After Dow-DuPont merger, more pain or gain?

Months ago, when news of the Dow-DuPont merger broke, retirees and shareholders feared the worst.

The company's 140,000 pensioners worried their income and healthcare would be slashed. Shareholders expected the stock price to plummet.

Fast forward 7 months. As shareholders vote whether to approve the merger Wednesday, uncertainty hangs over the state. Though the stock price – at about $67 – remains where it had been before the merger and retirees have not received notice their pensions will change, there is little known about what will unfold in the coming months.

Two Delaware-based companies will emerge, including the nation's largest agriculture company. But any optimism about new jobs is tempered from a promise from Dow and DuPont to make more than $3 billion in cuts after the merger is finalized. That will come after thousands have already been let go since the deal was announced.

"You haven't had any cuts from the Dow/DuPont merger yet," said John Roberts, an analyst with UBS Global Securities in New York. "The only cuts you've seen so far are the standalone Dow cuts and the standalone DuPont cuts. The $3 billion of post-merger savings begins after the mergers close."

But Roberts is confident both companies will retain enough critical mass to be successful after the belt tightening.

"Nothing is going to zero," he said.

The agriculture business, expected to generate $16 billion in annual revenue, will have the largest world market share among the big six agriculture companies, big enough that it would maintain that dominance even if its rivals join forces.

Bayer has launched an effort to buy Monsanto Co., and ChemChina is paying $43 billion for Swiss pesticide and seed giant, Syngenta.

Even if the big six becomes the big three, the Dow-DuPont agriculture company would have distinct advantages, according to Mark Gulley, an industry analyst and founder of Gulley & Associates.

"What I like about this deal is it is a marriage of DuPont's marketing prowess with Dow's investment in research and development," he said.

DuPont's hybrid seed unit Pioneer has the world's largest collection of germplasm, a genetic material that can be used to create new hybrid crops that withstand droughts, resist disease and have stronger roots. The germplasm focus gives the company a product line different from Monsanto's market-leading trait technology.

"When it comes to traits, for the foreseeable future, you are not going to beat Monsanto," Gulley said. "But investing in research and development to come up with best germplasms will reduce the advantages Monsanto has."

DuPont has confirmed the agriculture company will include the DuPont name, ensuring the DuPont legacy will continue in some fashion.

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A $12 billion specialty products company that will include DuPont's electronics, nutrition and health divisions will also be headquartered in Delaware. When combined with the agriculture company's $16 billion in revenue, the two companies could be more profitable than a standalone DuPont, which reported roughly $25 billion in revenue last year.

The third spinoff, focused on material sciences, will include DuPont's performance materials division but be based in Dow's hometown of Midland, Michigan.

Retirees worried

DuPont retirees were apprehensive about the deal, knowing it would be the demise of a 200-year company to which some gave the best years of their lives.

Dick Cornelia was saddened by the news. Corneila, who spent 20 years at DuPont before retiring in 1997, sold his stock in 2000 when it peaked at $72 a share. He said he would vote against the merger if he were still a stock owner.

"I have too much loyalty to the employees, so I would vote against it," he said. "A lot of the employees are going to suffer from this and they've already had huge job cuts."

In the weeks after the merger, DuPont eliminated more than 1,700 jobs in Delaware, accounting for nearly 28 percent of its state workforce.

Others say the merger prevented a takeover or worse outcome for the Delaware institution.

"Initially, I had a very negative response to the merger," said Ed Donnelly, president of the DuPont Retired Managers Society. "But the more research I do on this, I understand why this looks good for the future."

Donnelly spent 37 years at DuPont before retiring as group vice president of the company's coatings and color division. A DuPont shareholder, Donnelly's vote in favor the merger has already been cast.

"I think DuPont needed this extra boost from Dow to become more successful," he said. "The merger will not just help agriculture, it will help specialty products and material sciences."

Better outcome

As Wednesday's shareholder vote nears, it has become clear to most retirees, shareholders and analysts that had DuPont not agreed to a merger, the company, its stock value and pensions would have been decimated.

"The best thing DuPont could have done to preserve itself was to merge with another company," said Jack Saladini, a 30-year DuPont veteran who retired in 2006.

Saladini, who worked as a global product development manager in DuPont's Agriculture division, owns stock in his former company. He has already submitted a proxy in favor of the merger vote, which will begin at 10 a.m. at DuPont's Chestnut Run campus. A separate meeting of Dow shareholders will take place simultaneously in Midland.

Saladini said he understands DuPont retirees' concerns, but he is confident the deal won't reduce stock value or his pension. Most of his fellow retirees he's spoken with are also supportive, he said.

"There are some people who are going to be upset, but it's survival of the fittest in agriculture business," he said. "If you are not prepared to be challenged you are going to be gone."

Parry Norling, a former health and safety director at DuPont, retired in 1998 after 33 years with the company. He described himself as originally "depressed and worried" over the impending merger but softened his stance after learning it would yield two Delaware-based companies.

In May, Norling attended the DuPont Retired Managers Society luncheon at the Wilmington Country Club. CEO Ed Breen was the event's keynote speaker and strongly advocated for the deal, according to those who heard his remarks. Norling, a shareholder, said the speech won him over.

Donnelly and Saladini were among the roughly 160 retirees at the event.

"The CEO was very straightforward and convinced me this is the right thing to do," Donnelly said.

Wall Street appears to agree. The proposed merger has moved forward with very little noise from either company's institutional investors, nor has any shareholder filed a lawsuit opposing the deal.

It is somewhat surprising that no stockholder for either Dow or DuPont has pursued litigation alleging an unfair transaction considering nearly every merger these days is challenged in court. According to a 2015 study by Boston-based Cornerstone Research, 93 percent of deals valued at more than $100 million sparked litigation. The study also concluded that a single merger transaction faces an average of five separate shareholder lawsuits.

"If there had been any real objection to how this merger came about, you would have seen or heard about it by now and I sure haven't," said Lawrence A. Hamermesh, a professor of corporate law at Widener University Delaware Law School.

Hammermesh said there are two possible reasons few have objected. First, both companies' major investors believe the deal is good for their stock values. Second, the transaction was structured as a stock swap instead of a cash deal. Typically, lawsuits challenging stock deals rarely gain any traction, according to Hamermesh.

Matt Arnold, an analyst with Edward Jones in St. Louis, said the lack of serious opposition to the merger is because of Wall Street's belief the consolidation will benefit the companies and stockholders.

"It was the best option," Arnold said. "You have two businesses where there is a ton of complimentary pairings. In hindsight, the deal made a ton of sense and it is hard to imagine what could have been a better option."

Ellen Kullman, the former DuPont CEO, initiated talks with Andrew Liveris, the Dow CEO, about a possible merger as far back as November 2014, she confirmed in an interview with The News Journal. The talks continued between the leaders through September 2015, just before she was replaced by Breen. Once Breen took over, the merger talks intensified, according to a regulatory filing.

"This deal wasn't to the exclusion of other things," said UBS's Roberts. "They chose this after looking at a range of options. Everyone thinks the combination is stronger than the companies individually."

Pension worries

Despite overwhelming shareholder support others, such as Cornelia, oppose the deal.

Craig Hillermann, a DuPont retiree, is turned off by what he characterized as a lack of communication from DuPont regarding its post-merger plans for the retirees' health and pension accounts. A DuPont shareholder, Hillerman plans to vote against the merger and will attend Wednesday's meeting,

"As a retiree, there should be more assurances given to us," he said.

In May, DuPont filed documents with the Securities and Exchange Commission assuring retirees their accrued pension benefits will not change because of the merger.

"The pension and retirement plan will continue to meet its obligations to existing pensioners and other plan participants through assets held in a secure trust at State Street Bank," the SEC filing disclosed. "The trust is — and will remain — a separate legal entity from DuPont and will not be affected by the merger."

Donnelly and Saladini said Breen made similar guarantees when he spoke to retirees.

"Retirees are worried about one thing — their pension," Saladini said. "The commitment Breen gave us was very pleasing. We are not going to be thrown to the wolves, which for people in that room was very important to hear."

Donnelly said Breen's comments and the SEC filing have eased his worries about his pension.

"The SEC filing pretty emphatically said our pension is safe," he said. "It's really quieted down any talk among retirees."

Under federal law, pension assets must be kept separate from an employer's business assets and held in a separate trust. That is to protect workers' pensions in the event of a bankruptcy.

Yet, questions remain about the pension plan. Dow has 48,000 pensioners and it picked up another 52,000 when it acquired Union Carbide Corp. in 2001. Combined, Dow and DuPont will have about $50 billion in retirement assets. However, it is unclear if either company has enough funds invested in their pensions to cover the costs. Dow, according to its 2015 annual report, has $18.6 billion in assets to cover its $25.6 billion pension obligation. Meanwhile, DuPont has $17.4 billion in investments to pay for a $26 billion pension fund.

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Rachelle Schikorra, spokeswoman for Dow, said pension funding rules require companies to maintain a certain level of assets compared to the plan's liabilities. She said Dow is complying with these requirements and committed to meeting the plan's funding requirements.

"Dow has been funding more than the minimum requirement over the last several years," she said in an e-mail.

DuPont spokesman Dan Turner referred to the company's SEC filing where it vowed the keep the pension plan well-funded.

Neither company has disclosed where the pension liability will go once the consolidated entity is split into three companies.

"Will the successor companies be able to fund the pension?" Hillermann asked. "The likelihood is yes, but it seems to me there should be more communication from DuPont explaining this."

DuPont has been less forthcoming about retirees' health benefits. In the same regulatory filing guaranteeing pensions will be protected, the company could only tell retirees that details on their 2017 health benefits will be communicated in the fall of this year, several months after the shareholder vote.

The Employee Retirement Income Security Act, or ERISA, which protects pensions does not offer the same benefits to retiree health plans. Under ERISA, a 1974 federal law, retirees can only challenge a cut in health benefits under breach of contract claims. Health plan protections were further eroded in February when the U.S. Supreme Court ruled workers without a contractual guarantee of lifetime health benefits cannot claim such benefits were implied or inferred at the time of employment.

"DuPont has to do more to interact with retirees and assure them of what is being done to preserve the pension and medical benefits they've earned," Hillermann said.

Others say retiree health care benefits are at just as much of a risk if the merger doesn't happen.

"Medical benefits are subject to a competitive environment," Donnelly said. "It makes no difference if the merger happens. DuPont can cut it or DowDuPont can cut it."

Contact Jeff Mordock at (302) 324-2786, on Twitter @JeffMordockTNJ or jmordock@delawareonline.com.