A Dow-DuPont Merger Would Raise Big Questions

The news that Dow Chemical and DuPont, two of America’s oldest industrial corporations, are close to agreeing on a merger can hardly be regarded as big surprise. In recent years, both companies have been targeted by Wall Street hedge funds looking to make a score. And, a couple of months ago, DuPont appointed a new chief executive, Edward Breen, who is known as a deal maker, having disassembled the conglomerate Tyco International after its C.E.O., Dennis Kozlowski, was arrested and jailed.

No doubt Dow and DuPont will market their coming together as a visionary venture designed to create an American powerhouse capable of taking on such international rivals such as B.A.S.F. and Bayer, both of which are based in Germany, and Saudi Basic Industries, of Saudi Arabia. In reality, this looks like a defensive merger designed to cut costs, enhance monopoly power in particular markets, and yield a quick buck to the likes of Nelson Peltz’s Trian Fund Management, which has built up a big stake in DuPont, and Daniel Loeb’s Third Point fund, which has been busy agitating at Dow Chemical. On Wednesday, the stocks of Dow and DuPont jumped by more than ten per cent. From that perspective, the deal is already working.

It is rather less likely that a merger would create any lasting value. Over the long term, the fates of venerable companies like Dow and DuPont are determined by their ability to develop new products and do things more efficiently. Some Wall Street analysts are already speculating that the combined company would trim DuPont’s famed research division, which, over the past century, has created many notable products, including nylon, Lycra, Teflon, Corian, Kevlar, and Freon. That hardly augurs well for future growth.

Neither does the history of big corporate mergers. Although the record is mixed, the general conclusion from more than two decades of research is that most studies “fail to find consistent evidence of improved performance or productivity gains.” That quotation is taken from an old paper by the University of Chicago’s Steven Kaplan, which looked at a wave of mergers in the nineteen-nineties. More recently, research from various parts of the world has largely confirmed the lack of discernible benefits. Indeed, some researchers find that mergers lead to worse outcomes. For example, a paper published in 2012 by two Japanese researchers who were seeking to correct for statistical biases in other studies found a large decline in productivity following a merger and a small increase, at best, in the third year after one.

Could Dow and DuPont break the pattern? Before they even get the chance, their senior executives—and hordes of highly paid advisers—will have to persuade the antitrust authorities that a merger wouldn’t be anti-competitive. That could be quite a task. In terms of revenue, Dow and DuPont are the two biggest chemical companies in the U.S., and the third- and fourth-largest chemical companies in the world. (B.A.S.F. and Bayer are bigger.) Reportedly, Breen and Andrew Liveris, Dow’s chief executive, are planning to take their new baby and split it up into three new companies focussed on particular sectors of the industry: materials science, agriculture, and specialty products. But that plan won’t necessarily calm the concerns of the regulators.

In seeking to preserve competition, the key issues are what proportion of individual markets a Dow-DuPont combination would control, and whether a merger would enable it to raise prices. According to the Wall Street Journal, the new company would supply more than forty per cent of the seed corn sold in the United States, and slightly less than forty per cent of the soybean seeds. Figures like these will raise amber flags in Washington, where regulators are finally waking up to the dangers of consolidation. Having allowed the airline industry to reconstitute itself as a cozy oligopoly that charges much higher prices—an issue that I wrote about last year—officials have recently moved to block mergers in sectors ranging from cable television (Comcast-Time Warner) to retail (Staples-Office Depot) to hospitals.

Some proper scrutiny of this latest proposal is only appropriate, and not just on competition grounds. (What next? Ford merging with General Motors?) All in all, I agree with Alan Murray, the editor of Fortune, who wrote, “Unless you are an investment banker, it’s hard to feel good about the deal,” and described it as yet another example of Wall Street “corporate engineering” at work. For decades now, supporters of the “shareholder rights” movement have portrayed it as a disciplining device that forces tired old corporations to restructure and redirects capital to more productive areas. While this transformation may be painful, it is ultimately beneficial to the economy as a whole, or so it is claimed.

At this stage, it is surely time to ask where the benefits are—and whether they have trickled down to folks who don’t work on Wall Street or have big packages of stock options. For sure, the economy has generated a lot of jobs in recent years. Even the number of manufacturing jobs has rebounded a bit since 2010 (although it is still down about thirty per cent compared to the start of 2000). And the United States has a thriving tech sector, which Wall Street has played a role in financing. But, looking at the economy as a whole, where are the gains in competitiveness, productivity, and wages that we were promised?

If you’ve got a persuasive answer, I suggest you send it to Peltz or Loeb. They’d probably pay well for it.

Original Article
Source: newyorker.com/
Author: JOHN CASSIDY