Dow, DuPont Deal Cements Activists’ Rise

Wall Street Journal
By David Benoit
11 December 2015

 

Dow Chemical Co. and DuPont Co. announced plans to merge Friday in a transaction that combines two longtime rivals and heralds the arrival of a new era of activist investing.

Dow and DuPont said they would combine into a chemical giant worth more than $120 billion before splitting up into three separate companies. While the plan was hatched by the companies’ chief executives, they worked alongside activist investor Nelson Peltz, who played a central role in helping plan and execute the deal, according to those involved.

As the merger plan came together in recent weeks, Mr. Peltz and his colleague Ed Garden of Trian Fund Management LP worked behind the scenes with Dow Chief Executive Andrew Liveris and DuPont’s Edward Breen.

That campaign kicked off when Messrs. Peltz and Garden were invited in October to meet with DuPont’s board in Baltimore. At the meeting, the men encouraged the board to pursue a tie-up with Dow–a move that, unbeknown to them, was recently under way.

The involvement of Trian is the latest sign of the growing clout of activists. While they have become increasingly powerful in recent years, forcing companies to do everything from buying back stock to selling assets, their ability to help bring about such a monumental deal represents a new high.

Once viewed as fighters from the fringe who would be kept far from deal talks of two iconic companies, activist investors have won acceptance from some executives and boards, who now sometimes court their detailed analysis and thinking on decision making. That has placed them at the center of some recent deals, such as the ongoing role of William Ackman of Pershing Square Capital Management LP in trying to merge railroads Canadian Pacific Railway Ltd. and Norfolk Southern Corp.

Another activist, Daniel Loeb’s Third Point LLC, also played a role in the DowDuPont deal, albeit an indirect one. Mr. Loeb had pressured Dow to break itself up last year and had criticized Mr. Liveris, but had settled a pending proxy fight in exchange for two directors. As part of that pact, Mr. Loeb was barred from public comments on Dow for a year, but had privately kept his own pressure on Dow’s board and Mr. Liveris.

He wasn’t involved in the deal talks and wasn’t made aware before The Wall Street Journal reported on the talks earlier this week. But his standstill expires this weekend, meaning he could have started a new fight soon, a possibility that was known during the deliberations.

The following account is based on interviews with numerous people close to the negotiations.

Mr. Liveris called Mr. Breen as soon as he was named interim CEO at DuPont in October. Mr. Breen knew what the call was about before he even picked up the phone, he said in an interview.

Messrs. Liveris and Breen, who had never met, agreed to get together the following Sunday for brunch at a Philadelphia hotel. They spent the afternoon discussing the benefits of bringing the companies together and then breaking them into new entities. Mr. Liveris pressed to move quickly, hinting that he had other options.

Mr. Breen asked for a few days, and called back quickly, ready to press forward on a deal.

The timing was right for both sides. Commodity prices continued to sink and the U.S. dollar grew stronger, denting revenue for both companies. Meanwhile, the companies’ stock-market values were just about the same, making a merger of equals easier to strike. Then, Mr. Breen, a known deal maker, was given the reins with a mandate to change the 213-year-old company.

Messrs. Breen and Liveris then met numerous times at various hotels and sketched out the broad details of an agreement, handing back and forth a roughly seven-page document. Advisers reminded them that mergers-of-equals often founder when details aren’t agreed upon early.

A couple of weeks later, Messrs. Peltz and Garden were invited to meet the entire DuPont board. It was the first meeting with the whole board since they had begun a campaign for change at the company more than two years earlier.

In the Four Seasons Hotel in Baltimore, the Trian duo sat at a small table facing a large U-shaped table where the board of Wilmington, Del.-based DuPont sat and listened. The directors said little.

Trian didn’t hold back, chastising the board for disappointing results at the company and a spinoff they considered poorly executed. The activists, representing DuPont’s fifth-largest shareholder with a roughly 3% stake, said they would support Mr. Breen being named permanent CEO but wanted to see one of three things happen: A breakup of DuPont; a deal between its agriculture business and Syngenta AG; or a merger with Dow. They made clear the deal with Midland, Mich.-based Dow was their preferred option.

Mr. Peltz had already learned from a lunch with Mr. Liveris in late 2014 that Dow could be interested in a deal, and the two discussed how one could be structured. Mr. Liveris, had long desired the deal and previously worked out a plan with help from his banker Michael Klein, founder of Klein & Co. But on this day he demurred: The timing wasn’t right.

At the Baltimore meeting, Mr. Breen gave no hint to the investors he was already along the path toward a deal.

But after becoming permanent CEO in November, Mr. Breen arrived at Trian’s office in New York the week of Thanksgiving with Roger Altman, the banker and former deputy treasury secretary, with a nondisclosure agreement for Trian officials to sign. Once they had done so, they let the activists in on the secret: Dow and DuPont were in talks for a deal and a subsequent breakup.

Both Dow and DuPont wanted Trian’s input on how to execute the breakup, tapping its extensive history in separating industrial conglomerates. Trian leapt into action and signed a separate nondisclosure agreement with Dow. But it gave the sides only 30 days to strike a deal.

Mr. Peltz invited Mr. Liveris and his chief operating officer, James Fitterling, to his sprawling mansion in Palm Beach, Fla., the Monday after Thanksgiving for an all-day discussion on which businesses belonged where.

The group painstakingly went through each business’s customers, raw materials, costs and sales forces. Trian reported back to Mr. Breen on how they thought the split should work.

Once the sides agreed on the structure, Dow and DuPont gathered hundreds of advisers, including bankers from Lazard Ltd., Morgan Stanley and Goldman Sachs Group Inc., in the General Motors building overlooking Central Park in New York.

They dug in, looking at where the combined company could find savings. For a week, the teams discussed how they would build the company from scratch in the most efficient way.

When they were done, they had identified more than $3 billion in costs they could eliminate. Executives Friday touted the 4,000 hours poured into the math, assuring that the so-called synergy figure is a real one they expect to beat.

As a merger of equals, each side’s shareholders will get roughly 50% of the combined company, and the board will be split 50/50. Mr. Liveris will be executive chairman and Mr. Breen, chief executive. Mr. Liveris said Friday that he and Mr. Breen had “checked their egos at the door.”

Yet a diverging future for the two chief executives also appeared to emerge Friday.

Mr. Liveris described the accord as the end of a long road and hinted he may be retiring before long.

“I do want to eventually go to the place where the future of the company is not just beholden to my presence,” he said on a conference call.

Seven months ago, DuPont had beaten Trian in a proxy fight, a victory some thought could mark a pushback on activism’s rise. Now, Trian looks vindicated, says Chris Davis, a lawyer who advises activists at Kleinberg, Kaplan, Wolff & Cohen P.C.

“America’s corporate landscape is being permanently reshaped under the influence of two of its pre-eminent activists,” Mr. Davis said. “Public directors may want to rethink the DuPont narrative.”