Chemical Giants Dow and DuPont Talk Merger With Possible Three-Way Breakup Down The Road

The WSJ is reporting that Dow Chemical (DOW) and DuPont (DD) are in advanced merger talks to create a chemical behemoth with leading positions across the chemical spectrum including ag, plastics and a host of other markets. Both companies have been shedding non-core and non-performing assets over the past few years, including some via spinoffs and exchange offers. While many of those moves appeared to be driven by activists (both companies have been under attack for years by Dan Loeb, Nelson Peltz etc.), it seems these talks are a direct continuation and possible acceleration of their respective transformations.

So what is the story doing here? According to the WSJ, the combo would be short lived and likely followed by a breakup into three separate companies ‘housing the companies’ agricultural, materials and material sciences, and specialty-products businesses’. In other words, a potential double spinoff is on the horizon! What fun!

DuPont is currently led by Tyco (TYC) breakup architect Ed Breen, who took over the position after Ellen Kullman suddenly resigned shortly after spinning off the doggy Chemours (CC) and successfully fending off an activist attack Nelson Peltz’s Trian Partners. Given his history, Mr. Breen was thought of as more aggressive and open to deals and these merger rumors appear to support that assessment.  He also knows his way around a double spin breakup. The WSJ reports that Mr. Breen would become CEO of the combined entity, while DuPont CEO Andrew Liveris would become Executive Chairman. Their roles post three-way breakup (if any) remain unclear.

One obvious concern (at least to a mere layman like myself) with such a tie up would be on the regulatory side. The US Justice Department appears to have become much more aggressive of late and has successfully fought off a number of tie ups including Sysco/US Foods and most recently, Electrolux’s purchase of GE’s Appliances. It has also sued to block several other big deals. Given the size, scope, history and importance of these companies, I imagine this one will draw some interest. There may be issues abroad as well. For example, Monsanto (MON) had some issues in its failed pursuit European ag chemical giant Syngenta. Every deal is different though and with breakups and likely divestitures coming, this might be avoided.

The deal isn’t final yet so of course there is a chance that nothing ends up actually happening. Such is the way with M&A, but both company’s stock prices were up after the close on the news. Both companies have rich histories over a century old and are considered American icons. To some, this tie up makes sense as a way to rationally allocate capital efficiently, but this piece takes a much dimmer and glass half-empty view on the deal. Basically, America’s future is looking bleak.

So far, 2015 has been a record year for M&A and this deal would represent a potential capstone. Should be interesting to see how this plays out.

Disclosure: Author holds no position in any stock mentioned