Steeped in rich history, DuPont (NYSE: DD) and Dow Chemical Co. (NYSE: DOW) the massive chemical companies responsible for the development of everything from gunpowder to plastics to pesticides and other agricultural products recently announced plans to merge. Subject to regulatory approval the deal will give shareholders from each company roughly 50% ownership of the new company's shares.
The deal alone is not a shocking development. The two companies have been in talks for years about a possible merger.
It's what this new company will do after the completion of this merger that may have many scratching their heads.
The combined company, to be named DowDuPont, will immediately begin disbanding the moment it begins running as one business.
You see, right now, each of the two separate companies operates a number of separate businesses.
Like I mentioned, Dow and DuPont make a multitude of agriculture products, specialty chemicals for manufacturing and paints, sealants and insulation products for consumers, and that's only the tip of the iceberg. There are hundreds – likely thousands – of different products sold be each company if you were to list them all.
Obviously, when dealing with such a large array of manufactured goods, there's bound to be certain productivity gains and losses when considering an alliance. That's where this merger and its eventual dissection come into play.
Manufacturing these types of products can be extremely costly. It requires massive facilities and expensive machinery to be able to make these products on a large scale. That doesn't even account for the tens of thousands of employees it takes to churn out and package these products.
By combining forces – facilities, equipment and workforces – DowDuPont will save an estimated $3 billion in the first 24 months of its creation.
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However, there's a downside to all those products. You don't exactly shop at Home Depot for both deck sealant and the rare and costly chemicals used in modern electronics. Those are two far different industries and customer bases.
That's why in order for the two companies to take advantage of the synergy and cost savings that such a merger can bring DowDuPont will look to spin off its various operations. It'll likely separate into three independent companies: one for its agricultural products, another for its material sciences (like plastics and packaging solutions) and a final company for its specialty products like its high-end electronic parts manufacturing.