Case Study #7 (Chapter 11) Discussion Questions
Dow Chemical and DuPont Combine in a Merger of Equals
1. Speculate as to why the deal was structured as a merger of equals. What are the advantages
and disadvantages of such a structure? Be specific.
A merger of equals is a process in which two similarly sized companies of practically equivalent
value and market share combine. I think this deal was structured as a merger of equals for two specific
reasons. First, Dow and DuPont are both major chemical industry of relatively similar size, it would be
difficult, from a financing perspective, for one to acquire the other due to their sizes. Second, the firms are
some of the oldest firms in the industry and are likely rooted in tradition, their names are recognizable and
their brands are strong. I think the merger of equals was the chosen deal structure here because it made a
marriage of the two firms possible while still allowing brand image and company names and traditions to
be honored.
Some advantages of a merger of equals are they allow two, typically very large, firms to combine and
grab a significant amount of market share, in this case DowDuPont became the second largest chemical
company in the world. Additionally, significant synergies can be realized, especially through economies
of scope and scale. Specific to mergers of equals, they allow the new combined firm to keep the brands
and brand value of both firms intact. Also, in deals that are deemed or portrayed as a ‘merger of equals’
the buyer often pays a lower premium than they would in a traditional acquisition. The buyer usually pays
a lower price because through gestures like giving the target significant board representation and an even
shareholder ownership split, the target shareholders are not giving up total control and therefore don’t
need as large of a premium. According to Reuters, in 2013, in deals billed as mergers of equals, the
average premium paid was 11.9% vs. an average premium of 25.6% paid in all other acquisitions. Lastly,
for the target and their employees, there are psychological benefits and reassurances for workers.
While mergers of equals can sometimes be beneficial, there are significant disadvantages and hurdles
that come along with this type of deal structure. One of these disadvantages is the need to integrate the
cultures of two different entities. This can be especially difficult if companies are operating in different
industries such as tech and financial services for example. There have been numerous failures of mergers
of equals, notably Daimler-Chrysler, the have fallen apart due to differences in corporate culture.
Additionally, there can be distractions surrounding who will lead the company going forward and where
employees should look for guidance and strategic direction. Lastly, there exists the problem of if the
transaction is really “equal” or determining what exactly that means or looks like. Firms can argue about
board composition, leadership, strategy, product mix, and even who’s name comes first in the new
company name. These points of contention and attempts to create perfect equality can cause management
and employees to lose sight of the common goal of realizing synergies and returning value to
shareholders.
2. What are the key assumptions DowDuPont is making in arguing the merger followed by the
spin-off of three businesses makes sense?
The first key assumption that DowDuPont is making in arguing that this deal makes sense is that the
deal will win regulatory approval. With two major chemical companies combining, there will
undoubtedly be regulatory scrutiny. Management assumes that the deal will be approved by regulators.
The second assumption that DowDuPont is making is that their view that no change of control will occur
will be shared by the legal system and the deal will be allowed to proceed in a tax-free format. This is a
key assumption because the tax considerations, according to the case, are a primary driver of the deal.
Third, DowDuPont is assuming that they can split-up their business into three new units, Agriculture,
Material Science, and Specialty Products efficiently and within the defined time period. If this assumption
does not hold, then DowDuPont will have higher integration costs and will not be able to realize synergies
as quickly as expected, therefore eroding shareholder value. Similarly, DowDuPont is assuming that they
will be able to realize cost synergies through economies of scale and economies of scope that exceed the
costs that will be incurred in order to restructure the combined company. Last but not least, DowDuPont
is assuming that they can successfully integrate the cultures of their two firms without any significant
decreases or pauses in productivity or profitability.
3. What is the form of payment and the form of acquisition used in this deal? What are the
advantages and disadvantages of the form of payment and acquisition used in this deal?
The form of payment in this deal is non-cash and more specifically Common Equity. The form of
acquisition used in this deal is a Statutory One-Stage Consolidation (Stock Swap) because both boards
voted on the merger and Dow and DuPont shares will be exchanged for share of DowDuPont, the new
combined firm.
Common Equity (Stock) Form of Payment:
A) Advantages: Advantages of using shares include simplicity, the ability to set a fixed exchange
ratio or a fixed value to target shareholders, the possibility of a tax-free deal because capital gains
won’t be realized, etc.
B) Disadvantages: Possible EPS dilution because new shares must be issued by acquirer, EPS
dilution must be recouped, risk of price fluctuation between signing of purchase agreement and
closing.
Statutory One-Stage Consolidation (Stock Swap)
A) Advantages: All assets and liabilities (known & unknown) transfer to the acquirer, or in this case
the new company, as a matter of law. There are flexible payment terms and no minority
shareholders or transfer taxes.
B) Disadvantages: New firm (usually acquirer) is responsible for ALL liabilities, even those that
aren’t disclosed or discovered during due diligence. Also, the deal is subject to shareholder
approval by the shareholders of both firms.
4. In the deal, Dow shareholders will receive a fixed exchange ratio of 1.00 share of
DowDuPont for each Dow share, and DuPont shareholders will receive a fixed exchange
ratio of 1.282 shares in DowDuPont for each DuPont share. Dow and DuPont shareholders
will each own approximately 50% of the combined company, excluding preferred shares.
Common shares outstanding of Dow and DuPont at the time of announcement were 1.160
and 0.876 Billion, respectively. Using this information, show how the postclosing ownership
distribution can be determined. How might these fixed SERs have been determined during
the negotiation of the deal?
These fixed SERs were likely determined during negotiation by evaluating the stock price and the
estimated fair value of each company. Because this was a merger of equals, the fixed SERs were designed
so that the resulting company’s ownership structure would be even between Dow and DuPont
shareholders. Because Dow owns slightly more, maybe they gave up some board control to DuPont or
conceded on another level of negotiation. Alternatively, maybe Dow was valued slightly higher than
DuPont so they wanted a share exchange rate that gave them slightly over half of the ownership.
5. Dow’s price per share on December 11, 2015, was $54.91 and DuPont’s was $74.55. Dow
shares outstanding were 1.16 Billon and DuPont’s outstanding shares were 0.876 Billion.
Assume anticipated annual cost synergies are $3.0 Billon in perpetuity and DowDuPont’s
costs of capital is 10%. What is DowDuPont’s total market cap excluding synergy? What is
the market cap including synergy using the zero-growth method of valuation?
