Dissecting Dow And DuPont Deal, Part 3: Why Merge And Split?

by Trefis Team
-22.33%
Downside
80.46
Market
62.50
Trefis
DD
DuPont
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DuPont (NYSE: DD) and Dow (NYSE: DOW) are expected to merge, subject to regulatory approvals. Once merged, the management has plans to split the combined entity into three independent and publicly traded companies, with different areas of  focus. This is expected to happen within a period of 18 to 24 months following the merger. What is the need of splitting up the joint companies and how does it help shareholders? We would try to answer these and similar such questions.

(Read: Part 1. Dissecting Dow and DuPont Deal: Does The Merger Make Sense?  | Part 2.  Dissecting Dow and DuPont Deal: Are The Synergy Expectations Reasonable?)

Our price estimate for DuPont stands at $62.02   |  Our price estimate for Dow stands at $57.88 

The Split Is Consistent With The Existing Strategy

Both Dow and DuPont have been divesting some of their non-strategic businesses to focus on high-margin products. Some of the recent divestitures by Dow include: the Chlorine business to Olin Corp. in 2015 and the AGNUS Chemical Co. to Golden Gate Capital in 2014-15. Likewise, DuPont spun-off its performance chemical business, Chemours, in 2015. The merger and the subsequent split is essentially a continuation of the strategy to create lean and focused businesses, which could help them navigate the current challenging and competitive environment.

Avoiding Conglomerate Discount And Allocating Capital efficiently

The split should help unlock value for shareholders. Post-merger the companies would operate three broadly unrelated businesses: Agriculture, Material Science and Speciality Products. The combined entity would be faced with what is known as “conglomerate discount”, where the conglomerate tends to trade at a discount to its sum of parts valuation. The split up would lead to efficient capital allocation. The investors would be free to invest only in those businesses which they believe has value and is suitable for them.

Merger Before Split Would Provide Significant Size Advantage

The merger and eventual split, would give the three companies significant size advantage. The entities formed after the split will be market leader in agriculture and second largest in material science in terms of revenue. Had these companies split without merger they would have missed the size benefits. Additionally, being smaller in size, they would have been easy acquisition targets and would have missed the synergy benefit they can expect post-merger.

Have more questions about DuPont? See the links below:

Have more questions about Dow Chemical Company? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Dow Chemical Company |  our complete analysis for DuPont Chemical Company
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