Deals

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

Dow Chemical said Tuesday that it's cutting 2,500 jobs, or about 4 percent of its global workforce. The company's market value initially climbed by more than $600 million -- and that is what a synergy looks like.

What Goes Up...
Dow climbed in pre-market trading Tuesday, only to fall as an analyst downgraded the stock on concern over rising economic risks.
Source: Bloomberg

The firings are connected to Dow's buyout of its silicone joint venture with Corning, a deal that was announced alongside its mega-merger with rival chemical producer DuPont. Dow, which took full control of the Dow Corning partnership on June 1, says the job cuts are part of  "multiple actions to accelerate shareholder value creation." In plain English, not having to pay those 2,500 people means Dow can keep more profit for itself, which should boost its stock price and give the company more resources to reward investors with buybacks and dividends.

How much money are we talking here? Dow now thinks it can get $400 million in savings from the job cuts and the consolidation of back-office operations, IT systems, warehouses and the like. That's up from the $300 million it estimated when the Dow Corning deal was announced.  

But that's just the tip of the iceberg.

Dow had already announced 2,200 job cuts and targeted at least $645 million of savings within itself in 2015 and 2016. Then there's DuPont, which said in December that it wants to cut 10 percent of its 50,000-plus workforce. All in, DuPont wants to wring out $730 million in savings in 2016. That corporate slashing is separate from the merger with Dow, meaning that there are likely still more cuts to come from both companies as they hunt for the $3 billion in cost synergies that they've projected.

For those keeping count, we're now at at least 10,000 job cuts and as much as $5 billion in savings. More synergies. 

The corporate jargon has been coming up a lot lately as companies seek out deals to juice slowing earnings growth and keep their share prices rising. Among the record number of mega-mergers announced in the deal boom of the last 18 months, all but a few have involved combining direct competitors or companies with overlapping business. That means duplicate sales teams, R&D employees and executive suites, many of which end up on the chopping block. Sure, there are scale benefits and revenue-boosting opportunities, but job cuts are the easiest synergy to execute and a big reason why some of these huge transactions have been worth doing at all.   

U.S.-based employers cut more than 26,750 jobs because of M&A in 2015 and an additional 10,826 positions through May of this year, according to data from Challenger, Gray & Christmas. That's based on how the job cuts are identified in original press releases and news reports, so it's possible some of the more than 270,000 job cuts related to closings or cost-cutting over that stretch could also be M&A-related.

Thanks for Your Service
M&A-related job cuts have been picking up as companies strike bigger deals than ever before.
Source: Challenger, Gray & Christmas

This isn't a story about how corporations like Dow and DuPont are evil for putting profit above the welfare of employees -- although let's face it, there is a human cost to these mega-mergers that a clinical word like ``synergy'' can't erase. But these job cuts aren't happening in a vacuum: Times are tough for chemical corporations right now as global growth plods along and commodities prices flounder. Efficiency is essential to stay competitive. 

Dow is expected to report an almost 7 percent drop in revenue in 2016, while DuPont is on track for a 1.5 percent slide on the heels of big declines for both companies in 2015.

Under Pressure
Slow global growth and the plunge in commodity prices have taken a toll at Dow and DuPont.
Source: Bloomberg

On Tuesday, JPMorgan analyst Jeffrey Zekauskas cut his price target on Dow Chemical by $7, citing the rising risk of economic turmoil (hello, Brexit). That was enough to send the shares as much as 4.4 percent lower, wiping out all the value that was created in pre-market trading and then some.

In other words, those cost synergies -- however they are created -- are going to come in handy.

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

  1. Dow expects to reap another $100 million in ``growth synergies'' from the takeover of the Dow Corning joint venture.

     

  2. According to news reports, Delaware offered strategic fund grants worth almost $10 million over five years to help incentivize the companies to base their combined agricultural business in the state. A $3.6 million portion of that is in exchange for the creation of 400 jobs. DuPont had previously said it would eliminate 1,700 jobs in the state.

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