DuPont’s conglomerate structure blamed for underperformance

Trian Fund Management believes the reason for DuPont’s persistent underperformance is that its “conglomerate structure is destroying value.” In this article, we will go through DuPont’s main businesses and its restructuring initiatives.

A brief overview of segments and products

Wilmington, Delaware-based DuPont consists of 13 businesses which are aggregated into eight reportable segments. Its reportable segments are agriculture, electronics & communications, industrial biosciences, nutrition & health, performance chemicals, performance materials, safety & protection, and pharmaceuticals. DuPont said these segments are based on similar economic characteristics, the nature of the products and production processes, end-use markets, channels of distribution, and regulatory environment.

DuPont’s major segments and products include the following:

• Agriculture (corn hybrids and soybean varieties, herbicides, fungicides, and insecticides)
• Electronics & communications (photopolymers and electronic materials)
• Industrial biosciences (enzymes and bio-based materials)
• Nutrition & health (cultures, emulsifiers, texturants, natural sweeteners, and soy-based food ingredients)
• Performance chemicals (fluorochemicals, fluoropolymers, specialty and industrial chemicals, and white pigments)
• Performance materials (engineering polymers, packaging and industrial polymers, films, and elastomers)
• Safety & protection (nonwovens, aramids, and solid surfaces)
• Pharmaceuticals (represents the company’s interest in the collaboration relating to Cozaar/Hyzaar antihypertensive drugs, which is reported as other income)

Restructuring initiatives focused on streamlining portfolio

“Continuing macroeconomic uncertainty and resulting slowing demand in certain sectors” prompted the company to unveil a restructuring plan in 2012. Under CEO Ellen Kullman, the 212-year-old company said it is looking to “further sharpen its focus on high-growth and high-margin markets” in agriculture and nutrition, advanced materials, and industrial biotechnology.

In 2013, chemical companies, such as DuPont, Dow (DOW), Ashland Inc (ASH), LANXESS, Chemtura Corp (CHMT), and Rockwood Holdings, Inc. (ROC), were involved in portfolio restructuring. Some of this restructuring was pushed by activist investors.

A merger and acquisitions (or M&A) report from ATKearney noted that “large chemical players in the U.S. continue to divest non-core or low-performing (commodity) businesses to focus on higher-margin, less-cyclical specialty chemicals businesses with attractive growth opportunities.” ATKearney said M&A activity in 2014 is expected to rise driven by the “high liquidity of chemicals companies, resurgence of the U.S. chemicals industry because of low-cost feedstock, regional expansion plans of Asian companies pursuing growth through acquisitions in Western economies, and Western companies seeking access to developing markets.”

DuPont’s M&A activity driven by science and access to new markets

Kullman’s annual letter to DuPont shareholders for 2013 said that the company made acquisitions that added “scientific expertise and access to new markets,” including Danisco and Pannar Seed. Kullman said DuPont’s “divestitures have focused on where we could not use our science to create new growth trajectories, including Performance Coatings, Liquid Packaging Systems, and Zenite liquid crystal polymer resins.” She said the same logic was applied to the divestiture of glass laminating solutions/vinyls, and the decision last year to spin off the performance chemicals business.

Meanwhile, activist fund Trian believes that the company will remain “inefficient” even if the performance chemicals unit is spun off. The fund noted in a white paper that “DuPont’s structure – extremely high-cost corporate overhead perched above a portfolio of disparate businesses – is value destructive.”

Trian noted that one of its initiatives is to split DuPont into growth businesses and cyclical businesses. This breakup will be in addition to the announced separation of performance chemicals, which is expected to be completed in mid-2015. More details on this follow in the next article.