Cost Synergies at DowDuPont: Are They Real?

As I’ve commented before, I have trouble understanding the DowDuPont merger. One problem area  is the promised $660 million in procurement savings.

In the first place, let’s be clear: the Dow and DuPont merger was totally driven by dissident shareholders who wanted to see improved financial performance from the iconic companies. Management fought these efforts. DuPont CEO Ellen Kullman lost her battle with activist investor Nelson Peltz and retired two years ago. A hedge fund led by Daniel Loeb pushed for a breakup of Dow.

Somehow the answer was an 800-pound gorilla consisting of Dow and Dupont with plans to break them into three companies. Activist funds were not happy with the plan and pushed for further breakup, with the result of a huge chunk of assets being reassigned two weeks after the creation of DowDupont Aug. 31.

DuPont’s renowned performance plastics business (DuPont after all created the nylon business) was based in Delaware up until Aug. 31, and then was part of the Michigan plastics group for two weeks, and then it was back in Delaware as part of a hodgepodge of Tyco-like specialty businesses after that. DuPont’s global-leading industrial biomaterials business also seemed lost in the shuffle.

One of the rationales for the creation of DowDupont was the opportunity to create synergies, both market and cost.

Cost synergies of $3 billion were promised

“We remain committed to our target of $3 billion, no change to that expectation,” CEO Ed Breen recently said on a conference call. “Our previously stated timeline still holds; we expect to reach a 70 percent run rate by the end of year one and 100 percent run rate by the end of year two.”  The savings’ breakout by division is $1.2 billion for material sciences, $800 million for specialty products, and $1 billion for Ag.

Almost one-third comes in headcount reduction, and based on the cuts I saw, they could have taken place without creating DowDupont. Some savings came from facility closures, also much of which could have happened regardless of a merger. 

A big chunk of savings ($660 million) is also projected to come from DowDupont’s $35 billion in combined procurement spend, which I also find difficult to understand. There are often opportunities to save when two companies merge by building large contracts on commonly purchased items. It’s a ton of work because most companies don’t manage procurement optimally. What you usually find are a mish mash of old contracts, old systems, mismatched engineering specifications, and a lot of  fiefdoms. Another consideration is that the way procurement departments account for savings is often  questionable. Even when verified by a finance official, I’m often left scratching my head.

More than 50 procurement teams are working globally at DowDupont to study contracts and identify opportunities for savings. That job usually takes a while, and is imperfect because of poor foundations of building common, easily groupable specifications.

And part of Breen’s promise to shareholders is that DowDupont will spin into three new companies within 18 to 24 months. How is there an advantage of combining the spends if there will be three different companies?

And meanwhile there are all the costs of integrating and reintegrating the components in the three divisions and companies. The IT work, the legal work…time and money. One of my favorite medical systems in Boston has been working on this for five years, and that’s without a merger.

Potential procurement savings have been used as a rationale to combine companies for many years. Big numbers are always thrown out in initial press releases. But I have never seen any follow-up on the extent any of these savings were ever achieved. There are some great pros, like DuPont CPO and author Shelley Stewart, working on the DowDuPont project, but supply management execs are often handed mission impossible

I sought input from an old friend and the person I respect the most in procurement research: Pierre Mitchell, Chief Research Officer and Managing Director at Azul Partners.

Pierre, who also provides commentary on the excellent web site told me in an email:

“I think these cost synergies are a bit meaningless.  Sure, many corporate projects will kick off to reduce costs (e.g., go back to suppliers for another pound of flesh), and mergers can indeed drive savings. However, the firms are so massive, there’s not too much ‘mega synergy’ left, and what’s left out of the story are the increased costs when the firms split.  I’ve dealt with many firms who’ve been spun out that have to rebuild their backoffices from scratch.  Sometimes that’s good and you can re-invent yourself a bit with clean sheet processes and systems (and shed your old SAP R/3 system or whatever).  I suspect the crop sciences folks will stand themselves up just fine here.  This deal is not about cost savings though, it’s about corporate engineering to peel off business to make them more focused (not necessarily a bad thing) and command a higher multiple – and “unlock” them from their larger legacy businesses – whether large hydrocarbon based supply chain or an amalgam of businesses like in the specialty chemicals business.”

Good insights.

About Doug Smock

Former Chief Editor at Plastics World and Senior Technical Editor Design News

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