Tag / Merger

by Frank Maduri

Follow Up: Dow – DuPont Merger Update

The gigantic potential merger of Dow Chemical and DuPont, both with market caps at around $60 billion each, is being fiercely opposed in the European Union by regulatory authorities. The biggest concern is that the combined company would spend less on crop protection which the regulators maintain will lower overall global food supply production.

This comes amid news that the global population is growing and food supply chain issues will become increasingly more important. The financial markets have also responded amid these reports with the indicator known as short interest falling 88% regarding Dow Chemical. That is a hint that Wall Street thinks this deal could be headed for a complete halt.

This deal is also under scrutiny from several directions from a variety of interested parties: the farming and agricultural sector, the environmental activist groups, the GMO food supply activist groups, and from within the chemical industry segment. These groups each have different issues with the proposed consummation of these two industrial titans.

The farming and agricultural sector has concerns with this deal as it pertains to eliminating competition for certain components necessary for crop production. The decrease in competition could likely lead to higher prices for these items which will impact the profits for farms of all types, the majority of which are family owned.

The environmental activist segment has concerns about the increased production of several chemical products if these two conglomerates merge and begin synergizing their product lines. The increased production of products such as weed killing sprays as well as other pesticides or herbicides are at the forefront of their opposition to this deal. They also share the concerns of the E.U. regulatory boards regarding the effects that cost cutting combined with increased amounts of product being manufactured will have on the plants and factories being utilized.

Furthermore, these groups have increasing concerns over the potential for air and water pollution from the manufacturing practices used in the operation of these production factories for these types of chemical items. The emission of carbon is at the center of the climate change debate which is a very serious situation in Europe at this point within their discourse.

The GMO and food supply activism groups have issues with this proposed deal because of the potential for increased amounts of GMO seeds and the increased amounts of pesticides, weed killers, and other agro-chemical products that it will push into the marketplace. These groups also share similar concerns to the European regulators regarding the cost cutting strategies surrounding crop protection and the direct impact that will have on the food supply.

Finally, there are concerns from within the chemical industry segment regarding this deal as well. It should be understood though that most of the issues that this segment has with the proposed formation of Dow-DuPont is regarding the role it could play in decreasing competition. It will become even more difficult for smaller chemical manufacturers to compete in the business environment with a combined Dow-DuPont, the possibility of a combined Bayer-Monsanto, and the Chinese chemical conglomerate with their proposed bid for Syngenta.

The trend toward consolidation is invariably a concern for the other companies within the chemical industry segment as it will also be an area of scrutiny for the regulatory bodies involved in both the E.U. and the United States.

The implications are enormous for the future mergers and consolidations of the companies mentioned earlier: Bayer – Monsanto, and the potential for a Chinese company to obtain a key specialty chemical maker such as Syngenta. Those proposed mergers also impact the Dow-DuPont deal. In the event that the regulatory powers involved determine that either Dow or DuPont, or for that matter both entities, have to sell off pieces of their respective companies to make the merger more palatable; the other major players in the industry will be out of the mix to buy those business units.

Syngenta, Monsanto, and Bayer will be very reluctant to make any purchases at all while their proposed merger deals are also under regulatory scrutiny. This inability to find potential willing buyers for the business units at Dow-DuPont could also cause the merger process to go completely off the tracks.

The process will continue to play out in Europe, and the decision rendered there will have an impact on the manner in which the U.S. federal regulators view this potential acquisition. The stakes are high for farmers, for the environment, for the food supply, and for our natural resources. The stakes are high for us all if this merger moves forward and two giant companies have that much influence over the most important aspects of our global community.

by Frank Maduri

Rite of Passage: Walgreens, Rite Aid, & Fred’s Pharmacy Strike Deal

The retail pharmacy channel had an interesting week as we head toward the end of 2016, with the news that Fred’s Pharmacy chain is planning to purchase 865 Rite Aid store locations. This sale is motivated by the proposed merger between Rite Aid and Walgreens which I covered earlier in 2016.

A number of weeks ago the proposed merger was shifted to an early 2017 completion date because of some regulatory situations. The Rite Aid/Walgreens group decided to sell these locations in an effort to satisfy the Federal Trade Commission and some of their concerns over the potential monopoly the combined entity would have in certain geographic areas.

The exact locations of the Rite Aid locations being sold off to Fred’s Pharmacy has not been disclosed, and will not be disclosed until everything is finalized. The news yesterday had Rite Aid stock price jump 5% overall, and if the transaction is approved, the acquisition would vault Fred’s to the 3rd largest drug store chain in the United States.

Fred’s Pharmacy is a southeastern U.S. based regional drug store brand which also has a division of deep discount stores that compete with Dollar Tree and Dollar General. The company, according to financial news sources, is in the middle of a rebranding strategy to move away from being a discount retailer and shifting their focus to being a health and wellness focused drug store retailer. This transaction will provide them with a great opportunity to complete that type of rebranding effort. That was confirmed by the response in the stock market, with Fred’s Pharmacy shares jumping 81% at one point.

The Walgreens/Rite Aid group had to make some sort of move to divest locations to satisfy the anti-trust regulatory process. The reality in this market is that when you do a “channel check” on retail drug stores, Walgreens had just a few options to make a deal based on the current status in that market space currently. Then I read in Forbes that one of the top executives at Fred’s Pharmacy handled real estate transactions on locations for Walgreens in his most recent previous job, I started to understand the dynamics of this deal and how it was consummated.

The regulatory road has had some hurdles for Walgreens and Rite Aid because it will create a huge company of 12,000 store locations. The merger could benefit consumers because of the power they could possess for obtaining better drug prices from the pharmaceutical distribution companies. The merger could also be a negative for consumers because the company could set higher prices on other products leaving the consumer with little competitive options that could provide savings.

Fred’s is going to greatly expand their presence in the market with their investment of around $900 million to reinvigorate the company and help it to compete with larger regional and national marketplace players.

The deal makes sense for Walgreens/Rite Aid because their merger is estimated at over $9 billion and would completely reshape the retail drug store industry space in the U.S. if it is approved. The areas of health, beauty, and personal care are always in demand by the American consumer and that trend is not about to change anytime soon. Walgreens is planning on having the capability to provide all of those needs in a “one stop” shopping experience for the consumer.

This all bears watching as we will soon flip the calendar to 2017 and watch as the huge companies all get even larger through M&A activity.

(Some background information, statistics, and stock market data courtesy of CNBC, Forbes, and Yahoo! Finance)

by Frank Maduri

Busy Signal: AT&T and Time Warner Proposed Merger

The news today of a potential merger between two giants in the media industry: AT&T and Time Warner brought with it both a wave of enthusiasm and skepticism in the financial markets and the multimedia/telecommunications industry. The enthusiasm was demonstrated on Wall Street, where Time Warner stock trading surged, with their stock price up around 13% at one point in today’s activity.

The skepticism comes on the part of some consumer groups who are concerned about what this merger might mean for costs of internet access, cellular phone and data plans, and satellite television services (AT&T merged with Direct TV previously). There is also some legitimate cause for regulators to reject this deal, so there is some caution in the industry that this merger may eventually come apart.

The proposed deal includes Time Warner’s film division and cable television division which includes channels such as TBS, TNT, CNN, as well as the crown jewel of premium cable networks, HBO. The deal is valued, according to sources, at $300 billion. It would be the largest merger in the media industry since Comcast completed the acquisition of NBC/Universal in 2011.

This trend would continue what I have deemed in other mergers as the “big getting bigger” scenario. Time Warner is a huge company with many different divisions and huge market presence in media of all forms. AT&T has a market cap of $233 billion and provides cellular phone, internet, telecommunications, and satellite television services to millions of consumers. The combined entity would be a goliath capable of competing with Comcast/Universal, which I maintain is one of the goals of this move today.

The trend of the average consumer looking to cut out their cable television service, or “cord cutting” as it is known, is something I have written about in the past, and it is an increasing trend. This trend is damaging the cable television providers and the cable networks from making revenue gains. This has particularly impacted Time Warner’s cable services division, and made this potential merger a way to partner with a larger company to expand their reach.

The trend toward streaming content is also a driving factor in this proposed merger, as AT&T has been actively pursuing the development of their own streaming content service which would be offered via the Direct TV platform. The combination with Time Warner would provide AT&T with more advantageous content streaming negotiations because they would be better positioned to control the content from TBS, TNT, CNN, and most importantly, HBO.

HBO has top rated content that is sought after by competing streaming services and cable and telco providers. This would put AT&T in the proverbial driver’s seat of those negotiations, but is the same reason why regulatory boards will have issues with this deal.

The Wall Street Journal reported that regulators have some regrets over the Comcast merger with NBC/Universal which they do not want to have repeated by this potential media industry transaction. The Time Warner properties in the cable network division also have exclusive rights (or partial exclusive rights) to sports content such as the NCAA Tournament in college basketball, NBA basketball games both regular season and playoffs, and Major League baseball both regular season and playoff games. This made the deal more attractive for AT&T because of the demand for live sports programming, but it will also make the regulatory scrutiny that much more heightened because that content is meant to be seen by everyone and not meant to be restricted to only certain providers.

This proposed merger, should it gain approval, would give AT&T a huge advantage in providing streaming content for their cellular phones and their new service with Direct TV customers. It would provide Time Warner with more outlets for their content and more consumers in parts of the country which they could not reach with their traditional cable television services. It would offset the loss of cable television consumers through the streaming rights agreements for their content that they will gain through millions of AT&T customers.

However, in the end, this media giant would have more control over more content and that should give both the industry and the consumer cause for concern. This merger should be stopped because it will provide too much control to one corporation, we saw what happened with Comcast and NBC, we cannot afford to let that happen again.

(background information and stats courtesy of CNBC, The Wall Street Journal, and CBS News)

by Frank Maduri

Bayer Beware: The Monsanto – Bayer Merger

I write often about mergers and corporate takeovers here on Frank’s Forum so the opportunity to offer some commentary on the largest merger of the year was an opportunity I could not miss.

In between research and drafting of other pieces I have in the pipeline, and a final draft submitted for editorial review, I was reading the mainstream coverage of this gigantic transaction on Forbes and CNN Money among others.

I am not sure what I am more surprised about: the fact that Bayer made a third attempt which was more outrageous than the first two attempts to get this deal done, or that I knew that this merger deal was going to be announced before the end of the 2016 calendar year.

I thought the Dow and DuPont proposed deal was huge and scary (which it still is) especially given the implications for the seed market. However, this move by Bayer is also very large and bold with the valuation they put on Monsanto stock ($128 per share) and the clause if the deal does not meet regulatory approval (Bayer would pay Monsanto $2 billion). All of these factors and many more make this deal the most influential merger of the year.

The total valuation when this deal is broken down means that Bayer put a value on Monsanto of $66 billion. The deal, if approved, would do two things right away: have a huge impact on the U.S. seed market where Monsanto is the top player in that marketplace and dramatically expand Bayer’s North American footprint.

American Dream or Nightmare?

The value to Bayer is undoubtedly the opportunity to enter the North American market in a top strategic position and expand upon that through other product areas and industry segments in the future. Bayer is much more recognizable in Europe and Asia than in any other areas of the world, so growth into an essential and largely untapped marketplace for some of their products was the main impetus.

In the case of Monsanto, which has been dealing with an endless onslaught of negative publicity regarding their products and GMOs, the deal makes a lot of sense when you consider that the Dow-DuPont merger looks like it is gaining traction toward approval by regulators throughout the world. That deal did hit a snag in Europe recently, but if you are Monsanto, you proceed thinking it will eventually get done and they will be a tough combined duo to compete against.

The premarket trading of Monsanto stock, as noted by CNN Money, was $104 per share and that sort of gap between that number and the merger valuation of $128, in my time of covering M&A activity usually means that Wall Street is anticipating this deal to not be approved through regulatory channels.

Bayer is thought of in America as the company that makes aspirin and Claritin, but the reality is that they are a major player in other parts of the world in petrochemicals and agricultural chemical products. They have a position in the agricultural seeds marketplace in other regions of the world as well, and from that perspective this deal makes sense.

Why Monsanto?

Although I had a strong feeling that this outcome was going to take place with regard to this merger, I still keep coming back to the question: why would Bayer want to purchase Monsanto? I understand that Bayer swung and missed at a deal for Syngenta, another major American seed manufacturer (which is in the process of being purchased by a Chinese company, ChemChina).

Monsanto has so much baggage with the P.R. nightmare over the perception of their products in the marketplace, the potential links to their products and certain cancers, and the inevitable GMO questions. It is also no secret that I hold Monsanto responsible for putting greed ahead of the health and wellbeing of people. I have read enough data and reviewed enough clinical trials to understand the effect of pesticides and herbicides on both humans and wildlife to know that my opinion of Monsanto is not very favorable, to put it diplomatically.

Bayer top executives may have felt that the Monsanto acquisition was the best pathway to getting the market share they desired in the product areas where they have synergy in order to compete with Dow-DuPont in both the North American market and the global marketplace.

Heavy Scrutiny

This deal, make no mistake about it, will be scrutinized heavily by the political powers at play here; other online news sources are already running separate stories about that aspect of this proposed merger. Bloomberg featured a story on the merger’s impact on the cottonseed industry which if the two companies joined forces they would control a staggering 70% of the market. What further complicates the deregulation of this particular market is that Monsanto sold a piece of their cottonseed business portfolio to Bayer recently to make another acquisition themselves. I am not sure who would be to purchase assets from either company in order to satisfy regulators.

The overall picture for Bayer and Monsanto joining forces is made even further complicated because they will have limited pathways to sell off assets overall because Dow-DuPont and the ChemChina deal I mentioned earlier puts all of those companies in a holding pattern as well. Those companies are not going to be undertaking any large transactions while under regulatory review themselves.

A merged Bayer and Monsanto would control an alarming amount of agricultural products and products directly related to our food supply. They would have enormous influence and power over the pricing that all of those markets are set within. In addition, they would be able to exert enormous price pressure, which could translate to cost increases that are passed along to the consumer.

The potential combined behemoth would also have a tremendous impact on the global environment through an increased number of synergies in the pesticide, herbicide, and other agro-chemical products which will have negative effects on the soil, water, and wildlife.

The potential merger of Bayer and Monsanto is, in short, bad for the consumer, bad for the environment, bad for ingredient suppliers, and bad for farmers. I hope that the analysts on Wall Street are right, and that this merger fails to meet regulatory approval.

It is a proposal with tremendous consequences on a multitude of levels which could have a detrimental impact to our society. This proposal represents greed and the unbridled pursuit of power. I am very concerned over the outcome, and I hope I have proven to all of you that you should feel the same.

by Frank Maduri

Doubling Up: Danone Purchases White Wave

The latest in the seemingly continuous cycle of food industry mergers and consolidations was finalized today with international dairy giant, Danone acquiring a leading American organic food maker, White Wave Foods, in an all cash deal. The details of the transaction put a valuation on White Wave of $56.25 per share which equates to about a 24% premium over their average share price in their 30 day outlook. The deal has a total value of $12.5 billion according to several mainstream media outlets covering the financial transactions of the day.

My perspective on this situation comes from my time working for a food ingredient supplier that was partnered with Danone on numerous product lines. I have had direct involvement with Danone in the US which is more commonly known as Dannon. The statements released today announcing this transaction reflect the emphasis on values which are very important to Danone, in my experience. The focus on healthy food options for the consumer being a core value.

The transaction today essentially doubles the size of Danone’s North American business market share once the deal is finalized. The two companies have some great synergies with a common shared strategic specialty in the dairy segment of the industry. The proposed transaction will provide two major boosts to Danone with regard to their long term business strategy by obtaining White Wave: it provides a robust boost to their overall sales growth (Danone has had some issues with barriers to growth in emerging markets) and it will give them an entry point into the American organic foods segment which is poised for huge growth potential.

Danone has several well-known brands such as Oikos Greek Yogurt, Activia (yogurt), and Evian bottled water. This move to fold in White Wave will enhance their ability to compete with Nestle and General Mills, among other competitors.

White Wave has such notable brands as Horizon Organic and Silk. They possess some very valuable strategies and technologies with regard to the coveted organic/healthy food trend that is sweeping North America at this point. Their combination with Danone will result in an expansion of those brands and product lines as well as new business growth areas based on their shared expertise.

Both companies are committed to healthy lifestyles and sustainable product supply chains with shared focus on providing the consumer with healthy choices at cost effective price points. It will be interesting to see how the White Wave portfolio will be grown with Danone steering the ship.

In my view I know that Danone will seek to work with their select ingredient suppliers to eliminate redundancy in the supply chain for both companies wherever possible because that will directly enhance cost controls and maximize profitability.

It should not be lost that this move will also give Danone a position to compete with their yogurt lines against Chobani and Fage through the utilization of White Wave’s brand portfolio and organic milk production capabilities.

In the end, it is a smart move by Danone and it looks like a very fair valuation of the White Wave business at this point. In the event it gets finalized the consumer will reap the benefits of their collaborative strengths in the production of healthy and organic food offerings.

by Frank Maduri

Rebuffed: Hershey – Mondelez Merger Proposal Rejected

The proposed merger between Hershey and Mondelez at the end of last week was quickly rebuffed by The Hershey Trust which represents 81% of the voting power in the company. The trading of Hershey stock continued to climb due to an increased perception that, although the Mondelez deal was rejected, the chocolate giant would be acquired by another entity.

In my initial piece on this proposed deal last week, I was skeptical of the Mondelez offer for Hershey because it was being initiated because Mondelez had no room to grow, needed a branding makeover, and needed to grow market share in North America in their confectionary division. These three rationales are usually indicators which portend a poorly conceived merger of two organizations which generally ends badly.

Mondelez is now left to search for another potential partner so that they can attempt to gain a more stable foothold into the North American confection and snack marketplace. The former division of Kraft Foods has the cash to spend to make this acquisition eventually take place with the right suitor.

The merger proposal rebuffed by Hershey had some definite hurdles via the Pennsylvania state level regulatory bodies and through federal anti-trust regulations. Hershey remains an attractive target for another food company to pursue, and those suitors could line up in the weeks and months to come before the close of the calendar year.

However, that being stated, The Hershey Trust and the Pennsylvania Attorney General’s Office both have the ability to block the potential sale of Hershey and have done so in the past. The successful acquisition of Hershey would have to be a well-structured deal that accounts for all of the political and business implications involved; therefore that type of bid would have to be navigated by investment banks and M&A executives who have been involved in similar scenarios.

The way forward for Mondelez at this point is unclear, the executives and others there most probably felt that they put together an impressive offer to obtain Hershey. It now appears that the deal will never materialize.

In my view, the potential for a Mondelez bid for a company such as Mars Candy is not too far a stretch. That potential acquisition would provide the expanded market share in North America in strategic markets, it would provide a branding image makeover for Mondelez, and it would allow for the consolidation of resources to aggressively deal with rising commodity prices for cocoa as well as other staple ingredients in the confectionary industry.

In the case of Hershey, my opinion is that they could be merged with a larger food conglomerate such as ConAgra, which made news earlier this year with the announcement that they were moving their corporate headquarters from Omaha to downtown Chicago in order to be a more desirable employment destination for younger generations who desire to live and work in cities. They have an eye towards growth and Hershey could be a bold move into new territory for them.

In the end, the Mondelez – Hershey deal was a non-starter because Hershey did not want to sell to them and be merged with a company that has some other rather daunting issues. The right deal will come along for both companies to chart their respective future strategic growth and that is going to be interesting to see unfold in the months ahead.

by Frank Maduri

Mega Makeover: Mondelez / Hershey Merger Proposal

The news this morning that sent the stock market surging was a proposed merger between the top two candy and snack manufacturing companies in the United States: Mondelez and Hershey. The news sent shares of Hershey dramatically upward, and shocked others in the food and beverage industry space.

The Wall Street Journal reports that the proposed deal is for $23 billion and the financial markets have responded with shares of Hershey at a 52 week high. The proposal, if approved by regulators, would create one company under the Hershey brand umbrella.

Mondelez split from Kraft Foods about four years ago and has largely struggled to gain brand recognition. The name, Mondelez, has been problematic for the company because the American consumer believes that the products are made in Mexico and other countries and shipped in to the U.S. marketplace (which is true in some cases and not true in others). This merger represents a potential makeover for Mondelez to set a whole new branding message around one of the quintessential American brands: Hershey. The fact that they are willing to pay megabucks for this acquisition represents the desperation they have in reinventing themselves.

I believe that what fascinates me and so many others who have worked in the food industry space and also have knowledge of the financial markets is that this deal is indicative of the nationalistic agenda that has been sweeping the world. The markets have been struggling due to the “Brexit” decision that many see as nationalism gaining a victory with Great Britain separating from the E.U. last week.

This proposed merger is all about nationalism as much as it is about consolidation of two large corporations to cut costs and maximize profit margins. The guys at Mondelez have an opportunity to market their brands with a whole new strategic shift under the Hershey name. They can tout that the company headquarters is now in Hershey, PA which is an iconic American destination, especially now in the height of the summer vacation season.

Mondelez International is headquartered in Deerfield, IL and employs over 100,000 people. They hold the brand rights to Oreo, Nabisco, Cadbury, Chips Ahoy, and Triscuit just to name a few of their billion dollar brand lines. The company generates tens of billions of dollars a year in revenue and this merger would make the combined entity a significant competitor to Nestle in the marketplace.

The branding and P.R. aspects of this merger are just one component of the scenario. Mondelez had grown essentially to their capacity and so M&A activity is the only other pathway to getting larger. The synergies between both companies are evident, as the combined entity would conceivable grow the confectionary brand lines through shared intellectual property and manufacturing technology techniques.

The new combined entity would have significant power in the negotiations for retail shelf space and most likely see cost savings from streamlined distribution operations as well. The combined company will most likely look to grow their market share in the cookie and cracker industry segment.

The cascading effect will be for the other food companies in the next tier beneath Nestle and the newly proposed Hershey, companies like ConAgra, Kellogg, and Campbell Soup. Those companies will be key players for the purchase of brands that both Mondelez and Hershey will potentially have to divest in order to satisfy regulatory boards for anti-trust reasons.

The proposed combination of Mondelez and Hershey would also have more sway over suppliers of food ingredients and could command a whole new system for doing business which would have a direct impact on the food ingredients market place in the way of cost cutting and potential consolidation of product submissions.

In the end analysis, the hurdles remain for this combined company to become a reality, but if it does gain approval it will be yet another example of American corporate largesse. It also represents the lengths a company will go in order to makeover their image in the court of public opinion. The impact on consumer perception is hard to tell until it occurs, but perception is reality and that concept is at the center of this latest merger in the American food industry landscape.

by Frank Maduri

Creating A Duopoly: The Dow – DuPont Merger

The $130 billion mega-merger announced late last week between Dow and DuPont is just the latest agreement in what has become an environment of increasing consolidation across all industrial and commercial markets. This deal is unique because once the merger takes effect then the companies plan to split into three separate publicly traded companies.

 

The rationale behind the three-way split is for tax efficiency purposes and will take nearly 24 months to complete just one phase of this complex transaction, which some on Wall Street believe will invite further regulatory scrutiny. In fact, regulators have been hitting the pause button on several merger deals in recent weeks. The most high profile being the Staples merger with Office Depot which is being blocked currently by the FTC (Federal Trade Commission) creating a saga where most recently the Staples-Office Depot legal team has filed a countersuit which is expected to be heard in federal court in March 2016.

 

Those who track and analyze M&A activity are bracing for another contentious scenario with the proposed merger between Dow and DuPont, two of the oldest and largest American companies in the chemical and agricultural products industries. The obvious prevailing theory being that if the FTC is giving Staples a huge amount of pushback over their proposed merger in the office supply industry, just imagine the type of scrutiny they could enact on the largest merger deal ever in the chemical space.

 

The Importance of EBITDA

 

The CEOs of both companies, Dow and DuPont respectively, were on all the financial cable network shows last week trying to get their corporate PR version of why the merger should move ahead in an attempt to set the narrative before the FTC and other regulators provide the public with their version.

 

In particular they were pressed by the financial media as to the rationale behind the merger followed by the split into three companies. The concerns are due to the regulatory process involved in that type of complicated transaction as well as the sheer amount of time required to complete the entire transition into three distinct and publicly traded companies.

 

Both CEOs explained that the most tax efficient method was to complete the transaction in this manner. In their view this protocol could actually reduce overall regulatory scrutiny and anti-trust concerns because the mega conglomeration would essentially be split into three parts.

 

The concerns from the side of the average stock holder, big investor, or the Wall Street firms analyzing this deal hinge on what this type of transaction will mean for earnings growth. This measurement of performance is always paramount, but takes on added significance if this deal gets cold water thrown on it by the FTC or other ant-trust regulatory bodies.

 

In order to address some of that potential reticence the two CEOs from both of these iconic American corporations discussed the importance of EBITDA to this overall transaction. I interpreted this emphasis to be driven by the strong value of the US Dollar which has stripped away the revenues for giant companies such as Dow and DuPont, so shifting the focus to EBITDA is being done to demonstrate the cash flow overall for the combined entity prior to the 3 way split.
In my own view, I would caution investors on that rationale because EBITDA can be manipulated in a variety of ways to present an unrepresentative picture of the financial health of any given business. I am in no way insinuating that this is the case with Dow-DuPont, no evidence of that exists at this point, but as a general rule of thumb I would tread lightly and not use that one measurement to determine the overall viability of a company.

 

Moreover, the bigger issue for this proposed Dow – DuPont entity is twofold:

  1. The flattening curve in the commodities pricing market
  2. The potential creation of a “duopoly” in the seed industry

 

The decreasing demand for agricultural products is also an issue here but the commodities markets that both companies have large stakes within have been beset by falling prices.

 

The creation of a “duopoly” has been mentioned in other media reports regarding this mega-merger. The eventual 3 way split into three companies would result in an agricultural products entity that would combine Dow and DuPont’s seed and crop protection product lines.

 

The major anti-trust “red flag” would result because in that scenario Dow-DuPont and Monsanto, just two companies would control a huge portion of that industry segment. They would be able to set pricing and enact inventory controls that could have enormous consequences to farming and access to commodity products and the food supply. That could be the cause of significant regulatory concern especially if the public is informed and expresses those concerns to their elected representatives in Washington.

 

Three Way Split

 

The three way split of the company, provided the merger is approved by the summer of 2016, should take place according to the reports anywhere from 18 to 24 months from that point. The three companies proposed in this merger announcement are:

  1. Agriculture Company – see above explanation
  2. Material Science – combines product lines from material sciences and performance plastics divisions and performance materials/chemicals
  3. Specialty Products Company – nutrition, health, industrial bioscience, safety, and communications product lines merged for this company to form

 

This merger is seen as necessary for the ultimate survival of both companies between the commodity market issues I raised earlier to the strengthening of the US Dollar, the unpredictability of agricultural product sales, and falling crop prices; Dow and DuPont were individually facing some difficult hurdles to their future growth.

 

DuPont was rumored to have been mulling a variety of staff reduction plans in order to slash costs due to the negative impact of market conditions on their business units. Meanwhile, Dow was said to be reviewing the repositioning of some of their product lines in the marketplace as well as exploring other options in the event that the proposal to merge with DuPont was met with resistance.

 

Final Analysis

 

In my view, as one who has reported on mergers and acquisitions across many industry types and for a few large news organizations, this particular transaction will face some significant regulatory hurdles on the path to approval. The rationale behind that reality exists on a multitude of levels, from the obvious (the sheer size of the two conglomerates involved) to the subtle (the impact on the commodities markets for certain agricultural products).

 

The most pressing issue involved is the potential for a duopoly in the seed business with the potential merged Dow-DuPont and Monsanto. The consolidation of market share of any single industry into the hands of two corporations is usually, but in no way an absolute, death knell for M&A activity on this scale.

 

In recent history some exceptions to this rule have been made but the seed business is a different scenario and it will be viewed in that regard during the regulatory process. It may not necessarily scuttle the deal, but a revision to how that proposed merged business unit will operate will likely be the resolution. The sale of current Dow or DuPont brands or business units to other competitors is also a likely outcome in order to usher the merger through the regulatory approval process.

 

In addition, it is important to note that this merger, if approved, will not completely insulate the current staff head count. The financial news media has reported that job cuts from various divisions of both companies will come in order to position “the books” from an accounting perspective and enhance the profitability of this acquisition.

 

It is also my opinion that the merger into a one company followed by the 3 way split into multiple publicly traded entities could likely derail this merger from the way it was intended. The complexities involved in the transaction coupled with the longer period of regulatory review needed for this deal to process successfully are factors in forming my opinion in this regard. That is not to say that will not eventually happen (with this much money involved that seems unlikely) but the manner in which the companies are split may change, and the market conditions will dictate how that will all eventually come to fruition.

 

In the end analysis, this announcement of the proposed merger of Dow and DuPont, two enormous and iconic American corporations, is just the beginning of a lengthy process toward a potential merger. In the interim, we will read and see reports detailing tax efficiency, earnings, commodity pricing, market conditions and a myriad of other terms detailing the road either to consummation or perdition for this merger. It is a sad, stark reminder that even the big fish are not immune to the rough waters of a constantly changing global economy.