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2 Shipper BULKDISTRIBUTOR March/April 2016 Dow, DuPont deal could herald new chem merger wave DuPont’s Dordrecht, Netherlands plant. Dow and DuPont claim that cost savings of $3 billion can be achieved in the short term from their merger M ergers & acquisitions (M&A) in the chemicals industry recorded a record high in 2015, and many industry watchers expect the momentum to continue this year. Late last year, a multi-billion dollar deal between DuPont and Dow Chemicals was quickly followed by Chemchina’s offer for Syngenta. The merger of Dow and DuPont would create the world’s largest chemicals company, even dwarfing BASF. It is by a long chalk the biggest such deal ever seen in the sector, overtaking Azko Nobel’s 2008 acquisition of ICI for US$17 billion. Assuming the merger goes ahead the combined company will be named DowDuPont, although this entity will subsequently be pared into three independent, publicly-traded firms through tax-free spinoffs. This would occur as soon as feasible, which is expected to be 18-24 months following the closing of the merger, subject to regulatory and board approval. The three separate companies would be concentrated on agriculture, material science and speciality products. Announcing the deal the two chemicals giants said each of the businesses would have clear focus, appropriate capital structure, scale advantages and something called “a distinct and compelling investment thesis”. On closing the transaction the combined company would have a combined market capitalisation of US$130 billion. Dow and DuPont shareholders will each own approximately 50 percent of the combined company, on a fully diluted basis, excluding preferred shares. A big component of the claimed benefits of merger is an estimated $3 billion in cost savings, with “100 percent of these achieved within the first 24 months” following the merger taking effect. The prime sources of these savings are expected to be in eliminating duplication in research & development and administration, as well as restructuring corporate finance. Then there are the claims for significantly reducing cost of sales, among which would be achieving more efficient supply chains across the merged giant. Writing in Forbes magazine, supply chain analyst Lora Cecere questioned whether the deal would have happened without shareholder activism, and “would there have been activism if there had been stronger results?” “While I will never know for sure if supply chain results made a difference, it is clear that both companies’ supply chain teams struggled to deliver value to the balance sheet over the course of the last decade,” she wrote. “Each company underperformed their peer groups.” Moving up the chain The move can also be seen as part of the global trend to provide scale in higher value ‘specialty’ chemicals and specific industry verticals like agriculture. But such a move is by no means guaranteed just because shareholders approve a merger. Dr Sven Mandewirth, partner and industry lead chemicals at Germany-based consulting outfit Camelot, says that with the increasing volume of M&A activity in the industry a growing number of companies are faced with the question of how a merger can produce the desired effect, especially in light of increasing market volatility. Camelot identified the central trends and success factors in M&A in a customer survey of the chemicals sector. These include: Specialisation and market leadership. In the case of DuPont and Dow, this only supposedly pertains to market power through size, because the breakdown into specialised segments after the merger has already been planned. Successful M&As of the future will no longer target the principle of size but rather a specialisation strategy with regard to products and markets with the objective of becoming global market leaders in these sectors. This assumes a clear definition of the future business model, as well as the intended market segments. ‘Buy and build’ strategy. Businesses are specifically acquired over a longer period in order to reach a leading position in a defined market area. In this case, a suitable business model plays an important role. ‘Buy and build’ is frequently followed by mostly new companies or sub-groups. For example, Merck Life Science specifically strengthened its position in this market through larger and equally focussed take-overs. ‘Best of both worlds’. The traditional merger, during which the purchasing company leaves its mark on the purchased one, is no longer sustainable. Best practices are already specified in both companies and used as a blueprint for integration during the preliminary stages. ‘Think customer’. An acquisition burdens the internal organisation and can therefore have a negative impact on the development of customer and market relations. Frequently before and even after integration, undue focus is placed on internal topics, such as organisation and standardisation. A stronger focus on the customer, starting with the selection of takeover objectives to way past operative integration, ensures that the existing business is developed and new market potentials are realised throughout the entire acquisition process. But this is all easier said than done. Another Camelot study* points out that operations in chemical companies could be significantly more efficient if procurement, production and supply chain were managed by an overarching strategy. Some 85 percent of participants surveyed for the report stated that an operations strategy is available in their company. However, un FW'7F