DuPont, Dow Chemical to merge, then form 3 companies; layoffs expected

DuPont and Dow Chemical, with more than three centuries of history between them, have agreed to merge in one of the biggest deals of the year.

The combined company, which would be known as DowDuPont, would result from an all-stock merger of equals. Once the two are combined, they plan to split into three separate companies, consisting of agricultural chemicals, specialty products and materials, like plastics.

Job reductions are expected to result from the merger. Dow employs 53,000, while DuPont had 63,000 employees as of the end of 2014. The companies did not mention layoffs in their announcement, but DuPont, in a separate statement, said it expected to record a charge before taxes of $780 million, consisting of roughly $650 million in employee separation costs. DuPont said 10 percent of its global work force would be affected.

Despite the eventual breakup, the deal would undergo rigorous antitrust scrutiny for all three companies, particularly the agricultural chemicals company. Still, the companies did not expect that the deal would require much in the way of other divestitures to satisfy regulators' concerns.

Joining together to break into three separate companies later would give Dow and DuPont the ability to choose the best products in their research pipeline and close the rest, according to a note by Jeffrey Stafford, an analyst with Morningstar.

Hanging over both companies had been bruising fights with prominent activist investors. DuPont this year had narrowly prevailed over Nelson Peltz, whose firm, Trian Fund Management, had pressed for months for seats on the chemical mak

er's board.

While DuPont argued that its stock had outperformed traditional measures like the Standard & Poor's 500-stock index, Trian argued that the company had not cut enough costs and repeatedly missed financial performance targets. The investment firm also contended that DuPont had made missteps like selling a business unit that its new owner later took public at a much higher price than what it had paid.

DuPont won in a close vote at its annual meeting in May. But Peltz remained an investor. About two weeks ago, the company notified Trian about the deal talks after having signed a nondisclosure agreement, according to a person briefed on the matter who was not authorized to speak publicly about private discussions.

On Friday, a Trian representative said, "Trian fully supports this transformative transaction and believes that the combination of DuPont and Dow is a great outcome for all shareholders."

As a chemical powerhouse, Dow and DuPont combined would be the second-largest chemical company in terms of revenue after BASF of Germany. On a pro-forma basis, their combined revenue would be $83 billion, according to a presentation Friday.

Joining together Dow and DuPont's agriculture business would imply pro forma revenue of $19 billion. Its material sciences business, which includes plastics, chemicals and other materials, would yield $51 billion in revenue. Specialty products, encompassing electronics, nutrition, industrial biosciences and safety, would have revenue of about $13 billion.

In their statement, the companies said they would have a combined market capitalization of about $130 billion. Under the merger's exchange ratio, DuPont shareholders would receive $70.38 a share, based on Thursday's closing prices, or a total of $61.7 billion.

"This transaction is a game-changer for our industry and reflects the culmination of a vision we have had for more than a decade to bring together these two powerful innovation and material science leaders," Andrew N. Liveris, Dow's chairman and chief executive, said in the statement.

Liveris would become executive chairman of the combined company, while Edward D. Breen, the chief executive of DuPont, would become chief executive of DowDuPont. The board of the new company would have 16 directors, evenly divided between current Dow and DuPont directors.

The deal appears to be a rare example of a true merger of equals. Not only would the board be split evenly, but shareholders of each company would hold roughly 50 percent of DowDuPont.

Under the terms of the merger, Dow shareholders would receive one share of the new combined company for every one of their shares, while DuPont shareholders would receive 1.282 shares each.

The companies say they could cut $3 billion in costs within the first two years from the transaction closing. Most of these savings, which are above the already-announced $1.7 billion worth of cost reductions announced by the two companies, would come from the agriculture and material sciences businesses.

Dow also said on Friday that it planned to restructure its ownership with Dow Corning by becoming a full owner, up from a 50-50 joint venture.

This story was originally published December 11, 2015 at 12:00 AM with the headline "DuPont, Dow Chemical to merge, then form 3 companies; layoffs expected ."