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The Three Logic Behind Dow And DuPont Merger
Sep 14, 2017

Recently, the landscape of the global M & a market has started to burn again. The protagonists are the world's second and third chemical companies, the American Chemical giants, Dow Chemical and DuPont Co.

The two companies announced the merger in December 11, 2015, after the transition to 1 and a half years, and finally in the end of last month, was completed in August 31st, "DuPont Dow" was born, each holding 50% shares. After the merger, Dow DuPont's annual sales of 77 billion U. s.dollars, the stock market capitalization of over $150 billion, employees of 100 thousand people, will replace BASF as the largest chemical companies.

I. strategic logic: chemical "War Within Three Kingdoms""

The background of these two world-class firms is simply popularized. Dow Chemical Company, founded in 1897 in the United States, is an international multinational chemical company with an average annual sales of $48 billion in 2016. Founded in 1802, DuPont Co operates more than 70 countries worldwide. Products include agriculture, food safety, high-performance materials, and industrial biotechnology.

Overall, the two companies are 100 years old enterprises, all American companies, chemicals ranked second in the world and third. It is strong, why merge? I think there are two reasons.

The first reason is that the merger can drive itself out of the melee of the three kingdoms. Mature industry, generally formed a situation of tripartite confrontation situation. Global chemical first, BASF from Germany, if Dow and DuPont alone challenge the position of the first, it is difficult to say the results. But if you combine it, you can rewrite history right away.

Therefore, from the perspective of the industry structure, such a merger is clearly a positive role for the two market space, the market reaction is also very positive.

Two, transformation logic: how to make money in the chemical industry?

The second reason for the Dow DuPont merger is the strategic drive for the two companies to continue to seek growth in the specialty chemicals sector. The global leadership of the chemical industry, which has been migrating from basic chemicals to specialty chemicals over the past few decades, will greatly drive the transformation of the two companies.

From the beginning of the first day of the merger, both sides announced the merger is not the end point, the Dow DuPont will split into three leading and independent listed companies, are engaged in agriculture, specialty products and chemical materials business.

We take a look at the Dow DuPont resolution framework. The original Dow agricultural sector will form a new agricultural company and DuPont agricultural sector, will be headquartered in Wilmington, Delaware where the DuPont Co is now the headquarters of the company will be named "DuPont"; in addition to agriculture and Dow electronic materials outside the Department and the Department of functional materials DuPont group into a new Material Sciences Corp (Dow) and Dow electronic materials; will integrate to the DuPont in addition to agricultural and functional materials outside the Department to form a new (DuPont) special products division.

The split feature is mainly the one hand, the two companies were the best relative retention, while the two companies continued losses but has a strong agricultural sector with complementary sex together, creating a world-class agricultural chemical enterprises. The move, on the one hand, solved the two company's agricultural business losses, but also conducive to the integration of the two companies business, resource replacement. Why not?

After the merger, the new agriculture company will replace Monsanto as the world's largest agricultural company. After the merger of the agricultural business, there will be complementary advantages, more comprehensive in the product line, geographical coverage, channel advantages.

If you use a formula to explain with the DuPont and Dow, I think 1+1=3 is more appropriate, and although time-consuming, but saves the tax, and hopes to become the three industry leading companies, financial investors undoubtedly more love.

Three, scale logic: the value of mergers of large companies

The next question, why the international big company with love? The last two years, in some industries the world emerge in an endless stream of merger, so reduce the shipping giant several, agricultural chemical industry was also acquired several, including the acquisition of Swiss chemical China Syngenta, Monsanto's acquisition of ear worship, just happened. Large companies are so complex, and why are mergers attractive? From our point of view, mergers between large companies are still the result of economies of scale and economies of scope.

The merger of the two companies is an example. It was calculated that the merger would produce a cost synergies of about $3 billion at first. Specifically, R & D, R & D cooperation platform with two companies, can better achieve the cost saving and product upgrading, potential growth and better material; business areas, the two sides will be in the development and production of raw materials, because of economies of scale to achieve cost control. These are greater savings than their respective operations, which is economies of scale.

From a range of economic point of view, DuPont Dow merger will bring $1 billion growth synergies. The next 2-3 years, both companies will re adjust the business sector, some of the rapid growth of the business sector will focus on development. It is precisely because the merger will make the two companies decentralized professional restructuring of different businesses, can enhance the strength of the market is conducive to more occupation.

Finally, sum up, Dow DuPont's merger is the result of the three roles of strategic logic, transformation logic and scale logic. The chemical industry is still a big business for the king. Dow DuPont merger, will further lead to other lines?

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