Blogs

With industrial conglomerate DowDuPont ultimately finalizing its split – is it a further indication for the end of the conglomerate era?


  • Overview of the slow down and split of conglomerates
  • Details of the split for DowDuPont
  • Future outlook on conglomerates

 

The business model that a single company can manage diverse businesses well in the form of a conglomerate seems to have taken a back seat for some of history’s most successful industrial conglomerate giants. It was back in the 1980s and 1990s that massive conglomerates were all rage, and companies went on for aggressive mergers and acquisitions and also underwent integration in the value chain to handle a wide range of customer needs. But today, conglomerates around the world appear to have given way to pure players, which have become more dominant in markets where they operate.

In recent years, conglomerates across the world have seen a slowdown in their performances (much unlike their hay days) and thereby, forced them to split and take new approaches in order to sustain. Few mega industrial conglomerates that have split to become more focused companies include; United Technologies, which split into different companies and includes the aviation business, Carrier and Otis. Even Danaher (where United Technologies has a stake) decided to split further to become more focused. General Electric split into GS Healthcare, GE Transportation and even Baker Hughes, a GE company is going for a more synthesized operation by selling off chunks of its business. Honeywell International also spun into two companies; Garrett Motion and Resideo Technologies. Hence, from the trends that have been observed lately; conglomerates will be forced to reinvent in order to survive.

One of the largest mergers in the past decade is facing a similar fate. DowDuPont since the merger between Dow Chemical and El du Pont de Nemours (2014) has been facing some tough times and is not performing on expected lines. Numbers will give more perspective to the performance as the two companies have eliminated 18,000 jobs since they came under the hedge-fund managers in 2014. They have closed, sold or spun off about 82 factories since the merger, leaving the company with about 441 factories in 2018. Research spending, which is crucial for such companies to keep abreast with the latest technology and offerings has been down by more than 40 percent at about $2.1 billion (2018). Even the capital expenditure fell by one-third to $3.8 billion. Additionally, since 2014 both the companies have been buying back their shares to increase stock prices while issuing as many new shares, including insider compensation, spending an overall of more than $3 billion. Both firms have lost value of around $40 billion since the merger instead of gaining more valuation as predicted earlier.

DowDuPont, one of the largest industrial conglomerates (sales of about $86 billion [2018] makes it larger than any other company in its line of business) was formed with the combination of Dow Chemical and El du Pont de Nemours in a $130 billion merger. Further, from the very beginning, the plan was to break the newly formed company into three business entities. The newly formed company was viewed as a way to complement its operations in agriculture, materials and other speciality products thereby, increasing its scale and the merger was meant to take advantage of the synergies. The benefits were then expected to pay off as the company split into three separate entity as was planned. But the benefits that were viewed never materialized and the company saw its share prices nearly unchanged ever since the company announced the plan for a strategic split about four years ago, right when it merged. The company has now finally split its long intention of three entities into three different companies; Dow Inc., which is already trading as on April 2019 and is dedicated to commodity chemical production; DuPont its speciality chemical producer; and Corteva, which is dedicated to agricultural chemicals. Currently, Dow Inc. is worth $49.33 per share with a market cap of $36.9 billion, DowDuPont is trading at $74.18 per share with a market cap of $55.5 billion and Corteva is trading at $28.8 per share with a market cap of $21.6 billion (figures as of 3rd July 2019).

Though all the three lines of businesses have been streamlined and will be independently managed going forward, it might take years before the investors will see a growth in their valuations.

At present, as a business model, conglomerates and generalists are viewed as somewhat difficult to manage and since company-wide decisions and re-inventions will have to be very swift in the current market scenario, these are not the most ideal structure for an organisation. Evolving economies also introduces new challenges and only the most sustainable players will flourish. Thereby, it becomes more crucial for conglomerates to trim down their portfolio to a smaller set of leading businesses. But there are certain exceptions and some conglomerates have found a way around and are sustained by incorporating new and improved capabilities along with the advancement of technology. These conglomerates have actively re-shaped their business portfolio, evolved and taken up the challenges and fine-tuned their operations by incorporating necessary changes and proved otherwise. Technically, conglomerates are not completely off the market. They still very much exist such as the Berkshire Hathaway, Reliance Industries and the Japan Post Holdings, which are some of the largest companies in the world by consolidated revenues and are still very successful. It is just that there is a new breed of conglomerates, which are technology sector focused and have taken the world by a storm. The notable names include the Alphabet, Apple, Amazon, Tencent, Baidu and Facebook. These ‘new conglomerates’ have a different drive as compared to the traditional conglomerates. It is well agreed that these companies also have a very diverse portfolio ranging from healthcare, consumer goods, autonomous driving to both augmented and virtual reality and gaming. But it is also worth noting that the core fundamental driver for all these companies is digital technology and the use of data analytics, and they have been capitalising on these drivers very successfully.

Your Rating

Tire manufacturing industry, analysing the cost and margin trends

The global market for tire manufacturing stands at $180 billion. Michelin anticipates the long-term demand to rise at the rate of 5 to 10% a year in developing markets and 1 to 2% a year in mature...

Failure of Amazon in China, an analysis

E-commerce market in China Online consumer product retailers in China Performance of Amazon in China   Amazon is a global e-commerce player selling a wide...

An analysis of Malaysian rubber glove industry

How big is the international rubber gloves market? Reasons behind the healthy and steady growth Malaysia’s role in the industry Why are companies struggling for stable...

Rapidly growing Indian online food delivery industry and its unrealised profits

Evolution of online food delivery industry in India Geographical penetration and scope for expansion Key players and their zeal to balance revenue and costs   Online...

Can lithium-ion anode demand for needle coke reduce availability for electrode players?

What is needle coke? Uses of needle coke Lithium-ion battery manufacturers demand needle coke   Needle coke? Needle coke is a specialised form of petroleum coke...

Is the radio broadcasting industry in the U.S. dying? An analysis

Radio, the most powerful medium of reach in the U.S. Why the industry is moving at a slow pace? Radio’s health is still sound, will it continue in the long-term?   ...

Sri Lankan economic and political crisis

Sri Lanka’s latest political crisis, who governs the nation? Poor economic indicators adding to the nation’s woes   Sri Lanka is currently embroiled in a political crisis,...

Carbon black industry, strong potential for supernormal profitability?

What is carbon black? Its uses Impact of the environmental curbs in China   What is carbon black? Carbon black is a fine carbon powder and it is a disorderly...

Blockchain, an emerging concept, a disruptive technology (Part 1)

What is blockchain? How is blockchain revolutionary? Cryptocurrency, the new money ICOs, the new way of raising money Summary Blockchain is a software architecture...

Housing finance market in India. Is affordable housing driving the growth?

Overview of the housing finance sector in India Key players dominating the segment and their dynamics Factors driving aggressive demand for housing   The housing...

Rice industry outlook 2018

Major rice producers and consumers Global rice trade Factors dominating the trade   Rice is the 3 rd largest produced agricultural commodity in the world, after...

Indian wood panel industry, growth drivers and present trends

Current market scenario in the Indian plywood industry Growth in the housing sector and rapid urbanisation to provide the boost GST rationalization to reduce price difference...

Rise of Ant Financial, will the success story continue?

What is Ant Financial? Journey to become king of unicorn Will regulatory curbs hinder its success journey?    Ant Financial, an affiliate and integral part...

Baidu’s Apollo, the underdog of autonomous driving platform

Overview of the autonomous vehicle sector in the global automobile industry Search giant Baidu’s entry into the autonomous driving space Baidu’s approach in becoming a front-runner...

Malaysian rubber glove industry, an update

Rising global demand for gloves Impact of USP 800’s implementation and the US-China trade war on Malaysia’s rubber gloves industry Key challenges for the Malaysian rubber...

Unnoticed growth of the media and entertainment industry in India

Overall industry brief Growth of the M&E industry and its segments Major supporting elements of this growth   Media and Entertainment (M&E) is a very wide industry...

Battle for the textile and apparel industry in Southeast Asia

The reasons for China’s decreasing presence in the industry Initiatives by the governments in Southeast Asia to boost the textile trade Vietnam and Bangladesh’s quest to conquer...

OYO Rooms, an Indian start-up to enter Japan

Growth story of OYO Rooms in India Business model of OYO Rooms Analysis of strategy to enter Japan   OYO Rooms, the Indian start-up has decided to venture in Japan...

What’s in store for India’s first commercial REIT as it hit the market with Blackstone teaming up with Embassy Group

Overview of the partnership and assets of Embassy Office Parks Comparison of the Indian commercial office market space with other developed markets Road ahead for India’s...

German economy, will the slide continue?

Weakening global industrial demand weighs on Germany’s manufacturing sector Inflation and business climate take a hit with broader signs continuing to be subdued Future...