Activist At The Gate. A Lesson for Supply Chain Leaders from the Dow/DuPont Merger?

Definition: Shareholder Activism is a way in which shareholders can influence a corporation’s behavior by exercising their rights as owners. Although shareholders don’t run a company, they can influence the board of directors and management. Investopedia

For employees at Dow and DuPont  this holiday will be one of uncertainty. Many of my friends at both companies wonder if they will have a job in 2016. The future is uncertain. It is a story of shareholder activism. In 2015 Nelson Peltz hit DuPont as a shareholder activist, while Daniel Loeb challenged the strategy of Dow. During the year the fight was long and vicious. This week Dow and DuPont—two chemical giants—succumbed to shareholder pressure. They agreed to combine assets in a $130 billion deal that marks the 18th largest merger ever. The new company will be named DowDuPont.The plan is to split the company post-merger into into three separate companies — agriculture, material science and specialty products. The split is estimated to take two years to complete.

In the announcement, the joint leadership announced the potential of $3 billion in annual cost savings, believed to translate into $30 billion in market value. Before the merger DuPont announced the reduction of 10% of its global workforce of 63,000 employees.

Currently the market is in merger mania. 2015 is a record year for mergers and acquisitions announced by U.S. companies. M&A activity in 2015 hit a record $4.6 trillion on Monday (source: Dealogic).  The DowDuPont proposal becomes the fifth-largest deal behind drugmakers Allergan AGN +0.33% and Pfizer PFE +0.00%, brewers Anheuser-Busch InBev and SABMiller, energy producers BG Group and Royal Dutch Shell and media giants Time Warner Cable and Charter Communications.  The combined annual revenue is estimated to be $83 billion with an operating profit of about $15 billion and a profit margin of 18%. Post-merger the new entity will have a net debt of $18.3 billion.

Two years is a long time for a company in a global market, and history shows that it is harder to drive results above peer group as the company grows larger. I question if this deal would have happened without shareholder activism, and would there have been activism if there had been stronger results?

dow and dupontWould Activism Have Happened with a Different Supply Chain Strategy?

While I will never know for sure if supply chain results made a difference, it is clear that both companies’ supply chain teams struggled to deliver value to the balance sheet over the course of the last decade. Each company underperformed to their peer group(s).

Dow and DuPont’s relative performance to peer group is shown in Table 1. While the average chemical company grew at 6% in 2011-2014, the growth rates of both companies was at 2%. When it came to defining supply chain excellence each had a different focus. While Dow focused on inventory and employee productivity, Dow was below average on operating margin and Return on Invested Capital (ROIC). In contrast, DuPont performed above average on operating margin and Return on Invested Capital (ROIC), but was below peer group in inventory turns (note the precipitous decline in the orbit chart below). Neither company was successful, despite numerous technology attempts and projects to drive a balanced scorecard of supply chain metrics. As a result, when compared to its peer group, each company rated below average on supply chain improvement (as determined by the Supply Chain Index).