Dow Chemical and DuPont: How Will the Mega Merger Come Together?

(Continued from Prior Part)

Dow Chemical (DOW) and DuPont (DD) are the two leading chemical companies in the US. If they agree to merge, they will need approval from the antitrust regulators to merge the companies. They might face regulatory hurdles because they’re leading chemical companies in the US.

Dow Chemical and DuPont are expected to break the combined company into three smaller companies based on their product portfolios. This is probably to improve the business efficiency and to overcome the regulatory concern. The three companies would have separate product portfolios of agricultural, performance materials & material sciences, and specialty products. This would lead to significant cost reduction across the product segments. It would improve the operational efficiency of their businesses. As a result, the smaller companies would have higher margins than the separate margins of each product segment.

The new agricultural entity would include Dow Chemical’s agricultural science business and Dupont’s agricultural and nutrition & health businesses. It would contribute around 26% to the combined company. This would be the largest chemical entity in the world. With strong research and development and industry leading brands, the agricultural company would have a competitive edge over Monsanto (MON) and Syngenta (SYT). It could increase their market share in the global agricultural market.

The performance materials & material sciences company would probably include Dow Chemical’s performance materials and performance plastic businesses and Dupont’s performance materials and electronics businesses. This would be the largest company. It would contribute 53% to the combined company. The company will increase its market position and improve its productivity. With improved productivity and better product portfolios, the material business would be in a better position to compete with the world’s largest company—BASF.

Dow Chemical’s infrastructure and consumer solutions and Dupont’s industrial biosciences and safety & protection businesses would be part of the specialty products company. This company would contribute around 21% to the combined company. Extensive research and development activities would drive the business. There would be new product launches. However, merging the two companies and breaking the new company into three smaller companies would create significant integration and portfolio restructuring risks.

The iShares U.S. Basic Materials ETF (IYM) primarily tracks the performance of the US-based basic material companies including chemical companies. Dow Chemical and Dupont account for 22% of IYM’s total holdings.

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Browse this series on Market Realist:

• Part 1 - Analyzing the Dow Chemical and DuPont Merger
• Part 2 - What’s the Merger Rationale for Dow Chemical and DuPont?
• Part 4 - Will the Merger Have Geographical Synergy for the New Company?