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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,
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