In December of 2015, Dow Chemical and DuPont announced their intent to merge into a single chemical conglomerate. Nearly two years later, the $60-billion merger was finally completed as the New York Stock Exchange closed on the final day of August. When the market opened on the first of September, the new holding company, DowDuPont, emerged. According to DowDuPont, the deal is expected to create synergies across the new business, boosting revenue by roughly $1 billion and slashing an estimated $3 billion in annual costs. As a result, the company will be able to achieve larger economies of scale and greater purchasing power from upstream suppliers, which will give DowDupont a competitive advantage in its respective markets. Unfortunately, these trends will have a negative impact on buyers, as suppressed competition puts upward pressure on prices.
Behind the Merger
From the onset, the merger was referred to as a “merger of equals” between the two companies; the new board of directors contains 16 members, equally split between former members of the Dow Chemical board and the DuPont board. Now, the company will organize itself internally over the next 18 months into three independent divisions: Agricultural, Materials Science and Specialty Products.
The success of the lengthy, highly complex merger hinged on approval from government regulators around the world, including several throughout Europe and the US Department of Justice’s Antitrust Division, which only signed off on the deal in June of 2017. The primary concern for regulators was whether the new company would possess an unfair advantage in various markets due to the new company’s size. To alleviate concerns over monopolies and limited competition, DowDuPont has agreed to divest certain product line assets, which are still being finalized.
Impact on Markets
ProcurementIQ anticipates the size of DowDuPont to exceed that of BASF SE, which is currently the largest chemical company in the world. Despite selling off assets, which are likely to include some plastic and crop protection product lines, the new company is expected to be the market leader in several markets that the two companies formerly competed in. As a result, DowDuPont will gain significant pricing power, causing buyers in a variety of downstream industries to lose negotiation leverage, including agribusiness buyers, as well as manufacturers of cars, plastic products and many consumer products. Downstream buyers will see the level of market share concentration increase as they purchase products and services that DowDuPont provides.
For example, the pesticides market is already highly concentrated, with the top four companies collectively holding an estimated 60% of market revenue. ProcurementIQ expects the market to become even more concentrated as DowDuPont surpasses other major players in terms of market share, reducing buyers’ ability to negotiate. Many plastic markets will also be affected by the merger. For instance, ProcurementIQ anticipates market share concentration to increase in the plasticizers and synthetic resins markets. Market share concentration in these markets is already high and medium, respectively. Therefore, buyers should expect their negotiation leverage to decline as the top suppliers in the market gain pricing power.