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It’s Official: Meet DowDuPont

This week’s rumors are now reality. DuPont and the Dow Chemical Company announced a merger this morning. The new firm with a combined market capitalization of approximately $130 billion will be known as DowDuPont. This agreement entails a spinoff into three independent publicly traded companies. The firms will be:

* An agricultural company that features products from both companies, such as the herbicide SureStart from Dow and the fungicide Aproach from DuPont. Seed companies include DuPont’s Pioneer seed group and Dow’s Mycogen seed brand. 

* A material science company.

* A specialty products company. 

Dow and DuPont officials say each business will have:
* Their own focus.

* An appropriate capital structure.

* A distinct investment thesis.

* Scale advantages.

* Focused investments in innovation to better deliver superior solutions and choices for customers.

In agriculture, that’s you. 

“I think this transaction makes a lot of sense,” says Mark Gulley, principal of New York-based chemicals consultancy Gulley & Associates LLC in New York. 

That’s particularly true in Dow’s case, as it’s been the smallest of the Big 6 (chemical/trait/seed companies), says Gulley. Other Big 6 members are BASF, Bayer CropScience, Monsanto, and Syngenta. 

“Dow has always thought to be the most disadvantaged in terms of size,” he says. 

There may be some divestiture of seed/trait/chemicals, says Gulley. Much depends on how much overlap there is in a triple matrix of:

* Product active ingredients.

* Pests at which these products are aimed.

* Geography. 

The merger agreement is just the first step in a process that will take 18 to 24 months, according to Dow and DuPont officials. 

What Does This Mean For Farmers?
When business cycles start bottoming out, as is the case in crop production right now, it gives firms incentives to seek efficiencies through steps like mergers, Gulley says. More are likely to follow. 

Gulley notes that this merger was driven by different factors than was Monsanto’s pursuit of Syngenta earlier this year. 

“Monsanto began to pursue Syngenta a long time ago, independent of the current downdraft in the ag economy and low crop prices,” Gulley says. 

On the surface, it may seem like just one less competitor, and one less firm from which farmers may buy seed and chemicals. 

However, competition still exists, says Gulley. 

“One executive once told me, “people view this (ag seed-chemical) market as an oligopoly (a market structure in which a few firms dominate). If that’s the case, why are we beating each other’s brains out (for business)?’” Gulley recalls. 

With high gross margins, Gulley notes there are substantial financial incentives for these firms to compete for farmers’ business. Steps like mergers also afford companies the R and D (research and development) they could not otherwise do as separate entities, he adds.

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