By David Benoit
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 31, 2017).
A quartet of well-known activist investors has lined up to
pounce on plans to break up DowDuPont, the $150 billion chemicals
behemoth that will be created by merging Dow Chemical Co. and
DuPont Co., potentially waging an unprecedented attack on the firm
and Dow chief Andrew Liveris.
Jana Partners LLC and Trian Fund Management LP have privately
levied concerns with how the merged company might be divided,
according to people familiar with the matter, joining Glenview
Capital Management and Third Point LLC, which had already voiced
criticism. All four view Mr. Liveris as a roadblock to shifting
certain pieces in ways they think will create value, the people
said.
The swelling discontent threatens to upend his plans to close
out his legacy by transforming two storied companies.
Since the merger announcement in December 2015, the plan was to
combine the two firms and then splinter them into three. The
investors have voiced a view that the materials company expected to
emerge from the breakup -- the new version of Dow Chemical -- needs
to shrink.
An attack by four activists on one company or executive would be
highly unusual and would complicate the already daunting task of
standing up three separate, publicly traded companies in the 18
months after the merger closes, expected in August.
"The sole focus should be on creating the right number of
spinoff entities and stocking them with the right assets to
position each to create maximum long-term shareholder value, and
not on empire-building or ego-massaging by Mr. Liveris or anyone
else," Jana founder Barry Rosenstein said in an email to The Wall
Street Journal.
In an interview from his office, Mr. Liveris called such
assumptions "BS."
"I've spent a decade rejiggering the company's portfolio for the
future, " he said. "I will tell you that I see nothing sacred in
the portfolio, ever."
He said the next iteration of Dow will be poised for growth and
innovation.
Dow and DuPont are in the midst of reviewing how they will break
up, and some changes from the current plan are likely, people
familiar with the matter said. Both Dow and DuPont say everything
is on the table.
The investors' complaints could grow louder if the review
doesn't produce the moves they want, people familiar with some of
their thinking said.
A war on multiple fronts would also be the clearest test yet of
whether activists can keep successfully pushing companies to slim
down -- or if their corporate counterparts are regaining ground in
arguing that breadth of business is sometimes needed to ensure
stability and spur innovation and gains over the long term.
Mr. Liveris said "noisy" investors who don't understand the
chemicals business are trying to push him to create value in a
spreadsheet. He said he wouldn't judge the review until it is
finished and added that any changes must take into account how
employees would be affected. Mr. Liveris, 63 years old, has agreed
to stay on for another year as DowDuPont's executive chairman,
postponing his planned retirement.
The business at the nexus of the dispute with the activists is
Dow Corning, a pioneer in silicones used in products from laundry
detergent to building insulation. Dow Chemical took full ownership
of the longtime joint venture with Corning Inc. in a separate deal
announced the same day as the Dow-DuPont merger.
Dow Chemical executives say Dow Corning fits hand in glove with
traditional chemicals and thus should belong with the materials
business, which would become the new Dow in an eventual split.
Undoing the deal in the coming breakup would destroy benefits, they
argue.
They also say Dow Corning's earnings before interest, taxes,
depreciation and amortization have doubled since the takeover after
years of stagnant growth -- evidence, they say, of the boost the
combination has gotten. They now expect silicones to generate $2
billion in additional Ebitda, double the original goal.
Executives from both Dow and Dow Corning talk about how having
silicones and commodity chemicals together has helped sales grow
because they are visible to more customers when combined. Dow's
head of research talks excitedly about scientists using robots to
experiment with mixing silicone with chemicals Dow has long
manufactured, hoping to discover new materials. Dow Chemical
shares, meanwhile, are at record highs.
"When you come to a fork and you go left, everyone can always
hypothesize on what would have happened if you went right, but no
one can ever know," Dow Chief Financial Officer Howard Ungerleider
said in an interview. "Dow Corning is the perfect example of: We
know both sides of the fork."
The activists argue Dow Corning is among the pieces that should
be removed from the new Dow. Instead, they say, it should be part
of the specialty-products company.
Days after the review was announced in May, Third Point released
a proposal it said would add $20 billion in market value when
compared with the original plan. In that proposal, Third Point
estimated Dow Corning would be worth $20.4 billion based on current
valuations of specialty-chemical firms, compared with $11.9 billion
as part of a larger materials company.
In a quarterly letter to investors, Glenview said it largely
backed Third Point's proposal and raised the prospect of calling a
special meeting to replace directors. Trian and Jana have both
privately pushed changes, according to people familiar with the
matter.
At the same time, the activists could be happy if several other
changes are made, but Dow Corning isn't moved, people familiar with
those investors said.
The original breakup plan can be revised if 11 members of the
DowDuPont board agree. The 16-member board comprises eight
directors from each company.
Third Point is among the biggest holders in Dow Chemical. Even
after selling some of its stake, it still owns $1 billion of Dow
shares. It, Glenview and Jana together hold 2.5%. Trian owns 1.1%
of DuPont after cutting its stake by more than half since the deal
was announced.
The activists say DuPont and its chief executive, Edward Breen,
appear more receptive to their ideas than Mr. Liveris. Mr. Breen
told analysts last week the review aimed to "ensure maximum
shareholder value is created" and that the work was being done as
fast as possible.
Mr. Liveris said he is aligned with Mr. Breen and in close
contact, even briefly taking a call from him during an interview
for this article.
Write to David Benoit at david.benoit@wsj.com
(END) Dow Jones Newswires
July 31, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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