The continuing hedge funds’ attack on global chemicals and plastics giants will be a major story in 2015.
Last fall Bayer’s stock rose more than 6 percent on the Frankfurt stock exchange after it announced plans to divest its remaining plastics group, Bayer MaterialScience, within 18 months. BMS had the lowest cash flow return on investment of Bayer’s three units in 2013, and was the only one with negative cash value added. Bayer stock surged another 18 percent when the company announced plans to list the plastics unit on the German stock market. Bayer will become a company focused on pharmaceuticals, crop chemicals and seeds.
Now comes news that one of DuPont’s major hedge fund investors will launch a proxy battle in an effort to impose its will on the company in an effort to boost financial performance. The New York Times called it “one of the biggest challenges in its two centuries as an industrial powerhouse.”
The investment fund said in a statement: “Trian has been patient, giving management more than a year and a half to prove it could achieve its publicly stated financial goals. Trian believes all stockholders will benefit from the election of Trian’s nominees, who will stimulate robust dialogue and enhanced engagement in the board room.”
And that’s despite the fact that DuPont has been aggressively spinning off slower-growing businesses, like coatings. Trian would like to see the fast-growing agricultural chemicals, nutrition and health businesses standing on their own. Plastics at DuPont include Delrin acetal, Hytrel elastomer, Rynite polyester, Kevlar fiber, Sorona renewably sourced thermoplastic, and its flagship Zytel nylon. Dow caved into pressure recently and added four independent directors to its board. Last month, Ashland completed the sale of its elastomers business to Lion Copolymer. GE gave up on its engineering plastics business in 2007.
Not surprisingly, one of the big issues with the hedge funds is the amount of money spent on R&D. To DuPont, R&D is its lifeblood. After all, DuPont’s Wallace Carothers discovered nylon in the 1930s and created the engineering plastics business. Today, DuPont says that’s it combined focuses on agriculture, life sciences and industries like plastics create an important R&D synergy.
DuPont invested in corn-based plastics that have become a huge hit for fibers in the carpeting industry, creating some $300 million in annual sales. DuPont is now leveraging its capabilities to lead what could be the next revolution in plastics: use of renewable feedstocks to create basic monomers on a cost-competitive basis, with no sacrifice in materials’ properties.
It seems that investment companies want to turn plastics giants into a chemical industry version of what we used to call “shoot-and-ship” molders, companies that just churn out product in an effort to maximize profits. It didn’t work for the molding industry and it won’t work for the plastics industry either.