In the preliminary phase of a merger that will end with a
division into three distinct companies, chemical giants DuPont and Dow Chemical
Co. have signed an all-stock agreement worth $125 billion.
The deal to merge two of the most prominent American
chemical firms is a popular move for the company’s biggest investors and will
no doubt lead to further consolidation in the sector.
The deal will be subject to heavy scrutiny by the sector’s
regulatory board, but should it go through, it could be one of the biggest
deals in living memory. One analyst for CITC Tokyo International described the
tie-up as “The merger of the millennium.”
Following the announcement of the merger last Friday, both companies’
shares peaked before falling back to previous levels over the last few days.
According to experts, the biggest factor motivating the
complex merger-prior-to-division is to increase potential tax savings. James
Sheehan of SunTrust Robinson Humphrey said “There are certain tax free transactions
in the U.S. that can be taken advantage of. To do that, they need to first
merge and then the spin-off businesses will qualify for those tax breaks”.
Shareholders of Dow would have a slight majority stake with
a 53 percent share of the new entity. In the event that the deal should fall
through, a $2 billion termination fee would come into play, according to the
announcement.
The deal is certainly set to be the biggest of 2015, and
would give the two companies the ability to reshuffle their assets based on the
specific needs of their companies.
Dow and DuPont have been forced into the deal after lowered
demand for their agricultural chemicals resulted in a difficult year for
revenue. The demand decrease is mainly due to the strong greenback and a significant
fall in crop prices. The only saving grace for both firms has been their
thriving plastics sales, a testament to low gas prices.
Much of the pressure has come from activist investors such
as Trian Partners representative Nelson Peltz who had suggested DuPont break up
their business into distinct fields for years. He sees the upcoming merger as
“a terrific result for anyone involved in the company”.
A severe lack of growth opportunities has also compelled
both companies to seek savings, and there may be more major moves to come in
the near future.
