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Test-tube baby

11 December 2015 By Kevin Allison

Dow Chemical and DuPont are testing the limits of ambitious M&A. The $130 billion union of the U.S. chemical titans unveiled on Friday is really four deals in one, given a planned three-way breakup to follow. The estimated value creation being touted sounds optimistic and the structure is hazardous. At least the rationale makes sense.

For nearly a decade, Dow Chief Executive Andrew Liveris has been chasing the 213-year-old DuPont. Activist investors who jumped into both companies more recently proved to be the necessary catalyst. The departure of DuPont CEO Ellen Kullman in October probably helped open the window of opportunity wider.

The two companies will combine their operations before carving themselves up. It will take at least three years before it all gets done, assuming the initial merger secures all the necessary blessings from shareholders and authorities. Dow and DuPont are touting $3 billion of annual cost savings, which they say equate to some $30 billion of market value.

The headline figure is too high. It uses a fairly generous 10 times enterprise-value-to-EBITDA multiple. Investors need to discount the time it will take to achieve the savings. That alone knocks the value down by 20 percent. Then there are the one-off costs of the deal, estimated at about $4 billion. Net those off, and the potential benefit in present-value terms is closer to $20 billion. Another $1 billion of generally elusive “growth synergies” also can be ignored for the time being.

Any integration or later separation pains could reduce the sum even further. Dow and DuPont shareholders each are due to hold about half the newly christened DowDuPont, with Liveris as executive chairman and DuPont boss Ed Breen as chief executive. The board also will be evenly split with eight directors from each company. Such mergers of equals are prone to culture clashes and power struggles that can be value-destructive.

Once costs are ripped out, however, there will be little reason to keep products as diverse as genetically modified seeds, plastic packaging and Kevlar body armor under one roof. New chemicals, agricultural and materials companies eventually will be easier for investors to value. They should also benefit from greater focus and the opportunity to pursue consolidation in their respective sectors. That’s a long way off, though. The broad hypothesis looks sound but DowDuPont is still a potentially risky experiment.


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