DowDupont Closes Higher in First Day of Trading, Company Still Faces Challenges

After almost two years, chemical giants Dow Chemical Co. (DOW) and Dupont (DD) on Friday began trading as a combined entity under the name DowDupont Inc. and the ticker (DWDP) on the New York Stock Exchange.

Next up for the company and its executives is to carve the company into three separate businesses: agriculture, materials science and specialty products. That process is expected to occur over the next 18 months, management has said. 

The new company opened at $66.55 per share, the same as Dow's closing price on Thursday, Aug. 31, and carries a market cap of $156 billion, according to Andrew N. Liveris, Dow's CEO, who will take over as CEO of the combined entity.

The company closed at $66.97 per share on Friday, after hitting a high of $73.33 midday.

Hedge funds Third Point LLC, Glenview Capital Management LLC, Jana Partners LLC and Trian Fund Management LP have all privately voiced concerns that management could impede efforts to retool the company. Trian was the investor which first pushed for the merger. 

Dan Loeb of Third Point launched an insurgency campaign in May arguing that the post-closing plan to split into three businesses may not be enough. 

Loeb has suggested that the company should evaluate whether "three spin-off companies is appropriate or if the creation of additional businesses or divestitures would further enhance shareholder value." The fund suggested that the specialty products business, post-closing, could be split into as many as four public companies to ensure that each unit has a "clear and compelling investment case."

Loeb also suggests that several businesses should be shifted from the material science unit to the specialty products company, post-closing. In other words, Loeb is seeking to have the combined companies shift divisions and break up into even more than three companies to drive share-price improvement value.

The U.S. Justice Department in June approved the $130 billion blockbuster merger after a lengthy review, requiring some divestitures but not the extreme split-up the activists are seeking.

Specifically, the DOJ required that DuPont, officially E. I. du Pont de Nemours and Co., divest some of its crop protection portfolio. It also required Dow to sell its global ethylene acrylic acid copolymers and ionomers business, which supplies products used in food and specialty packaging, adhesives, thermoplastic powder coatings, metal pipe coatings, wood plastic composites and molded durable and sporting goods. Regulators did not require a split.

Under the current plan, the agriculture business and the specialty products business will be both headquartered and incorporated in Wilmington, Del. The material science company will be headquartered in Midland, Mich.

No matter the extent of the break-up, it will be a massive undertaking for management and the swaths of advisers that will be needed to execute it. The company has market cap north of $80 billion and sales of more than $50 billion. A break-up could also lead to further deal making for the surviving entities.

The last big industrial company to undertake such an effort was Tyco International in 2011. 

Tyco, which was built through acquisitions, said the split would allow its three businesses—ADT North America residential security, flow-control products and services, and its fire and commercial security business—to have more options for growth, both from within and through acquisitions.

Tyco's flow controls business was merged with Pentair (PNR) in a tax-free all stock transaction. Johnson Controls Inc. (JCI) ended up acquiring the the surviving business of Tyco. In February 2016 Apollo Global Management LLC (APO) acquired ADT Corp. for $12.3 billion in cash and debt and merged it with Protection One Inc.

It is unclear who the company is working with to consider the split. The combined company is also a holding in Jim Cramer's Action Alerts PLUS charitable portfolio

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