Polymorph of Plastics: Merging Corporate Molecules

Dow and DuPont have agreed they would be in a stronger position as a merged company. This move may define the evolution of the global plastics industry. Dow Chemical and DuPont have more experience than anyone on the planet at creating complex compounds from basic ethylene or polyester formulations, transforming these molecular brews into indispensable plastics that are made into everything from garbage bags and soda bottles to car doors, bulletproof vests and aircraft components.

So it probably shouldn’t come as a surprise that these two stalwart chemical giants are considering a merger that would—at least temporarily—create the world’s largest chemical company, with a market capitalization of more than $120 billion. But it certainly took a long time for these suitors to arrive at the altar: both companies are more than a century old (in DuPont’s case, two centuries) and both began making plastics in the 1930s.

DuPont, currently the second-largest global chemical player (by market cap, behind no. 1 BASF), got its start in 1802 when Eleuthere Irenee du Pont and his family fled the French revolution and opened a gunpowder mill on Brandywine Creek near Wilmington, DE (and yes, we left all the accent marks out of E.I.’s moniker because there are too many of them). The company moved on from gunpowder to dynamite and then bought a bunch of smaller chemical companies to form the foundation of the modern DuPont. Soon after commencing its polymers research, DuPont invented several transformative plastics, including neoprene and polyester, followed by nylon and teflon.

Dow, number three on the global chemical market-cap list, got its start in 1897 when Canadian-born chemist Herbert Henry Dow invented a new method of extracting bromine trapped underground in brine in Midland, MI. The bromine was used to produce bleach. After a few years of duking it out with bromine producers in Germany who were undercutting his price, Dow quickly diversified his product line to include agricultural chemicals and, during World War I, magnesium for incendiary flares. The plastics empire that followed was built around the three Ps: polystyrene, polyethylene and polypropylene, a trio of the most ubiquitous resins ever produced.

According to The Wall Street Journal, which broke the story (see also – Dow and DuPont’s Merger — Recap) on its front-page this week, the potential combination of U.S. chemical giants is being approached by both sides as “a merger of equals” (Dow’s CEO Andrew Liveris would become Executive Chairman of the new entity, while DuPont CEO Edward Breen would keep his current title), one that will not bring a flood of dividend premiums to shareholders of either company. This sets it apart from the bevy of corporate takeovers that have been announced this year, a record-setting haul of transactions worth an estimated $4.35 trillion.

The Journal says Dow and DuPont have agreed on a game plan to fend off antitrust regulators by engineering a three-way breakup soon after the merger (the merged entity would have a near-monopoly on industrial and agricultural chemicals, as well as crop seeds). It is by no means certain this three-way split will pass muster with the Justice Department; the Feds have a long history of requiring participants in mega-mergers to sell off key assets to avoid monopoly status, requirements that often blow up the proposed merger before it comes to fruition. DuPont is quite familiar with these requirements: E.I.’s original chemical conglomerate was one of the first targets of the Sherman Antitrust Act when the law was enacted in 1890.

So why are Dow and DuPont thinking of tying the knot? According to WSJ, both companies realized the need to get bigger before they get smaller.

You read that right. the Journal says both companies have been under pressure from shareholders to slim down and focus on rapidly growing units, selling off some product lines that have long been household names and consolidating units that are being hammered by lower commodity prices. According to WSJ, the merger talks between Dow and DuPont heated up after DuPont abandoned a bid to combine its agriculture division with seed giant Syngenta (Monsanto also tried to acquire Swiss-based Syngenta).

Dow and DuPont apparently both reached the same conclusion, WSJ says: they would be in a stronger position as a merged company with powerful synergies to successfully navigate an eventual breakup into more specialized units. The tentative deal also may signify the next step in the evolution of the global plastics industry, a shift in focus to specialty and advanced engineered plastics from oil-based petrochemical mainstays like polyethylene.

So two chemical pioneers who in the 19th century found a way to turn the dinosaur muck of the tar pits into industrial gold may be locking arms to achieve new heights in the 21st century and beyond. We wouldn’t bet against them.