“Tectonic” might describe the recently proposed merger by Dow Chemical and DuPont, two global industry giants, each a leader across multiple sectors. The transaction will result in a massive conglomerate with a market value of more than US$120 billion and will reshape the chemical and agricultural industries.1 The combined company, known as DowDuPont, is expected to have about US$90 billion in total revenue.2 Shortly after the completion of the proposed merger, the combined entity will be split into three separate firms: one focused on agrochemicals and seeds; a second one focused on material sciences and the third one focused on specialty products including electronics; nutrition and health; safety and protection; and industrial biosciences. The merger is expected to occur in the second half of 2016, followed by the separation 18 to 24 months later.3
The DowDuPont proposed merger reflects a larger, industrywide trend toward increased M&A activity. The top ten deals in 2015 amounted to US$51 billion out of a total of US$74 billion for completed deals.4 These figures do not exceed 2011 totals, but they still represent a year-over-year increase since 2012. Many deals involve strategic acquisitions designed to increase growth. At least for now, global chemical companies can no longer depend solely on organic growth and R&D to boost revenues. Due to continued economic uncertainty, global markets remain subdued, and CEOs are looking for new synergies to increase margins. In many cases, chemical companies are looking for acquisitions to improve their competitive position by moving further down the value chain, away from commoditized materials to differentiated products and services.
Today’s M&A activity is a part of a longstanding megatrend, a pendulum swinging back and forth between divestment and consolidation as companies react to changes in global markets, government policies, access to raw materials and credit availability. Equally important have been evolving attitudes about the relative merits of large conglomerates. After consistent growth and consolidation that lasted until the 1980s, chemical majors began to break into smaller units or spinoffs. The main idea behind the break-up of these large companies was that large conglomerates could not be steered effectively. After the 1990s, the industry saw a wave of M&A activity toward specialties. This activity paused during the Great Recession but resumed and continues with today’s move toward more focused consolidation.
We believe that the industry will not see any other deals with the same size, scope and structure of DowDuPont. However, the industry will also see many more spinoffs like Chemours and Dow’s chlorine business even while consolidation continues. In a sense, this activity will resemble the DowDuPont strategy but with significant effort directed toward carving out businesses, launching IPOs and merging again.
The result will be a new generation of large chemical companies that are more focused on specific sectors and subsectors. This strategy will be essential for Western companies facing increased competition from new players in the Middle East and Asia. The biggest challenge is to make the right cuts at the right time so the resulting carve outs and IPOs are competitive and properly positioned for long-term growth in both Western and emerging economies.
1 DuPont, Dow Chemical Agree to Merge, Then Break Up Into Three Companies, Wall Street Journal, December 11, 2015.
3 Dow and DuPont Lay Out Merger Plan, C&EN, December 11, 2015.
4 Figures do not include the Dow DuPont merger, which was announced but not completed in 2015.