lower energy costs, while their agrochemicals divisions have struggled to cope with weak demand for crop protection products.
For the past year, both companies have been hounded by activist hedge fund investors. DuPont fought a pitched battle with Nelson Peltz, which it appeared to have won. But in September DuPont’ s Ellen Kullman, whom Peltz’ s Trian Partners had heavily criticized, exited the company. Now DuPont looks to be doing a deal that was along the lines of what Peltz was thinking.
The problem was poor returns. Never mind that the global chemical and agricultural businesses of Dow and DuPont are being dragged down by a slow world economy, and a strong dollar. The market wasn’ t prepared to wait.
Pioneer seed produced by DuPont
regulators," they could obtain clearance subject to conditions, Zhang said.
The talks come as the global agricultural chemicals industry is in a state of upheaval. Michel Demaré, chairman of Syngenta of Switzerland, confirmed last month that there were“ extremely active” talks among the leading companies in the sector.
Both companies have been under pressure from activist investors— Third Point in the case of Dow, and Trian at DuPont— to become leaner and more focused by cutting costs and spinning off non-core businesses. Trian owns 2.94 per cent of DuPont, with 25.8m shares valued at more than $ 1.7bn. Third Point owns 2.03 per cent of Dow, with 23.5m shares worth almost $ 1.2bn.
A merger of Dow and DuPont would seem to fly in the face of the activists’ strategy. However, a three-way break-up of the merged group could allow the creation of more focused businesses, concentrating on areas such as speciality chemicals or petrochemicals. Their plastics and specialty chemical businesses have benefited from
Kullman had argued DuPont’ s research and development budget was essential to the company’ s future. Peltz said it was hard to see a current return on DuPont’ s investment. DuPont has invested an average of $ 2.1 billion in its businesses over the past few years. Yet its cash flow this year is expected to drop by about $ 500 million from last year.
Dow has done better. This year Dow predicted it will invest $ 3.9 billion in capital expenditures, yet its cash flow from operations this year is on track to rise by just $ 400 million. After taxes that’ s an ROE of just over 6.5 %.
Even that number wasn’ t enough to get Dow out of the cross-hairs of activist investor Dan Loeb. Loeb’ s Third Point, which had agreed to a truce with Dow a year ago after being granted two board seats, has been reescalating its battle with the chemical giant for the past month or so. Third Point wants the company to spin off its petrochemicals business. Like DuPont, Dow has argued that its size creates better research synergies. Loeb hasn’ t bought that, saying the market would value the petrochemical business higher on its own.
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