DD DuPont de Nemours Inc

   (FROM THE WALL STREET JOURNAL 1/6/16) 
   By Bob Tita and Joann S. Lublin 

To gauge the future of the planned chemical titan DowDuPont, it helps to look back at the dismantling of another industrial giant: Tyco International PLC.

DuPont Co. Chief Executive Edward Breen spent a decade as CEO of Tyco, pulling apart what was once among the largest U.S. conglomerates. He transformed Tyco from a company with $41 billion a year in revenue to one that now has about $10 billion in annual sales, mostly from security and fire-suppression systems for commercial buildings.

Mr. Breen and Dow Chemical Co. CEO Andrew Liveris plan to similarly disassemble their two companies after first merging them into one with about $90 billion a year in combined sales. Mr. Breen will be the CEO of the resulting enterprise, DowDuPont, which the companies hope regulators will approveby the end of 2016.

Executives plan to eliminate about $3 billion in annual costs, then split DowDuPont by 2018 into separate companies focused on agriculture,industrial materials and specialty products.

Mr. Liveris, who will be chairman of the combined company, brings some experience in separating businesses as well. Dow last year split off much of its chlorine business in a $5 billion deal with smaller rival Olin Corp. Dow also has committed to reducing costs without sacrificing growth.

"You always have productivity as your focus," Mr. Liveris said in an interview, adding that the company has figured out how to stay lean while it grows.

Mr. Breen, in an interview, said his Tyco experience offers a guide to how to select and prepare executives for the changes.

Several people who know him agreed that his Tyco work showed an ability to assess how executives and business units can slide effectively into new companies.

"He likes stepping into situations that have a lot of moving parts," said Deane Dray, a longtime analyst covering industrial conglomerates at RBC Capital Markets. "It's easier for CEOs to be acquisitive and empire builders than to be diplomatic and ruthless about making decisions to create viable spin outs. He's not shy about controversy."

During Mr. Breen's tenure as Tyco's CEO, which ended in 2012, the company sold about 100 businesses, hived off three public spinoffs, and made Tyco shareholders majority owners of a fourth through a merger.

Some of the resulting stocks became hits, particularly medical-equipment company CovidienPLC. Othershave faredless well, particularly home-security service ADT Corp.

Unlike DuPont or Dow, Tyco was in perilous financial shape when Mr. Breen arrived in 2002 after serving as president of Motorola Inc.

Following years of acquisitions by his predecessor, L. Dennis Kozlowski, Tyco was saddled with debt and dozens of incompatible businesses that made it unwieldy to manage.

Still, fellow directors were surprised when Mr. Breen in late 2005 proposed spinning off Tyco's medical products and electronics businesses, recalled a former Tyco executive.

The medical business, which would become Covidien, was Tyco's most profitable unit. Tyco Electronics, a components manufacturer that became TE Connectivity Ltd., generated the most revenue.

Mr. Breen argued at the time that separation would help the businesses thrive. For example, Covidien, which manufactured pharmaceuticals, sutures, surgical instruments, and other items for operating rooms, needed independence to invest in research and development, and to attract specialized employees wary of joining a manufacturing conglomerate.

The spinoffs began trading in 2007. Covidien's stock price soared more than 170% through early 2015, when it was acquired by medical-device maker Medtronic Inc.for $42.9 billion in cash and stock.

Thomas Lynch, TE Connectivity's CEO since its split, credits Mr. Breen with identifying executives and board members for the new companies early on and involving them in decisions.

Mr. Breen created trust among the future CEOs, and avoided surprises. "It was very seamless when the split occurred," Mr. Lynch said.

Connectivity's stock languished following the move, owing partly to the auto industry's collapse, but is up 71% since the start of 2013.

Four years after the initial spinoff, Tyco said it planned to split off ADT security and its business selling valves and pipes.

To groom executives to run them, Mr. Breen devised a six-month training program, emphasizing compliance with regulatory requirements and managing relations with investors and board members, recalled Laurie Siegel, Tyco's then senior vice president of human resources. "We even went into things like how to do succession planning with a board,"shesaid.

Mr. Breen says he tried to be clear with employees about their aspirations and prospects, and stepped back while senior managers handled portions of earnings calls to explain plans for their proposed new units. "People were nervous," Mr. Breen said in the interview, but "that process worked very well for us."

Tycoended up merging the pipes-and-valves business with Pentair Ltd.in 2012, giving Tyco shareholders 52.5% of the resulting company. Pentair's stock rose in the two years after the merger, but fell in 2015 amid weaker sales, particularly in energy, leaving it up 15% since the merger.

ADT has an industry-leading 25% share of the home security market in the U.S. and Canada, but has faltered since its 2012 spinoff, owing partly to high costs to acquire customers and new competition from cable TV and phone service providers. Its shares are down 13% since their debut.

ADT recently entered the commercial-building security market, competing with Tyco, its former parent. ADT declined to comment.

Tyco performed well immediately after the last breakup, its stock beating the broader market during its first two years of trading. But its shares fell 27% in 2015 amid slowing revenue growth. Its 2016 sales and profit guidance lagged behind analysts' expectations.

Despite more challenging business conditions, corporate breakups such as Tyco's that create focused companies remain popular with investors.

Jack Krol, a retired DuPont CEO who was Tyco's lead independent director during much of the Breen era, expects Mr. Breen to follow the same breakup playbook at DowDuPont.

"He will send [the companies] out with strong balance sheets and the right kind of people to run them," Mr. Krol said. In that way, "they don't run into trouble."

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Jacob Bunge and Rachel Feintzeig contributed to this article.

(END) Dow Jones Newswires

January 06, 2016 02:47 ET (07:47 GMT)

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