Dissecting Dow And DuPont Deal, Part 3: Why Merge And Split?
DuPont (NYSE: DD) and Dow (NYSE: DOW) are expected to merge, subject to regulatory approvals. Once merged, the management has plans to split the combined entity into three independent and publicly traded companies, with different areas of focus. This is expected to happen within a period of 18 to 24 months following the merger. What is the need of splitting up the joint companies and how does it help shareholders? We would try to answer these and similar such questions.
(Read: Part 1. Dissecting Dow and DuPont Deal: Does The Merger Make Sense? | Part 2. Dissecting Dow and DuPont Deal: Are The Synergy Expectations Reasonable?)
Our price estimate for DuPont stands at $62.02 | Our price estimate for Dow stands at $57.88
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The Split Is Consistent With The Existing Strategy
Both Dow and DuPont have been divesting some of their non-strategic businesses to focus on high-margin products. Some of the recent divestitures by Dow include: the Chlorine business to Olin Corp. in 2015 and the AGNUS Chemical Co. to Golden Gate Capital in 2014-15. Likewise, DuPont spun-off its performance chemical business, Chemours, in 2015. The merger and the subsequent split is essentially a continuation of the strategy to create lean and focused businesses, which could help them navigate the current challenging and competitive environment.
Avoiding Conglomerate Discount And Allocating Capital efficiently
The split should help unlock value for shareholders. Post-merger the companies would operate three broadly unrelated businesses: Agriculture, Material Science and Speciality Products. The combined entity would be faced with what is known as “conglomerate discount”, where the conglomerate tends to trade at a discount to its sum of parts valuation. The split up would lead to efficient capital allocation. The investors would be free to invest only in those businesses which they believe has value and is suitable for them.
Merger Before Split Would Provide Significant Size Advantage
The merger and eventual split, would give the three companies significant size advantage. The entities formed after the split will be market leader in agriculture and second largest in material science in terms of revenue. Had these companies split without merger they would have missed the size benefits. Additionally, being smaller in size, they would have been easy acquisition targets and would have missed the synergy benefit they can expect post-merger.
Have more questions about DuPont? See the links below:
- How Much Can Dupont’s Revenue Grow In The Next Five Years?
- What Is Dupont’s Revenue & EBITDA Breakdown?
- What is Dupont’s Fundamental Value Based On Expected 2016 Results?
- How Can Dupont’s Revenue Composition Change In The Next Five Years?
- How Has Dupont’s Revenue Composition Changed In The Last Four Years?
Have more questions about Dow Chemical Company? See the links below:
- What’s Dow Chemical’s Revenue & EBITDA Breakdown In Terms Of Different Products?
- What’s Dow Chemical’s Fundamental Value Based On Expected 2016 Results?
- How Has Dow Chemical’s Revenue Composition Changed In The Last Five Years?
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