This article has been written by Manan Sabharwal pursuing the Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.
Merger Control in the United States of America is principally governed by Section 7 of the Clayton Act which prohibits transactions where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” Both the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) have the authority to enforce Section 7 of the Act. Merger control essentially means the practice of prevention and prohibition of such activities which will topple the balance of a fair industry and create undue advantages in favor of a significant player in the market at the expense of other players.
Merger Control is also known as Antitrust and Competition Practice enforced by governmental and non-governmental agencies from around the world. Both Dow Chemical Incorporative and E.I. du Pont de Nemours and Company are significant market shareholders in the U.S.A for farm products like insecticides, pesticides etc. The Dupont and Dow merger was famously termed as a 130 billion dollar merger of equals. The objective behind this article is to analyse the Dow and Dupont Merger to show how innovative strategies were used to avoid merger control provisions and the post-deal integration strategy behind this mammoth deal.
Background of Dow and Dupont
The Dow Chemical Company was founded in 1897 by chemist Herbert H.Dow of Midland city to supplement the Midland Chemical Company (1890) and the Dow Process Company (1895). In the year 1900, Dow Chemical was incorporated, combining all of Dow’s Midland properties. After the year 1920, it turned to the production of phenol and magnesium, initially for use in World War I ammunition. Pre-merger in the last decade, Dow Chemicals employed tens of thousands of people with manufacturing plants in more than 150 countries and was especially famous for adhesives, herbicides, insecticides, and pharmaceutical products but also had its fair share of controversies. You can know all about Dow Chemicals’ history here. In the year 2015, Dow’s Gross Profit stood at 3.2 billion dollars as per the regulatory findings as referenced here.
Dupont Company, in full E.I du Pont de Nemours & Company is an American Company engaged primarily in biotechnology and the manufacture of chemicals and pharmaceuticals. The company was founded by Eleuthera Irene du Pont in Delaware in 1802 to produce black powder and later explosives, which remained the company’s main products until the 20th century. DuPont now makes an array of products like synthetic fibers, pharmaceuticals, agricultural chemicals, etc. You can read more about DuPont here. DuPont’s gross profit in the year 2015 was even higher than Dow’s, at 11 billion dollars, referenced here.
With changing global trends around the world and paradigm shifts in industries, an effective strategy for mammoths like these is to combine forces and enjoy varied market dominations around the world. It’s only natural to face merger control hindrances and competitors taking objections to the deal when enormous market czars like Dow and Dupont intend to combine powers.
Intricate details of the deal and innovative strategy used
Timeline of the Deal –
- December 11, 2015 – Dow and Dupont announced that their board of directors approved a definitive agreement under which the companies will combine in an all-stock merger.
- May 23, 2016 – Dow and Dupont announced their senior leadership appointments, for now, to be known as DowDuPont, following the consummation of the proposed merger of equals.
- July 20, 2016 – Dow and Dupont announced stakeholders of both companies have voted to approve all stockholder proposals necessary to complete the merger of equals transaction.
- March 27, 2017 – Dow and Dupont announced that the European Commission has granted conditional regulatory clearance in Europe for the Company’s proposed merger.
- May 2, 2017 – Dow and Dupont gave a statement that China’s ministry of commerce had granted conditional regulatory approval of their proposed merger.
- May 11, 2017 – Dow and Dupont gave a statement that Brazil’s Administrative Council for Economic Defense has granted conditional regulatory approval of their proposed merger of equals.
- June 15, 2017 – Dow and Dupont announced that they have reached a proposed agreement with the Antitrust Division of the United States Department of Justice that will permit the companies to proceed with their proposed merger.
- June 28, 2017 – Dow and Dupont announce that both respective boards support a comprehensive portfolio review for DowDuPont, which is intended to assess current business facts and leverage the knowledge gained over the past year and a half to capture any material value-enhancing opportunities in preparation for the intended creation of three industry-leading companies.
- August 4, 2017 – Dow and DuPont announced that all required regulatory approvals and clearances have been received and that the merger of equals will close after the market closes on August 31, 2017.
- September 01, 2017 – On this day Dow and Dupont announced the successful merger of equals.
In what was being termed as one of the largest mergers in the history of business, Dow and Dupont in an all-stock merger deal had at the beginning unanimously agreed that the combined company would be called DowDuPont and the parties would subsequently pursue a separation into three independent publicly traded companies through tax-free spin-offs. Now known as DowDuPont and dually headquartered in Midland, Michigan and Wilmington, Delaware the corporation gave details of the proposed merger that will include a global Agricultural company, a global Material Science company, and a Technology and Innovation-driven Speciality products company.
Upon the closing of the transaction, DowDuPont had a combined market capitalization of 130 billion dollars and as per the terms of the transaction, it was made public that Dow shareholders received a fixed exchange ratio of 1.00 share of DowDuPont for each Dow share and DuPont shareholders simultaneously received a fixed exchange ratio of 1.282 shares of DowDuPont for each Dupont share.
The European Commission opened an in-depth probe in 2016 to assess whether the proposed merger was in line with E.U Merger Regulations. The proposed merger was seen as creating the world’s largest integrated crop protection and seed company, especially in an industry that is already highly concentrated. The Commission has the responsibility to assess mergers and acquisitions involving companies with a turnover above the threshold prescribed in Article 1 of Merger Regulation. You can read about the investigation here.
The National Farmers Union in the United States was one of the first organizations to take explicit objection to the deal, stating that farmers would face higher costs, also considering that this merger was to change the demographics of the farming industry globally, among other industries. More details about the controversy can be found here.
DowDuPont before incorporation had to go through its fair bit of trouble, which included a detailed investigation by the European Commission and the Department of Justice(DOJ) and regulatory approval from all major Merger Control and Anti-trust organizations in the world. One of the conditions agreed to by DuPont before E.C was to sell its pesticide business and most of its agricultural R&D generating 1.4 billion dollars in sales in 2016 to FMC Corporation, another chemical manufacturing company. In return, DuPont was to receive 1.6 billion in cash and FMC’s health and nutrition business. This was seen as a bold strategic move to satisfy the antitrust regulators of the European Union and to eventually receive a green light to the gargantuan deal.
The relevance of innovation was discussed at length by the E.C which observed that the merger would not only significantly impede competition in the pesticides and petrochemical industries at a global level but would also reduce future innovation in the global pesticide industry. It was noted that the development of effective and environment-friendly pesticides required large-scale investments and continuous R&D globally. The DowDupont merger would further consolidate market power in a highly concentrated industry with significant market barriers and would substantially reduce the parties’ incentives to innovate in the pesticide sector. More details of which can be found here.
In addition to the strategic move and to further post-merger integration, future plans to split the behemoth organization into 3 different companies as agreed before, McKinsey was hired as an independent consulting firm which led a 4-month review and gave its detailed advice to the chemical company.
Indian law context
At the outset, it’s important to mention that a merger between Dow and Dupont as mentioned above, will be synonymous with the term Horizontal Merger in the Indian context. The meaning of which is ‘merger between companies operating in the same industry or producing similar products.’ The main objectives of horizontal mergers are to benefit from economies of scale, reduce competition and achieve greater market share. A horizontal merger is common in industries with fewer firms and is intended to dissolve high competition among fewer players. The consequent market power surge may undoubtedly invite action under Antitrust regulations, which is principally governed by the Competition Act 2002 and enforced by the Competition Commission of India (CCI).
Some examples of Horizontal Mergers are: in the banking industry in the Indian acquisition of Times Bank by HDFC Bank in February 2000, Bank of Madura by ICICI Bank in 2001. In the consumer electronics segment acquisition of Electrolux’s India operations by Videocon International Ltd. in 2013. And in the BPO sector acquisition of Daksh by IBM in 2004.
A point of concern that was noted by the CCI in the DowDupont merger before granting a clean chit to them was the innovation harm emanating from the merger that would adversely affect the Indian crop protection market and would jeopardize the rate at which new and better pesticides come to the Indian market. The CCI while cooperating with other jurisdictions, accepted the E.C directive for a global divestiture of the DuPont deal with FMC to address innovation concerns.
Industries and Business Environments are becoming highly dynamic and volatile, burdened by uncertainty, and making successful post-deal integration makes it increasingly difficult to trump such situations. Innovation emerges as a make-or-break deal factor ensuring continuous growth and contributing towards consumer welfare and mankind in general. The DowDuPont merger being an accord of titanous nature, could either be seen as a consented step towards world market domination or as a corporation being a custodian for the welfare of farming based industries contributing to the enrichment of environment and public benefit – the perception wholly depends on the point of view of the reader. Either way, the DowDuPont merger acts as a lesson and case study for attorneys, law students, and lawyers in general on how to circumvent the provisions of Merger Control and push towards a successful post-deal integration while simultaneously satisfying the majority of Antitrust and Competition agencies around the world all of it credited to innovation.
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