For Dupont, Christmas In April

Early last fall, when Edgar Bronfman Jr. first called DuPont Co. CEO Edgar S. Woolard Jr. to propose selling most of Seagram Co.'s 24.2% stake back to the chemical giant, Woolard couldn't believe his ears. And no wonder: After a three-year slog, the tough shake-up Woolard had ordered at the chemical maker was finally paying off. With costs down, cash flow soaring, and record earnings on the way, it hardly seemed the moment to sell.

But if it was an odd time to sell, it was a great time to buy, and Woolard was happy to oblige. For much of 1994, he had been searching for a way to get some of DuPont's growing cash pile into shareholders' hands, and Wall Street was anticipating a buyback. Now, Bronfman, desperate to cash in his DuPont chips to move into entertainment, was handing Woolard a can't-miss deal.

And how. For as the dust settles over Bronfman's twin transactions, one thing is clear: In the short term, at least, DuPont appears to be walking away with by far the better half of the deal. While the move strips Seagram of the source of 70% of its net income, DuPont's reduced equity base should add 10% a year to earnings-per-share. Moreover, Woolard's savvy negotiations allow DuPont to effectively buy its stock back at 18% below market, saving $1.8 billion. And people close to DuPont say it's happily rid of its large-- and somewhat pesky--shareholder, especially since the risk of the stake ending up in hostile hands is gone. "We are very excited," Woolard crows. "It's a once-in-a-lifetime opportunity."

Woolard isn't the only one with something to crow about. Although angry shareholders knocked 16% off Seagram's stock, DuPont's investors pushed its shares up 2%, to 62. Says money manager Mario Gabelli, who holds stakes in both companies: "This is terrific for DuPont shareholders."

DEADWOOD. Those shareholders may get even more icing on their cake: To fund the buyback of Seagram's shares, Woolard must sell $2 billion in assets. Although he hasn't yet decided what to shed, analysts list plenty of underperforming units. Woolard has instituted stiffer return-on-capital requirements for all DuPont's businesses since 1993, but parts of its Conoco oil and gas business, imaging unit, and scattered chemical lines still don't measure up. Wall Street has pushed DuPont to sell those assets for years. Ironically, thanks to the big share buyback, investors may get their wish.

And even as Bronfman argues that his shift from plastics to celluloid will cut Seagram's dependence on a cyclical business with limited prospects, the best may be yet to come for the revitalized chemical giant. Harold A. Ofstie, a portfolio manager with Delaware Investment Advisers, which owns 5.36 million shares, thinks DuPont is far from topping out. "People will be surprised by their earnings power," he says.

It's all the more surprising because DuPont had so far to come. With huge civil-service-like bureaucracies in Wilmington and Geneva, it had long epitomized all that was stodgy and sluggish in Corporate America. But faced with stagnant sales and sliding profits in the early 1990s, Woolard began to dramatically transform the company. Under the whip of the soft-talking but tough-minded CEO, DuPont's crushing bureaucracy has been dismantled, overhead costs have been slashed, and front-line managers have been freed to operate more entrepreneurially. To reduce cyclical swings, Woolard has expanded abroad, while a sharpened focus on customers is propelling growth in once tired products such as nylon.

As with many corporations, DuPont's transformation followed a crisis of competitiveness. After taking the helm in 1989, Woolard banked on continuing a strategy of diversifying into higher-growth areas such as pharmaceuticals and electronics. But the payoff was slow, and as recession hit, Woolard realized that bureaucracy wasn't helping. "We had to face reality," drawls the genteel 61-year-old CEO, a North Carolina native who joined DuPont straight from the Army 38 years ago. "Our costs were too high, and we had become too slow to respond."

Woolard began in 1991 by slashing thousands of middle-management posts, selling $2.8 billion in ill-fitting businesses, and reengineering those remaining. He has cut 37,000 jobs to shrink DuPont staff to 107,000. So many people left that DuPont has halved its headquarters office-space needs, to 2 million square feet.

But the biggest moves came in 1993, as Woolard realized that cutting costs wasn't enough. Far more focus was needed on markets. "I had to get a much larger percentage of people in the company to understand that customers pay our bills," he says. So he split DuPont into 21 strategic business units (SBUs), from a $700 million-a-year synthetic fabrics unit to Conoco Inc.'s $13 billion retail gasoline operations.

Now, each SBU operates as a free-standing unit, and managers report directly to Woolard or a handful of top aides. Gone is a complex hierarchy in which a half-dozen middle managers once stood between the CEO and operating business heads, and another six between them and their sales staffers.

The changes are paying off. Although DuPont's 1994 sales rose just 6%, to $39.3 billion, net income excluding one-time charges soared 65%, to a record $2.7 billion. A strong economy helps: Chemical makers are all riding a rising tide. But DuPont has done better than most--and unlike rivals such as Dow Chemical Co. and Union Carbide Corp., which are enjoying soaring prices for commodity chemicals, its specialized products haven't yet seen big price jumps.

Certainly, DuPont cannot escape economic ups and downs. Still, Bronfman appears to be jumping from a train just now gaining a full head of steam. Analyst James F. Hickman at CS First Boston predicts several strong years to come: Excluding asset sales to fund the buyback, Hickman predicts a sales rise of about 5.5% annually through 1996, while earnings should jump 17.3%, to $3.2 billion, this year and 23%, to $3.9 billion, in 1996. Hickman argues that DuPont has come closer to taming the cycle than most chemical makers.

That's because Woolard's restructuring has gone far toward minimizing the swings the company will suffer. For starters, he has improved DuPont's global spread: From 39% in 1989, it now gets some 47% of sales overseas and nearly 36% of aftertax operating profits. Europe and Asia--where DuPont has built a dozen plants since the late 1980s--are seeing double-digit growth. More important, he has sharply reduced breakeven: Annual overhead costs have fallen from $3.7 billion in 1990 to less than $2.9 billion. By forcing suppliers to reduce inventories and improve efficiency, Woolard has also cut nearly $1 billion from supplier costs. They're now down to $22 billion, and Woolard insists that suppliers deliver new savings of 5% to 10% every year.

HARD AND FAST GOALS. Thanks to the shaved costs, operating margins have gone from 5.4% to 8% since 1992 and are expected to top 9% by 1996. The benefits flow straight into DuPont's coffers. Operating cash flow, which fell to $4.38 billion in 1992, topped $5.3 billion last year and Donaldson, Lufkin & Jenrette analyst William R. Young says that, excluding asset sales, it should hit $5.9 billion in 1995. With capital spending down, free cash flow--operating cash flow after dividends and capital spending--is soaring. From a negative $1.2 billion in 1992, DuPont should rake in more than $2 billion in free cash flow over the next two years (charts).

For all that, the restructuring job is only partly finished. Growth will depend largely on Woolard's push to create a customer-driven culture. Early signs are good: Customers say the new SBUs have become far more responsive. "DuPont had a take-it-or-leave-it attitude," says Edward Andrew, chairman of British industrial-fabric maker Andrew Industries Ltd. Now, dealing with the company is "simpler, quicker, and more efficient."

But for DuPonters, the changes have been invigorating and unsettling. Greater responsibility means people can no longer blame higher-ups for decisions, while more managerial freedom also means more risk. "When I joined DuPont, if you kept your nose clean and worked hard, you could work as long as you wanted," says 21-year veteran Gary M. Pfeiffer, head of the North American nylon unit. But today, he says, "job security depends on results."

For DuPont veterans like Stephen M. Long, that means developing the more entrepreneurial instincts needed to spark growth in once mature businesses. After Chrysler Corp. asked DuPont to tailor a plastic bumper with the distinctive "smile" for the company's hot-selling new Neon, for example, Long ramrodded through an unprecedented development effort. At stake: sales of $3 million annually--and an important beachhead in the car business.

MIDNIGHT OIL. In the old DuPont, approval would have taken years as Long sent endless memos through layers of higher-ups and waited for clearances to pull staffers from other units. Instead, Long phoned colleagues in West Virginia and Wilmington and cobbled together an informal team that set to work with Chrysler immediately. "DuPont was 100% supportive. If anything faltered, they stayed up all night," says David L. Anderson, a Chrysler engineer. "I know--I was up with them." Long's perseverance paid off: After completing the technically difficult project in just nine months, his team won the order.

Even the SBU heads have to learn to manage in a far more freewheeling way. Salim M. Ibrahim runs the $1 billion Lycra business from Geneva, for example. But his marketing director works in Wilmington and his 11 other top aides are scattered around the globe. Ibrahim meets with them just four times a year. "The company has given me a lot of freedom to operate as if it was my own business," Ibrahim says.

Ibrahim's autonomy is a sharp change. Back in 1984, needing $7 million to buy factory equipment, he underwent two weeks of detailed preparation for a two-hour grilling by middle-managers--only to be turned down. But when he wanted $70 million to expand a Singapore Lycra plant recently, he got the O.K. a week after discussing it with Woolard over breakfast.

Of course, such trust springs from his track record: Ibrahim has tripled Lycra sales since 1986. That's the other side of autonomy: Managers are left to run their businesses, but must perform. Woolard sets strict targets with all SBU heads, who do the same for staffers. And to ensure all go aggressively after business--without giving away the company store--a large part of many managers' pay depends on both sales and profitability of the SBU.

While the goals are meant to sharpen customer focus, there are limits to just how cozy DuPont can be with buyers. Lately, relations have been tested with price hikes. After years of declines, the price of widely used hydrogen peroxide has climbed by about 5% since September. Says a top exec: "A delighted customer is probably someone not paying enough."

To soften the blow, DuPont is stretching out delivery times and selling smaller lots. For years, it wouldn't sell nylon in the smaller lot sizes some Japanese preferred, for example. "They acted like selling to us was a favor," recalls Fumitaka Yoneda, sales director of Toa Wool Spinning & Weaving Co. Now, he finds it more responsive--though other Japanese buyers say they would be happier if DuPont passed on savings from the higher yen. "I'm not out to delight my customers," counters Ned C. Jackson, chief of the $2 billion-a-year specialty chemicals SBU. "I just want to become indispensable to them, so they can't live without me." DuPont may not be indispensable quite yet, but thanks to Woolard's makeover, it's a lot closer than ever before.

How Woolard Has Transformed DuPont

CUTTING COSTS Since 1991, Woolard has pared DuPont's workforce by 25%, to 107,000, and shrunk headquarters operations in Wilmington and Geneva.

ENDING BUREAUCRACY In 1993, Woolard cut 5 management layers and split DuPont into 21 semi-autonomous "strategic business units." Now, operating managers have more freedom to make deals and invest capital.

EMPHASIZING RESULTS In place of bureaucratic oversight, Woolard has imposed strict financial targets and performance-linked pay. Managers are left alone to run their businesses--but are expected to deliver.

FOCUSING ON CUSTOMERS Long an inward-looking, arrogant company, DuPont is becoming far more market-focused; close cooperation with customers has enabled it to develop lucrative new niches for mature products such as nylon. Together with DuPont's expanding foreign presence--international now brings 47% of sales, up from 39.8% in 1989--that's helping to reduce cyclicality.

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