At Dupont, Time To Both Sow And Reap
John A. Krol does not fit the image of the formal--even stiff--DuPont exec. Now finishing his second year as CEO of DuPont Co., he has been known to loosen up meetings by leading executives in song. (A favorite: You Are My Sunshine.) But since Krol took over from the far more reserved Edgar S. Woolard Jr., it's not only the tone of the meetings that have changed. Krol, a 34-year DuPont veteran, is also trying to turn the slow-moving, cyclical giant into an industrial growth machine.
So Krol is accelerating DuPont's push into high-growth life sciences such as biotech agriculture and pharmaceuticals. Now, they make up less than 20% of the Wilmington (Del.)-based company's aftertax operating income; Krol is aiming for more than 30% by 2002. But he's not slighting DuPont's core chemical and fiber operations, instead selling off underachievers among these businesses, such as hydrogen peroxide, and focusing on making the keepers No.1 or 2 globally. To bolster the lot, Krol struck three deals this summer to buy or invest in new assets, spending an eye-popping $6.2 billion.
The moves are part of an ambitious plan to shift DuPont toward faster-growing markets where profits are stronger and cycles less vicious. This has pleased Wall Street. During Krol's tenure, the stock has climbed 86%, to 62, compared with 56% for the Standard & Poor's 500-stock index. Krol, who along with other DuPont executives declined to speak for this story, has said he wants to double the company's historic revenue gains to 6%-8% annually and rack up 10%-12% earnings growth. This year, says Bear Stearns & Co. analyst J. Jeffrey Cianci, Krol will likely produce net income of $4.2 billion, a 12% increase excluding one-time accounting items--helped by a strong global economy. However, due in part to Krol's divestitures, Cianci figures that sales growth will be a meager 2.6%.
Some investors want Krol to go even further in his remake of DuPont. They're pressing him to spin off the $20 billion Conoco Inc. oil and gas unit. The rationale is that DuPont stock isn't being fully valued in the market. Because the chemical analysts who follow the company are not oil and gas experts, Conoco may be undervalued. DuPont "will not have gone the full nine yards until they've disposed of Conoco," says Richard G. Unruh, president of Delaware Investment Advisers, a large DuPont investor. "And there will be a lot of disappointed people if they don't do that." Others like Paul T. Leming, a research director at Deutsche Morgan Grenfell, also want DuPont to get out of its traditional commodity fiber businesses, which he says generates mediocre returns. So far, however, Krol seems disinclined to follow the advice. In recent speeches, he has said the mix he is creating will fit together well.
Advocates of pruning DuPont point to Monsanto Co., which became a Wall Street darling by spinning off chemicals and focusing on higher-margin life sciences. Monsanto's income rose 18% in the first half of the year, excluding acquisition-related writeoffs, and its stock has more than doubled, to 40, in two years. Life sciences and chemicals, says Robert T. Fraley, co-president of Monsanto's agricultural sector, "have completely different operating mentalities."
TO THE TRENCHES. The groundwork for Krol's shift to a more growth-oriented strategy was laid by Woolard. Between 1991 and 1993, DuPont took charges totaling $3.1 billion, in part to close factories and trim a bloated management corps. Since 1991, DuPont's workforce has been cut by one-third, to 97,000, while selling, general, and administrative costs dropped by more than $850 million annually, to $2.8 billion in 1996. With costs now far more competitive and much of the trauma behind, Krol's aim is to further lessen DuPont's vulnerability to the economic cycle. "Woolard's job was to drop the neutron bomb," says Cianci. "Krol has to go in now and do tactical, ground warfare."
NAVY HITCH. As a DuPont lifer, Krol definitely knows the troops. The 60-year-old Krol, who goes by Jack, has followed a standard company career path. Holding undergraduate and graduate chemistry degrees from Tufts University, he spent four years as a nuclear engineer in the Navy, handpicked by the legendary Admiral Hyman Rickover, father of the Navy's nuclear program. Following the Navy, Krol joined DuPont in 1963 as a chemist in the fibers department at the company's Wilmington laboratories. The next 23 years were spent in a series of marketing and manufacturing positions.
Krol's savvy sense of customer relations helped his steady rise. He moved several times, living in places like Old Hickory, Tenn., where he helped run a polyester fiber plant. Ed T. Escue, president of the employees' bargaining group at the plant, remembers the future CEO as friendly toward workers and a good listener. "So many managers at DuPont are pompous," says Escue. "Krol is a real people person." Krol further boosted his profile when he went to DuPont's agricultural products unit in 1986. His timing couldn't have been better. DuPont was then rolling out a series of crop-protection products, such as herbicides, that scored a hit in the marketplace. By 1992, Krol had been elevated to vice-chairman under Woolard.
Although he worked closely with Woolard, Krol has moved quickly since becoming CEO to establish his own style. Woolard, who was known to be a very demanding boss, often made decisions with a small circle of advisers. Krol, by contrast, prefers to talk to a large number of executives before taking a position on major issues. "I used to get after him that it took too long for him to make a decision," says former chief financial officer Charles L. Henry, who left DuPont about a year ago to become chairman and CEO of Johns Manville Corp. "But when he did, he usually had people with him." That openness also extends to the investment community. While analysts say Woolard didn't go out of his way to talk to Wall Street, Krol has won kudos for making the famously tight-lipped company accessible. Says DMG's Leming: "There's a much greater sense of energy and communication."
Krol's two big agricultural deals are his boldest moves to date. Building on the company's longtime presence in herbicides and insecticides, Krol wants DuPont to capitalize on the coming biotech revolution in farming. He's concentrating on the fast-growing business of designer crops, where the genetic makeups of seeds are altered to create plants that, for example, produce more oil. The $1.7 billion investment in Pioneer Hi-Bred International and a research alliance with the company will help DuPont bring genetically enhanced corn, soybeans, and other oilseeds to market. And the $1.5 billion acquisition of Ralston Purina Co.'s soy protein company will put DuPont even further down the food chain: Protein Technologies International supplies soy products to companies that make everything from infant formula to processed meats. DuPont executives have said that revenues from enhanced seeds may grow from about $60 million now to $3.5 billion in 10 years.
DEEP POCKETS. Observers say Krol's moves appear to be driven in part by rival Monsanto's own buying spree. Early this year, Monsanto shelled out $1.26 billion for soybean and cornseed companies, giving it the lead in the race to market genetically altered seeds. Krol's deals level the playing field. Says Leslye Sims Emptage, a consultant at McKinsey & Co.: "DuPont has been a little late and may have paid higher prices as a result."
Yet DuPont, which generates free cash flow of about $2 billion a year, certainly has the means to keep on buying. Aside from more life-science acquisitions, analysts expect DuPont to continue its expansion into pharmaceuticals. That business is booming right now, especially DuPont's 50% joint venture with Merck & Co., which produces such top sellers as the blood thinner Coumadin. And the joint venture has two other promising drugs in the pipeline, one for the prevention of blood clots, one for AIDS. Another sign that the DuPont of old is giving way to an altogether different company.