Splitting the babies: Billionaire tries to out-spin DuPont CEO Ed Breen, the Breakup King
Instead of the three new companies proposed since late 2015 by Breen and Dow CEO Andrew Liveris, there ought to be six, says Dan Loeb, boss at Third Point LLC, the hedge fund that led the charge to push Liveris toward the DuPont merger.
One of the hedge-fund billionaires who pushed DuPont Co. and Dow Chemical Co. to cut thousands of jobs and plan a merger to enrich investors is now trying to supercharge the CEOs' plans for splitting the combined chemical giant into profitable pieces.
Instead of the three new companies proposed since late 2015 by DuPont boss Ed Breen and Dow chief executive Andrew Liveris, there ought to be six, says Dan Loeb, boss at Third Point LLC, the fund that led the charge to push Liveris into the DuPont merger.
Loeb is particularly challenging Breen's plans for former DuPont Co. units. Instead of keeping most of its diverse industrial lines together in a company that might be split later — the way Breen, of New Hope, broke up the former Tyco International Ltd. in two stages, 2007 and 2010 — Loeb wants to break up the DuPont businesses, combining them with similar Dow lines and selling them quickly, exploiting today's record-high stock market valuations.
Besides the planned "agriculture" company to be built out of DuPont's and Dow's pesticide and genetically modified seed businesses, and a modified "material science" company based on many of Dow's chemical plants, Loeb's blueprint calls for grouping DuPont's and Dow's growth-oriented electronics-materials units into an additional company and their food-supplement and biosciences businesses into another, moving DuPont's remaining safety and performance-materials units into yet another company, and carving out Dow Corning's silicone business into still one more.
According to Loeb, the split could "unlock" an extra $20 billion — a figure he reaches by comparing the proposed higher-growth sector firms to similarly specialized rivals that trade at higher stock premiums.
To show that focused spinoffs can outperform conglomerates, Loeb points to a string of Philadelphia-area companies broken off from Dow, DuPont and Tyco:
Trinseo, based in Berwyn, the former Dow plastics division that has more than tripled in value since its IPO in 2014.
Axalta, the former DuPont paints business based in Philadelphia that is up more than 60 percent since its 2014 IPO.
Chemours, the Wilmington-based company made up of some of DuPont's older chemical lines that has doubled since its 2015 public share offering, despite its environmental liabilities.
TE Connectivity, based in Berwyn, the only Tyco successor that remains an independent public company, which trades at 10 times its 2009 low. Its returns were more than double Dow's and DuPont's in the five years before their deal was announced.
Is Loeb too late? Since 2015, Breen and Liveris have been selling their three-way plan to shareholders and regulators. Top executives for the successor companies have been named. So have headquarters: The pesticide and rump-DuPont companies are to be based, like old DuPont, in Delaware, which tore a big hole in its state budget cutting the companies' taxes so they would stay. The rump-Dow company would remain at Dow headquarters in Midland, Mich. On May 11, DuPont and Dow agreed to review their merger plan but have given little public sign they are willing to change much.
"Who should realize value in this deal? And who gets to do the restructuring? Is it Ed Breen, selling these business off one by one and getting big compensation packages? Or is it a large shareholder, presumably acting in the interest of other shareholders, by pressuring management to sell?" asks Emilie Feldman, management professor at the University of Pennsylvania's Wharton School and author with Siwen Chen of a study of 3,500 divestitures (2007-14) that found corporate divestitures pressed by activists like Loeb tended to make investors more money than divestitures made by managers on their schedules.
"I'm kind of sympathetic to Loeb. These activists have a real track record," Feldman told me. What about the losses in labor, customer and supplier disruptions that follow mergers, and the impact on long-term pension and environmental claims? Those costs are hard to quantify and compare.
Not all merger-watchers think investors like Loeb can force the hands of veteran CEO dealmakers like Breen. "I don't think [Loeb] is going to have too much success here," said Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware.
What's to keep Loeb from winning support from other investors, as Nelson Peltz did in undercutting Breen's predecessor, ex-DuPont CEO Ellen Kullman, clearing way for the Breen-Liveris deal?
"Different times," Elson told me. With Dow and DuPont share prices near record highs as the August merger nears, Loeb "will have a tough time getting traction." Plus, Elson concluded, the likelihood DuPont businesses will be split and split again "is already baked into the share valuation."
(This item has been updated to clarify the focus of the Emilie Feldman-Siwen Chen paper)