Christmas came early for Wall Street in 2015 when Dow Chemical Co. and DuPont Co., two of the largest chemical companies in the United States, announced plans to merge in an all-stock deal and create DowDuPont. In a historic year for mergers and acquisitions in the U.S., hitting its highest levels since 2007, this was the largest corporate merger in 2015. If the merger is approved, the new company will be the second-largest chemical company in the world with a market value of $130 billion.
Dow and DuPont are two of the oldest companies in America, with 330 years of history between them; they’ve helped shape the American business landscape and served as the backbone for scientific ingenuity in the modern age. The two companies are responsible for a myriad of products that have been revolutionary and are still used daily by people from all walks of life. DuPont’s invention of Kevlar protected our soldiers while Dow Chemical’s invention of Styrofoam helped keep life rafts afloat for the U.S. Coast Guard. Thanks to DuPont, mothers could wake up in the morning and slip on Nylon stockings with their dress, while their baby sported diapers that kept them comfortable with high-performance polymers created by Dow Chemical.
While the companies seemingly have their hands in every market, after they join forces, they plan on dividing the company into three independent and publically traded corporations with distinct identities. One will focus on material science, consisting of DuPont’s Performance Materials segment, as well as Dow’s Performance Plastics, Performance Materials and Chemicals, Infrastructure Solutions, and Consumer Solutions operating segments with pro forma revenue of $51 billion. Another, with pro forma revenue of $13 billion, will focus on specialty products and will include DuPont’s Nutrition & Health, Industrial Biosciences, Safety & Protection and Electronics & Communications, as well as the Dow Electronic Materials business. Their final corporation, agriculture, will unite DuPont and Dow’s seed and crop protection businesses with pro forma revenue of $19 billion, which will edge out Monsanto as the largest seed business in the world.
The agricultural side of the merger between Dow Chemical and DuPont raised the most eyebrows, as well as concerns about antitrust issues. Antitrust laws are put in place to promote fair competition, not only to the benefit of consumers but also among businesses. Currently, there are only six major players in the seed industry: Monsanto Co., DuPont, Syngenta AG, Dow Chemical, Bayer AG and BASF SE. The deal is currently under review by federal regulators who will focus on individual product lines, namely their seed and crop chemicals, where the two companies compete. There are few other rivals to keep prices in check. While this investigation may be an obstacle to signing a final deal, Bernstein analysts predict that the outcome will most likely be regulators deciding to divest Dow’s corn seed sales to another company like Syngenta.
According to the current CEO of DuPont, Edward Breen, who will retain his position as CEO after the companies merge, there is much overlap between the products, so there won’t be any antitrust issues with the merger. However, there will be overlap within their workforce, which will result in layoffs at both companies. Since the plans for the merger were announced, DuPont has said that they will undergo a $700 million restructuring that will result in the elimination of 10 percent of their 54,000 employees.
The announcement of this merger didn’t just strike fear into the hearts of employees, but it worried those in the agriculture industry as well, fearing the merger will mean fewer options and higher prices. After a severe agricultural downturn in 2015, farmers are still hurting. The US Department of Agriculture predicted that 2015 would be a rough year for farm income, with nearly a 40% drop in annual income, making it the largest one-year drop in more than three decades.
The main contributing factor to this is the falling prices of cash crops like corn and soybeans, down nearly 50% from their peak price in 2012.
Many farmers are now forced to sell their corn below their break-even point, and the recovering American dollar has also made selling crops overseas increasingly difficult as the strong dollar makes the crops more expensive and less appealing. While the commodity prices for corn and soybeans continue to fall, the operating expenses for fertilizer, rent, seed and other farm overhead have remained high.
Morgan Stanley analysts state that once the merger is complete, DowDuPont would sell 17 percent of the world’s pesticides, 41 percent of America’s corn seeds and 38 percent of the country’s soybeans. In a market already dominated by such a small number of companies, if this merger is successful, it could inspire other major players in the agriculture industry to merge as well. This would foster less competition, slowly eliminating the need to innovate, and possibly increase the price of seeds.
Breen said they did not reduce funding for research and development when they laid out the plans for the merger, as they did not want to affect the future growth of the companies as they were founded on technology and innovation. However, DuPont’s seed and pesticides business utilize half the research budget while only returning a third of the revenue. For a deal with a primary focus on saving money, there’s a good chance this area could face reductions in the future.
Thankfully, farmers may not have much to fear. As far as pricing goes, senior research analyst for Piper, Jaffray, and Co., Brett Wong, told Ag Web that he believes aggressive price jumps in proprietary crop protection products would drive many growers to independent dealers and generic offerings. He believes this is a possible scenario that proprietary companies will take into account when making pricing decisions.
Whether or not this potential deal has people shaking in their boots or overcome with joy, nothing will be set in stone until the second half of 2016. If the deal goes through, for better or for worse, it will clearly be a game changer for the industry.