Five summers ago, two billionaire investors convinced themselves that the giants of America’s chemical industry were fat, slow, and ripe for squeezing.
The result, after boardroom drama and lab, factory, and office pain, was DowDuPont, a tax-saving arrangement that was briefly the nation’s largest chemical company and that is now breaking into three:
∗ A reshuffled Dow Chemical, which became a separate company in April.
∗ Corteva, which makes pesticides and designer crops and is supposed to spin off June 1.
∗ A “new” DuPont Co., which is already trying to sell businesses totaling at least 10 percent of its $20 billion in yearly revenues, as bankers visit its Wilmington offices (beside Corteva’s) to urge still bigger asset sales.
One thing hasn’t gone according to plan: These successor companies’ shares are now worth not more but significantly less than the $150 billion the companies were worth when the deal was announced, confounding their creators’ predictions.
Stock analysts blame the U.S.-China trade war (all three companies are deeply invested in China) and higher oil prices. Trade and costs are endemic variables in the chemical business. But the timing seems to have taken the spin-off doctors by surprise.
DuPont grew from a family gunpowder business in the early 1800s into the most valuable U.S. company after World War II. Its scientists invented nylon, Kevlar, Teflon, and many more useful and lethal compounds. Its engineers created the new-car smell, the shiny surfaces of a suburban home, the security and menace of a soldier’s equipment.
It’s not new that the company’s owners have been buying and selling business units like a giant game of Risk. What’s new is that the parts are now small enough that the 217-year-old DuPont itself could disappear.
“Their valuations are all depressed right now," says Chad Imgrund, senior research analyst at Tower Bridge Advisors, West Conshohocken, which invests $1.3 billion for clients, including an $8.5 million stake in DowDuPont and its successors. “There is deal fatigue. People are champing at the bit to see results.”
“They are taking $3 billion in costs out of the combined companies," dividends are high, "and yet the underperformance, it’s been painful,” said Hank Smith, co-chief investment officer at Haverford Trust Co., which invests $14 billion and owns the stocks in all three of its equity portfolios.
The stocks’ decline, even amid the trade war and rising oil prices, “is excessive,” argues Jonas Oxgaard, a Ph.D. chemist-turned-financial analyst for Bernstein Research in New York. Oxgaard says that the companies are better run now and that cost cuts under DowDuPont chief executive Edward Breen will accelerate, dividends and share buybacks should increase, and profits should surge after separation, driving shares up, too.
And if that doesn’t happen, the new DuPont, with its stew of auto/smartphone/medical, computer-materials, protective-materials, and food-additives businesses, can always “be broken up” again, Oxgaard told clients last month.
DuPont’s Nutrition and Health business, for example, is a “hidden gem,” making food taste better and helping big food processors and other buyers in a weight-obsessed world, writes Credit Suisse analyst Christopher S. Parkinson.
Breen will stay on as the new DuPont’s executive chairman, shadowing chief executive Marc Doyle and weighing the fate of DuPont businesses in changing markets.
“We don’t want to be a commodity maker of materials. We want to be the downstream value guys” who improve products for industrial customers, said Michael Saltzberg, global business director for biomaterials (including Sorona bioplastics, a hot item in textiles and carpets), at an industry conference in Philadelphia last summer. “Our sales were up 30 percent last year,” he added. “Ed Breen doesn’t mess with us. We’re just running our business."
This spring, Saltzberg’s business was one of several designated “non-core” by Breen and put up for sale.
The companies eliminated 18,000 jobs since they began responding to the hedge-fund managers in 2014, leaving 98,000. They have sold, spun off, or closed 82 factories, leaving 441. Research spending is down more than 40 percent, to $2.1 billion last year. Capital expenditures fell one-third, to $3.8 billion.
W.L. Gore & Co., founded by an ex-DuPont employee, has hired more University of Delaware graduates since 2014 than DuPont has, the school confirms. Most are engineers.
Also since 2014, the companies have spent more than $3 billion on share buybacks to prop up stock prices, while issuing almost as many new shares, including insider compensation.
Despite all that, the companies have lost more than $40 billion in value since the merger, instead of gaining, as predicted.
Back in 2014:
∗ Billionaire hedge-fund manager Nelson Peltz of Trian Partners bought a stake in DuPont. He railed against the “country club” mentality under CEO Ellen Kullman of overpaid executives who wasted profits on costly research that failed to yield new products or lift the stock from 1990s levels. (DuPont actually did have a country club, with three golf courses, which it has since sold to a group led by Ben duPont, an heir to the founding family.)
∗ Dan Loeb of Third Point LLC bought into Michigan-based Dow Chemical and pushed to remove another underperformer, Andrew Liveris, its Australian CEO.
To keep shareholders loyal, Kullman and Liveris sped up layoffs and asset sales. From 2015, “both companies were on a path to really rationalize their cost structure and increase their focus," says Monica Bonar, an analyst for Fitch Ratings Inc., which is content with how the three successor companies have split their debt, environmental, and pension liabilities.
But stock investors weren’t impressed by those cuts. In late 2015, Kullman was replaced by Breen, whom Peltz admired. Loeb won Liveris’ acquiescence to merge the companies into DowDuPont. As a stock merger, they wouldn’t owe taxes on the acquisition, they told investors.
Loeb and Liveris said the underlying businesses should be worth tens of billions more -- once Breen, as executive chairman, chose his management team, methodically cut billions from yearly costs as he had at Tyco, and planned the spin-offs.
For example, DuPont laid off or early-retired half the Ph.D. scientists and assistants in its Central Research Department, moved an additional one-third into business units, and shrank its central offices. Even with more than $200 million in recent improvements, “the Experimental Station is pretty much a ghost town,” compared with what it once was, University of Delaware professor and former engineering school dean Babatunde Ogunnaike said in an email.
In 2017, the year the companies formally merged, Peltz’s firm got out of the stock, to chase other targets.
Loeb hung in. A year ago, his firm sent investors a vote of confidence in “Ed Breen’s plan to create value,” and predicted the stock would rise 50 percent by now. It went down, instead. In February, he sent a follow-up admitting that DowDuPont had proven to be one of his “top five losers.”
Cheap oil decades ago made possible the Delaware River refining-chemicals-plastics complex. “I made a lot of money on DuPont and Rohm & Haas" as a young trust officer at Girard Trust Co., says Howard Trauger, a 50-year veteran of Philadelphia investing, now managing director of Carnegie Investment Counsel. But during the 1970s, “the feedstock -- oil -- went to $100 a barrel,” and the fast money went elsewhere -- into computer, drug, and telecom shares, for example.
DuPont tried to rebrand as a high-margin multitech company. But it trailed drug and software stocks. As population growth slowed in the developing world, chemical demand and profits plunged, notes an investment banker who worked with the company. State-backed rivals such as ChinaChem took market share (leading Dow’s Liveris to ask for U.S. subsidies). DuPont focused more on marketing and financial targets; researchers complained they couldn’t get products approved unless they would be instantly profitable.
Bankers saw the company as stagnant and lacking in serious new ideas. “Like [former DuPont CEO] Jack Krol liked to say, sometimes you have to get small to get big again,” adds a former DuPont official who’s been in talks to purchase one of the company’s business units. Breen’s cuts “felt very heavy-handed to some, but maybe it was time," he added. "A lot of bureaucracy needed to be addressed.”
The DowDuPont merger and spin-off is a bigger, tax-free version of the company’s past reorganizations, says Sam Waltz, a former DuPonter who runs a strategic consulting business in Greenville, Del. He says an earlier spin-off, Chemours, has partly taken up DuPont’s old community role in the city of Wilmington, with offices in former DuPont headquarters.
Chemours also inherited DuPont’s poisoned-soil plant sites in Deepwater, Repauno, and Parlin, N.J., among other places. It joins Newark, Del.-based Gore, Philadelphia-based Axalta, Malvern-based Endo, Wilmington-based Lycra, and other former DuPont divisions that now dot the region.
Besides the proliferation of successful companies, there are individual ex-DuPonters striking out for themselves. “The unprecedented downsizing of DuPont three years ago resulted in releasing hundreds if not thousands of people on streets. I was one of them,” says Hajime Sakai, who has since raised funding for his wheat genome-editing firm, Napigen, at Delaware Innovation Space, a former DuPont lab.
“That’s how a lot of U.S. industry started out," noted Bonar, the credit analyst. “You get a guy making a better mousetrap, and it’s like: ‘Whoa, we’re making [big] loads of money. How do we put this to work?’ That’s how you end up with conglomerates. Then you split it, and build it up again. Very rarely does a successful guy just stay in one business.”