Dow Chemical, DuPont reach deal on merger

Nathan Bomey | USA TODAY

Show Caption Hide Caption Dow Chemical, DuPont reach deal on merger Dow Chemical and DuPont agreed to combine their operations into one company that will subsequently split into three, marking one of the largest mergers in the history of business.

Two chemical and agricultural giants, Dow Chemical and DuPont, have agreed to combine in a $68.6 billion deal that would make it the 18th largest merger ever.

The combined company would be called DowDuPont and would have a combined market value of about $130 billion. After completing the deal, DowDuPont would 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. Until then, shareholders of each company will hold 50% of the combined company.

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."

The companies have identified $3 billion in annual cost savings, which they said would translate into $30 billion in market value. With rising commodity prices, the Dow and DuPont are facing pressure to bolster their profit margins while preserving market share.

Before the merger, DuPont said it will shed $700 million in costs. About 10% of its global workforce will be "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 three-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.

The DowDuPont proposal becomes the fifth-largest deal announced this year, according to Dealogic. It's behind drugmakers Allergan and Pfizer, brewers Anheuser-Busch InBev and SABMiller, energy producers BG Group and Royal Dutch Shell and media giants Time Warner Cable and Charter Communications.

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 deal is 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, over concerns about competition.

But the plan break up into three companies could assuage regulators. The companies expect to close the deal in the second half of 2016.

Edward Jones analyst Matt Arnold said any regulatory scrutiny is likely to come in the form of a prolonged review, not a blockage.

"Dow and DuPont each had complementary businesses that paired well with another," Arnold said in an interview. "And as a result of that there's opportunity to combine them and not only improve their cost structure but also improve their customer reach."

The new 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.

Although Dow has nearly twice as much revenue as DuPont, Dow won't necessarily have greater influence in the combined company's direction.

"Most time it's easy for a skeptic to find a reason why a 'merger of equals' is not truly equal," Arnold said. "In this situation it's much harder to find one."

Shares of Dow and DuPont had already jumped 8% and 12% since word of their negotiations was first reported earlier this week. Dow shares fell 3.7% to $52.89 and DuPont shares fell 4.7% to $71.08 in morning trading, though that may be because the overall market is slumping.

"We operate in a dynamic global environment and this is the right plan at the right time," Breen said. "It's a unique opportunity to bring together two great highly complementary companies with a long history of innovation."

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.