With Trian Capital’s letter to DuPont yesterday we formally open a debate that has been expected for some time – whether DuPont can create more shareholder value in pieces than it can as a whole.
At the 64,000 foot level there is empirical evidence that the market is penalizing business complexity more today than in the past – see chart – and this is a subject that we have written about in the past. This alone is a reason for DuPont to listen to the arguments that Trian is making.
Trian is focused on costs as much as alignment and simplicity and the driver is the a number of “low cost” businesses that have outperformed, such as LyondellBasell, which has a much lower cost structure than for example Dow, while in many of the same geographies and businesses. See our research for more on this subject.
DuPont is separating its performance chemicals business – and the plan is much evolved at this point, but Trian’s view is that this is not enough. Their position is that only DuPont’s agriculture and nutrition businesses are truly specialty and require a significant R&D focus, with the rest better run at much lower costs and focused on cash generation. DuPont has repeatedly maintained that there are significant R&D synergies and opportunities that cross the boundaries between Ag, Nutrition and Materials, driven by bioscience and that is why the businesses should stay together.
The battle lines are now drawn and the question is the one posed in the title. DuPont needs to provide investors with more concrete evidence that what is so far only an R&D assertion, has some real legs – but now the clock is running. Working against DuPont are a couple of historic realities:
- The chemical industry has a history of overestimating the value of businesses as they fall to generic competition, and generally makes divestments a few years later than would have been optimal. DuPont has done a better job of divestment than most.
- Company managements often really struggle with the idea of shrinking a company – overvaluing the notion of size.
- The chemical industry does not generate a return on R&D spending in aggregate and while DuPont claims that it has developed a way to measure R&D returns it has not shared this with investors, perhaps because the results are not what they want. DuPont has shown better R&D returns than most of its peers, however.
If DuPont is going to win this battle/debate, they will need to do a couple of things in our view:
- Accelerate the Performance Chemicals spin
- Start showing more R&D productivity data
- Look for a large Ag deal – we have suggested Dow Chemicals
We would continue to own DuPont here as we think there is substantial upside either from what the company achieves internally or what can be driven through a restructure.