Remaking Dow and DuPont for the Activist
By STEVEN DAVIDOFF SOLOMON
combination of Dow Chemical and DuPont
shows that in today’s markets, financial engineering prevails and that
only activist shareholders matter. Whether that is good for the rest
of us remains to be seen.
is certainly an impressive feat of financial engineering. It will bring
together two companies: DuPont, with 54,000 employees, and
Dow Chemical, with 53,000 employees.
The two behemoths will merge, and then in the space of two years spit out
three newly formed companies, one in agriculture, another in material
sciences and a third in specialty products used in such fields as nutrition
This plan is
one easily understood by a hedge fund activist or investment banker in a
cubicle in Manhattan with an Excel spreadsheet. To them, it makes perfect
sense to merge a company and then almost immediately split it in three.
Doing so will meet the goal to define business lines with precision and, it
is hoped, spur growth. Expenses can also be cut, on paper at least.
Harry Campbell for The New
companies that the combined entity will create can cut $3 billion in
expenses, but the last time I checked, three companies each require a chief
executive, general counsel and many other executives, so these savings may
be eaten up by new overhead.
of course, is that putting together two companies and then splitting them
almost immediately is no easy task. These are people and businesses being
moved around and the logistics of integration alone may take years to work
babies out into the world almost immediately seems to be asking for trouble.
There will also be significant costs for the employees, suppliers and
customers of all the companies involved. Whether this will create value for
shareholders is up in the air, let alone whether this will create value for
last spinoff, Chemours, a performance chemicals unit, has been a disaster,
losing three-quarters of its value in less than a year after its separation.
it appears that the
Dow Chemical chief executive, Andrew N.
Liveris, initially proposed a split back into two companies, but Edward D.
Breen, the chief executive of DuPont, countered with three. So it goes.
risks involved, one wonders why the companies would commit to this. The
reason is those activist shareholders.
shareholder activist hedge funds roam our capital markets. They are willing
to agitate vocally for change at almost any company. And in many cases the
hedge funds are looking for a crystallizing event to capture more immediate
value. A sale is the best option. But outside that, a spinoff has become the
transaction du jour.
case, the funds and other shareholders are for the most part not looking to
do the hard work of a turnaround, but instead perform some financial
engineering. Whatever an analyst with an Excel spreadsheet can do is what
companies seem to be plunging headlong to mimic, paying heed to their
spinoff is the ultimate financial engineering exercise.
behind a spinoff is that one plus one equals three. A spinoff allows the
company to be more focused and deliver more immediate value. Rather than
having a company sell two product lines, management can be more transparent
and focus on the line they are better at. In addition, high-growth and
low-growth businesses can be separated.
theory at least. In practice,
studies have shown that spinoffs
produce short-term gains but over the longer term may not be as successful.
Moreover, spinoffs are often seen as a chance to take out the trash and
jettison liabilities. Time Inc., for
spun off from Time Warner with
substantial debt and has struggled significantly since its spinoff.
splits are all the rage and there were 60 last year,
according to spinoff research. Even
Hewlett-Packard, the granddaddy of Silicon Valley, has split into two
companies: a low-growth HP Inc. and a high-growth Hewlett-Packard Enterprise
Company. EBay and PayPal are now also separate. From General Electric to Yum
Brands, corporate America is marching to the spinoff piper.
who study history, it feels a lot like
the go-go years back in the 1960s. Only
then, companies raced to become conglomerates, under the theory that
diversification was the key and that managerial talent could be brought to
bear anywhere. Now, it is the opposite, and companies are being atomized.
Those go-go years, by the way, ended badly.
iffy empirical support and the bubbly atmosphere behind them, spinoffs
persist because companies, frankly, are scared, and shareholders are much
more powerful than they have ever been.
institutional shareholders like BlackRock, T. Rowe Price, Vanguard and a
handful of other companies often hold almost a majority of a public company.
And many of these institutional investors pay heed to proxy advisory
services like Institutional Shareholder Services, meaning that these
shareholders often vote as a group. Increasingly, institutional investors
are throwing their support behind the activists.
So far this
year, hedge funds have won 59 percent of the proxy contests they waged,
according to FactSet SharkRepellent. Now the mantra in corporate America is
to settle with hedge funds before it gets to a fight over the control of a
companies are running scared. Much was made of DuPont’s victory over Trian
in a proxy contest. But now it is clear that it was a Pyrrhic victory. The
chief executive of DuPont at the time, Ellen J. Kullman,
is now gone.
much of what Trian wanted anyway, and now Trian, which holds only 2.9
percent of DuPont, is a cheerleader for this merger.
Dow Chemical had been a target of Daniel S. Loeb’s Third Point. While Mr.
Loeb is supportive of the merger, he also sent a letter to the Dow Chemical
protesting the continued role of Mr. Liveris
at the merged company. Mr. Liveris may have felt the need to do something to
placate the activists by doing this deal, but in any event, it is now hard
to see him surviving the wrath of Mr. Loeb.
historians look back at this era, they will see this deal as a turning point
when corporate leaders threw up their hands and surrendered to activist
Is this a
Dow-DuPont merger may create more value, but the risks are high. In the
boardrooms and cubicles, these risks appear to be acceptable, because they
are just items on a spreadsheet.
life, however, this series of complex transactions may end up harming not
just shareholders but everyone else involved in the corporate enterprise.
To be sure
there is valuable activism out there, but perhaps it is time to take a deep
breath and do some thinking about whether the spinoff craze and indeed the
relationship between companies and shareholders makes sense before it ends
badly, like those go-go ’60s.
Davidoff Solomon is a professor of law at the University of
California, Berkeley. His columns can be found at nytimes.com/dealbook.
A version of this article appears in print on December 16, 2015, on
page B5 of the New York edition with the headline: Does a Deal Have
the Right Chemistry, or Is It Just Financial Engineering?
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