The editors of the Wall Street Journal put in their two cents on the proposed merger of America’s chemical giants, DuPont and Dow:
The game plan for Dow and DuPont is to bring together two storied American businesses, cut $3 billion in costs, and then split the resulting company again into three different companies. All of this financial engineering is intended to result in three focused firms that are more understandable and marketable to investors and more manageable for executives. Agricultural seeds and pesticides will be the heart of one resulting firm. Another high-tech outfit will focus on specialty products. And the third will be a chemical company focused on controlling costs as it sells lower-margin materials.
This sounds logical, and more focused management often squeezes more value out of scarce capital. But all of this combining and dissolving also means a lot of money going out the door to investment bankers and lawyers, as well as several years of distractions and antitrust hassles for executives as they negotiate with Washington on which businesses need to be divested. The leaders of both companies will be spending much of their time doing something other than bringing new inventions to market or driving global revenue.
Investors clearly like this deal as an alternative to the slow-growth status quo, but it affirms the pattern of our times. The Wall Street business of merging industrial firms that are desperate for growth is one of the few thriving markets in a world and a country lacking economic policy leadership.
I think that I see it a little differently. The world has changed. India and China both have large chemical companies of their own. China’s are mostly state owned and India continues to maintain its policy of one-way autarky.
How do two poorly run companies justify their CEOs’ eight figure compensation plans?
Step 1: Merge
Step 2: Make the combined company look better on paper by firing a lot of people.
Step 3: Divvy the company into three components: the stable, profitable agricultural business (see here), the doomed commodity chemicals business, and the highly competitive “specialty chemicals” business
Step 4: Profit!
That plan is clearly trolling for speculators’ dollars. The WSJ calls it “a merger made in Washington”. I think it’s a B-school grad’s fantasy. My alternative plan would be no merger, divest some brands, cut top management’s compensation commensurate with performance, hire some researchers, and actually grow the companies the old-fashioned way. In the history of the world no company has ever cost-controlled its way to greatness.
It’s hard to recognize a country as your own when everything is a fraud and planning for the future revolves around new ways to execute bullshit on a bigger or less detectable scale.
I am never purchasing another Anheuser Busch or Miller product.
To put things in a bit of perspective the world’s largest chemical company is BASF. It’s about half again as large as Dow. BASF’s CEO has total compensation of about $5 million. Dow’s CEO’s compensation is about $20 million.
I think I can figure out how to cut costs by $15 million at Dow without firing a soul.
“In the history of the world no company has ever cost-controlled its way to greatness.”
A few observations:
That is certainly true, but it’s not an argument to not control costs. It’s hard to fathom that “two poorly run companies” do not have bloated cost structures, among other problems.
As for CEO or senior management comp, that’s none of our business, even though it may indeed be a failure of the board or passive influential investors. It would be far better to replace CEO/managers with those who can create value. Their comp is but a rounding error.
And as for steps 1-4. It seems to me that the characterization of simply “making things look better on paper” is just projecting bias. Cost reduction that is warranted and well executed is real, and difficult. As for focus, my personal experience is that it generally makes sense. The ITT conglomerate model is long dead, and soup to nuts vertical integration not necessarily good. The ITWs of the world make conglomeration work by ceding a lot of business unit autonomy. Lastly, I can hardly imagine two businesses that require more distinct equipment, strategies, skill sets or mindset than a commodity (chemicals) business and a specialty (chemicals) business.
Only time will tell if execution is poor or superior, but if indeed the two businesses are currently poorly run and significant management changes are not made then I wouldn’t be wasting too many shiny new dimes on what actually is a trade, and not really an investment. But I’m not sure the broad strokes of the restructuring should be criticized.
A CEO, like any executive, is a private bureaucrat. When functioning properly they enable the real talent to design, create and produce. When not they interfere with that process and extract rents from the corporation they control. This appears to be the sort of plan the latter would come up with, concerned solely with appearances to investors and not with creating a growing and loyal customer base through better service and products.
Executive compensation is a matter of public interest because corporations are a matter of public laws without which they would not exist. In fact the very purpose of corporations when such structures were first made legal was to serve a purpose deemed beneficial to society, bot to pursue profits without restraint.
My point about executive compensation was not to suggest that they should be set publicly but, since compensation at the industry leader was so much lower than at the much smaller Dow and DuPont and that revenues in all three were pretty flat a) there pretty clearly is no market in chemical company CEOs to appeal to for the difference and b) performance doesn’t explain the difference, either.
I suspect that the integration plan doesn’t involve buying a lot of new equipment or changing skillsets or mindsets over a two year period. Pure cost control seems like the most likely plan.
Finally, I’m skeptical that companies of that size can realize economies of scale. My observation has been that economies of scale are fully realized at much smaller sizes. Overhead expenses relative to revenues really are a lot lower in a $1 billion company than they are in a $1 million company. However, the $5 billion company has a phone bill about half that of the $10 billion company.
It’s hard to recognize a country as your own when everything is a fraud and planning for the future revolves around new ways to execute bullshit on a bigger or less detectable scale.
The amazing thing is they’ve pulled it off right in front of our eyes, and almost no one noticed.
“As for CEO or senior management comp, that’s none of our business”
Interesting. That $15 million would easily pay for 150-200 jobs, more than we would get with the Keystone pipeline you guys care so much about. Also, I fail to see why the public would not have an interest in boards failing to link executive compensation with performance. We clearly do if it is a publicly traded entity, and given the protections provided to corporations at public expense I think we have some interests in all cases. (In the case of partnerships we should not have much interest.)
Steve