S. firms to compete successfully against producers in other economies that lack American-style antitrust laws?  In this industry, global market share is a more meaningful measure than national market share.  This makes the proposed Dow-DuPont deal a very different animal from the Time Warner-Comcast merger that regulators recently pushed back on.

Each of the three new firms projected to emerge from this corporate combination will face very different competitive realities. Agricultural chemicals is a commodified business, more price sensitive than the others; separating it from the other enterprises is a strong motive for the merger in these days of a strengthening dollar. Of the three new firms, it will likely be the black sheep. (When DuPont was split into three pieces by an antitrust suit in 1913, the new DuPont got the prized assets, Hercules Powder Company did less well, and Atlas Powder Company was left with the dregs. So investors beware.)

Specialty chemicals and engineered materials are a very different story. There, the two new firms would be well-positioned to leverage their R&D knowhow and distribution channels in high-value-added businesses. They will be more focused on their core competencies than either DuPont or Dow. Let less sophisticated firms duke it out in commodities.

David B. Sicilia is Henry Kaufman Fellow in Business History at the Center for Financial Policy, at the Robert H. Smith School of Business, at the University of Maryland, and an associate professor of history. His books include Labors of a Modern Hercules: The Evolution of a Chemical Company, co-authored with Davis Dyer and published by Harvard Business School Press.

SMITH BRAIN TRUST
HOME | ABOUT | ARTICLES | HOT TOPICS | VIDEOS | WEEKLY NEWSLETTER | SUBSCRIBE