DOVER, Del. -- Dow Chemical and DuPont, two of corporate America's oldest institutions, will merge into a $130 billion behemoth called DowDuPont -- and then split again into three companies -- in one of the largest deals of the year, the companies said Friday.
Since their founding in the 19th century, both companies have made significant discoveries in chemistry, changing how homes are built and painted, and how food is grown and stored. Dow brought the world Ziploc bags and Saran wrap, and DuPont developed Teflon coatings and nylon and Kevlar fibers.
The proposed merger would temporarily create the world's second-largest chemical company, behind BASF. It comes as both Dow and DuPont Co. have experienced recent declines in agricultural performance and have been pressured by activist shareholders to control spending and shift from commodities to faster-growing parts of their businesses.
The three independent, publicly traded companies will be focused on agriculture, material science and specialty products.
"Overall, this transaction represents a tectonic shift in an industry that has been evolving over the last many years," said Dow Chairman and Chief Executive Officer Andrew Liveris, calling the merger a seminal event for employees and customers of the two companies, which have a combined workforce of more than 110,000 people.
DuPont Chairman and CEO Edward Breen said the "industrial logic" behind the deal is compelling.
"When I look at DuPont and Dow, I see businesses that fit together like hand and glove," Breen said.
The merger would cap an extraordinary year in deal-making. More than $4 trillion worth of deals have been struck so far this year, overtaking 2007 as the busiest year for acquisitions on record.
DuPont shares fell $4.11, or 5.5 percent, to close Friday at $70.44. Dow Chemical shares fell $1.54, or 2.8 percent to $53.37.
Breen took over as DuPont CEO after the resignation in October of Ellen Kullman, who just a few months earlier fended off a proxy challenge by Trian Fund Management, a hedge fund led by activist investor Nelson Peltz.
Peltz has called for DuPont's agriculture, nutrition and health, and industrial biosciences units to be combined into a single company, separate from the more cyclical businesses of performance materials, safety and protection, and electronics and communication.
Similarly, Dow has been pressured by hedge fund Third Point LLC, led by activist investor Dan Loeb, to split its specialty chemical and petrochemical businesses. Dow avoided a proxy fight last year by adding four independent directors, giving board seats to two Loeb nominees.
"Both Dow and DuPont had activist shareholders who had sought breakups of these companies, so ultimately the visions of these activists are being realized," said James Sheehan, an analyst for SunTrust Robinson Humphrey.
Sheehan said the deal also could spark other mergers in the agriculture chemical industry. Earlier this year, Missouri-based Monsanto, the world's largest seed company, abandoned a $46.5 billion hostile bid for Swiss rival Syngenta. Last month, Syngenta rejected a $42 billion offer from state-owned China National Chemical Corp.
Liveris will be named executive chairman of the combined company, while Breen will be CEO. The company will have dual headquarters in Midland, Mich., and Wilmington, Del., where they are currently based.
Advisory committees led by Breen and Liveris will be established for each of the spinoff companies.
Antitrust Scrutiny
The deal, which the companies expect to close in the second half of 2016, is sure to be scrutinized by antitrust regulators.
The structure of the deal poses a particular challenge for regulators as the competitive landscape is reshaped, according to Allen Grunes, a former Justice Department antitrust lawyer now with Konkurrenz Group in Washington. An antitrust investigation would focus on individual product lines where the two compete and where there are few other rivals to keep prices in check.
"The bigger and more transformative the deal, the more likely it will in fact affect competition in some fashion, even with a remedy," Grunes said. "It's highly doubtful that a merger that realigns an entire industry changes nothing from a competitive standpoint."
Breen said that while consolidation in the agricultural industry is a "natural step," any agriculture-related divestitures are likely to be minimal.
"These are highly complementary businesses. ... We don't see much real significant overlap here, which is pretty incredible," he said, adding that the combined agriculture business would be balanced between seeds and crop protection.
One motive for the merger is to cut costs. The companies said the deal should cut annual expenses by $3 billion. In addition, the companies announced separate restructuring steps.
DuPont announced a plan that is expected to reduce costs by $700 million in 2016 compared with this year. Employee and contractor layoffs will affect about 10 percent of the company's workforce. DuPont expects to record a pretax charge of about $780 million, with approximately $650 million of employee separation costs.
"The state is committed to supporting those affected by DuPont's cost cutting in Delaware," said Delaware Gov. Jack Markell.
Dow, meanwhile, said it is taking full ownership of Dow Corning, currently a 50-50 joint venture between Dow and Corning. Dow said the move is expected to generate more than $1 billion in additional adjusted earnings and increase its product offerings in the building and construction, consumer care, and automotive markets.
Under the terms of the merger, Dow shareholders will receive a fixed exchange ratio of one share of DowDuPont for each Dow share, and DuPont shareholders will receive a fixed exchange ratio of 1.282 shares in DowDuPont for each DuPont share. Dow and DuPont shareholders will own about 50 percent, respectively, of the combined company.
The proposed agriculture business would unite DuPont's and Dow's seed and crop protection businesses.
The material science company would combine DuPont's performance materials segment with Dow's performance plastics, performance materials and chemicals, infrastructure solutions, and consumer solutions units, excluding its electronic materials business.
The specialty products company would combine DuPont's nutrition and health, industrial biosciences, safety and protection, and electronics and communications segments with Dow's electronic materials business.
The companies have two of the best-known names in American corporate history. Dow was founded in 1897 as a bleach producer in Michigan. DuPont was founded in 1802 in Delaware by Eleuthere Irenee du Pont, a French political economist who had fled to the United States during the French Revolution.
Information for this article was contributed by Randall Chase of The Associated Press; by Drew Harwell of The Washington Post; by Lydia Mulvany, Sara Forden and Patrick Gower of Bloomberg News; and by Leslie Picker and Michael J. de la Merced of The New York Times.
A Section on 12/12/2015