A potential cost-cutting megamerger announced Friday by Dow Chemical and DuPont is being analyzed across the country and around the globe, and one economist has cast a wary eye on the deal. American Farm Bureau senior economist Bob Young warns the proposed merger of two $60 billion companies into what would be called DowDuPont could yield mass layoffs, abrupt research cuts and possible fewer choices for farmers.
“Well limited choices,” he said. “Obviously your choices are going to get smaller. I mean there’s still one or two out there but not that many out there when it gets down to it.”
Analysts say Dow Chemical and DuPont would sell almost a fifth of the world’s pesticides, more than 40 percent of America’s corn seeds and nearly as much of the country’s soybean seeds. Young says such consolidation could lead to higher input prices at a time when commodity prices are already low.
“Eventually one would think that could be the case. As competition in that space backs off one could certainly talk about a story where input prices would adjust, accordingly.”
He says farmers could also pay the price of less research.
“Plants and weeds and pests have been developing resistance to whatever treatment it is we decide to try to put on them since the dawn of time and if you’re not always out there kind of on the cutting edge trying to find a new tool to be able to use against them we’re going to have to constantly fight yield pressure, weed pressure, bug pressure etc. We’ve got to always be working on this research front.”
Young says Farm Bureau may take a closer look at the proposed Dow-DuPont merger when the Justice Department does the same, but he says there may not be much anyone can do since market economics are behind such industry consolidation.
Many, like the American Soybean Association and National Corn Growers Association released statements that they would be looking carefully at the details and anticipate the opportunity to file comments in the future.
“As always, we welcome competition and innovation to the industry, while keeping the best interests of soybean growers at the forefront,” said ASA President Richard Wilkins, Greenwood, Delaware. “ASA looks forward to the opportunity to provide comments to the companies and U.S. regulatory authorities that must approve any merger, and will continue to study how this merger will affect soybean farmers.”
Chip Bowling, Maryland farmer and president of the National Corn Growers Association, said, “The National Corn Growers Association is committed to protecting the best interests of our members and our nation’s corn farmers. With respect to the proposed merger, we anticipate that we will have an opportunity to submit comments regarding the effect this merger may have on agricultural research, innovation, grain marketing, and the competitive pricing of farm inputs. We will do all we can to protect farmer interests and preserve an open and competitive marketplace.”
Source: NAFB News Service
Dow Chemical and DuPont agreed to combine their operations into one company that will subsequently split into three, reflecting one of the top 20 biggest mergers ever. With collective market capitalization of $130 billion, the combined company would be known as DowDuPont, the companies said Friday in a statement. After completing the deal, they said they would pursue a split into three companies — one focused on agriculture, one on material science and one on specialty products. They estimated it would take up to two years to complete the tax-free split.
Dow Chemical CEO Andrew Liveris will become executive chairman of the new entity, while DuPont CEO Edward Breen will become chair and CEO.”When I look and DuPont and Dow, I see businesses that fit together like hand in glove,” Breen said in a conference call. “The strategic nature of what we could pull off is incredible. To me it checks all the boxes of a great deal and a way to create value for our shareholders.”
National Corn Growers Association President Chip Bowling,said in a statement, “The National Corn Growers Association is committed to protecting the best interests of our members and our nation’s corn farmers. With respect to the proposed merger, we anticipate that we will have an opportunity to submit comments regarding the effect this merger may have on agricultural research, innovation, grain marketing, and the competitive pricing of farm inputs. We will do all we can to protect farmer interests and preserve an open and competitive marketplace.”
Roger Johnson with the National Farmers Union said the merger could result in less competition and higher prices for farmers. “The federal government has shown its willingness to approve giant acquisitions and mergers that harm competition and the result has been a year of mergers resulting in fewer and fewer choices for family farmers and ranchers,” said Johnson. “The standard against which to measure any merger is whether it will increase competition in the marketplace, and almost certainly this merger will leave us with much less, not more, competition,” he said.
The companies have identified $3 billion in annual cost savings, which they said would translate into $30 billion in market value, in addition to $1 billion in targeted “growth synergies.”
Before the merger, DuPont said Friday it will shed $700 million in costs, with about 10% of its global workforce “impacted,” according to a statement. The company had 63,000 employees at the end of 2014.
“We are undertaking a selection process on the reductions and that will take some time,” DuPont spokesman Dan Turner said in an email. “However, we will begin implementing the changes immediately, and expect most of these actions to be complete by the end of the first quarter in 2016.”
For its part, Dow is slashing $300 million in costs before the closure of the deal as part of what it called a 3-year, $1 billion “productivity plan.”
The companies said they would maintain dual headquarters in Midland, Mich., and Wilmington, Del., but said they plan to “optimize” their physical footprint, which could mean plant closures.
The deal comes amid a record year for mergers and acquisitions announced by U.S. companies. M&A activity in 2015 hit a record $4.6 trillion as of Monday, according to Dealogic.
It’s the 18th biggest deal ever and the fifth largest deal announced this year, according to Dealogic. It’s behind the Allergan-Pfizer, Anheuser-Busch InBev-SABMiller, BG Group-Royal Dutch Shell and Time Warner Cable-Charter Communications. It’s ahead of EMC-Corp-Dell and Kraft-HJ Heinz.
Liveris, who has thirsted for a deal with DuPont for “an awful long time,” had faced the serious prospect of a renewed fight with activist investor Dan Loeb. DuPont has faced pressure from activist investor Nelson Peltz. Both companies had been under fire to consider breaking up.
“I think it’s very important that you understand that Ed and I checked our egos at the door,” Liveris said on the conference call. “We really put shareholder value and the future of these companies as the primary thought.”
The companies have combined annual revenue of about $83 billion and operating profit of about $15 billion, with a profit margin of 18%. They would have combined net debt of $18.3 billion.
The merger of equals is still subject to regulatory approval across the globe. U.S. regulators have pumped the brakes on several major deals in recent months, including the Staples-Office Depot accord.
But the decision to immediately break up into three companies could assuage regulators. The companies expect to close the deal in the second half of 2016.
The agriculture company would have combined revenue of $19 billion, making it the industry’s largest company by sales. The material science company would have $51 billion in revenue, while the specialty products company would have $13 billion.
Dow simultaneously announced Friday that it has acquired from Corning Corp. the 50% stake in silicon-making joint-venture Dow Corning that it did not previously own for $4.8 billion. The deal would enable $400 million in annual savings from cost cuts and revenue opportunities, Dow said.
Shares of Dow and DuPont had already jumped 8% and 12% since word of their negotiations was first reported earlier this week. After the deal was officially revealed Friday morning, Dow shares rose 1% in pre-market trading to $55.44 and DuPont shares fell 3% to $72.40.
“We operate in a dynamic global environment and this is the right plan at the right time,” Breen said on the conference call. “It’s a unique opportunity to bring together two great highly complementary companies with a long history of innovation.”