Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

DowDuPont is finally getting its day.

Dow Chemical and DuPont said  Friday they plan to merge, then split into three companies focused on agricultural products, commodity chemicals and specialty chemicals such as those used in solar panels.

The merged company will be called DowDuPont. It's a dream combination that creates businesses that are bigger and yet more focused at the same time -- and does so in a highly tax-efficient way. With at least $4 billion in cost savings and revenue benefits at stake, Bloomberg Intelligence analyst Jason Miner said earlier this week ``the only perhaps surprising thing about this deal is how actually logical it is.''

So logical, and yet a long time coming. Andrew Liveris, CEO of Dow, says he's been interested in such a merger, the biggest ever for the chemical industry, since 2006. Revived discussions about a possible deal back in February came to naught, when Ellen Kullman was still CEO of DuPont. And then a lot changed.

Smashing Records
Dow-DuPont is the latest in a string of superlatives for a record year of M&A.
Source: Bloomberg

For one, Kullman resigned in October, just months after overcoming a proxy fight from Nelson Peltz of Trian Fund Management, who appeared ready to reignite a breakup debate. The new CEO, Ed Breen, is known as a dealmaker after leading the breakup of Tyco International -- which could be why Liveris was banging down his door about a deal the very first day he took the reins (Breen joked with bankers that he hadn't even had a chance to find the bathrooms, according to a Wall Street Journal report).

The deepening slump in commodities is also making those massive synergies even more appealing. Dow and DuPont have both looked to refocus their businesses on higher-margin products, but they haven't been immune to the depressed prices, particularly in agriculture as farmers are forced to cut back their budgets. Both companies are on track for a drop-off in revenue this year.

Monsanto CEO Hugh Grant has said agriculture consolidation is "inevitable," even as he ended a $46 billion pursuit of Swiss agricultural chemicals maker Syngenta after being rebuffed. Liveris may have had the idea for a DuPont combination years ago, but it seems Monsanto's dealmaking moves and the prospect of an even bigger rival in both seeds and pesticides definitely got the ball rolling. Now, Dow and DuPont get to be the first movers -- with Monsanto chasing them, rather than the other way around.

Because of the storied history of both companies, a merger-of-equals scenario was likely a necessity. While the two have never been hugely far off from one another, the market-value gap was much wider as recently as March, with DuPont about $18 billion bigger than its rival.

Getting In Sync
Dow and DuPont are the right size for a deal.
Source: Bloomberg

The decline in Dow's agriculture business over the last year has been offset by the stellar performance of its plastics division, which is benefiting from lower prices in the oil and propane it uses as raw materials. Hounded by activist investor Dan Loeb of Third Point to improve performance, Dow has been vigilant in reducing costs. DuPont, meanwhile, has been harder hit by the weakness in crop prices and potentially behind the curve in terms of cuts.

While Dow was up about 12 percent this year before news of the combination broke, DuPont was down about 5 percent. That also gave Dow a stronger equity currency to pursue a combination as a buyer, something that may have been less likely even just a few months ago.

Liveris said once Breen came on board as DuPont's CEO, “the mindset of DuPont and the mindset of Dow aligned.” Looks like the stars have aligned, too. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net