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December 27, 2015

Why some investors are sour on the Dow-DuPont deal

Merger will cut $3 billion in costs, but at what price?

Is the Dow-DuPont merger a brilliant business strategy or a misguided effort to cut costs at the expense of thousands of jobs?

Investors don't seem to be completely convinced of the wisdom of merging the two chemical giants, both titans of American industry for generations. While shares for both companies soared when the deal was in discussion, the actual merger announcement on December 11 was anti-climactic. Dow's stock has fallen almost five percent and DuPont's stock has fallen almost 11 percent since the announcement. 

The skepticism comes despite DuPont CEO Edward Breen's promise that the merger will be "an extraordinary opportunity to deliver long-term, sustainable shareholder value."

There's a lot to say in the deal's favor (assuming that anti-trust regulators approve it). Dow, based in Michigan, and DuPont, based in Delaware, will cut costs by around $3 billion when they merge. Then the mega-company, worth $130 billion, will split into three independent companies, each with its own focused specialty: materials, agriculture or specialty products. 

As a bonus, since it's a "merger of equals," investors should, in theory, be able to avoid capital gains taxes.

Dow DuPont Stocks
DuPont and Dow's stock prices have both fallen since the companies announced a "merger of equals" on December 11. (Contributed Art / Google Finance)

"There's no reason to think these two companies are in any way smarter for investors than three intelligently thought-out businesses," said Mike Holland, chairman of an investment firm, to U.S. News and World Report. "This wasn't something they were sitting around on a golf course trying to figure out – rather, this has been in the (planning) stage for years."

Other analysts are more pessimistic. The main argument of the naysayers: there many be short-term profits, but by cutting so much, the companies are cannibalizing their own long-term competitiveness.

"Nothing about this mega-transaction actually makes business prospects better," wrote Adam Hartung for Forbes.

He likened the deal to a one-time "Christmas present" for investors, because profits will go up without sales actually improving. With smaller staffs, the companies will hurt their ability to invent and promote innovative products. Will DuPont be able to invent another Teflon or Kevlar after laying off more than 5,000 employees?

"It is rather less likely that a merger would create any lasting value. Over the long term, the fates of venerable companies like Dow and DuPont are determined by their ability to develop new products and do things more efficiently," said John Cassidy in The New Yorker.

Analyst Jonas Oxgaard brought the point home in an interview with The Inquirer: "DuPont is an innovation company," he said. "You cannot cut the scientists and researchers."