Andrew N. Liveris, the head of Dow Chemical, may find it harder to keep his company together now that a smaller rival is planning to break up. Mr. Liveris has resisted the campaign by the activist hedge fund manager Daniel S. Loeb to split Dow, a $60 billion company, into separate petro- and specialty chemicals groups.
The decision by a competitor, the FMC Corporation, to hive off its agriculture and pharmaceutical businesses from stodgier commodity minerals should create a more valuable company. The voluntary split makes it harder for Mr. Liveris to resist activist pressure to do the same.
There are decent parallels between the two companies. With a market capitalization of $10 billion, FMC is dwarfed by Dow, but they both have specialty chemical businesses. The better operating margin and revenue growth here is being overshadowed by a decent but weaker performance in minerals at FMC and petrochemicals at Dow.
The two companies also trade below their best-performing peers â€" Dow at 16 times consensus earnings estimates for this year and FMC, before today’s announcement, at around 17 times. Monsanto, by contrast, which deals purely with agriculture, has a multiple of 20 times expected earnings.
Applying that performance to FMC’s newly independent agriculture business, while keeping minerals on the current multiple, would yield some 18 percent in extra value to shareholders. It’s not the biggest jump, but the two separate companies could prosper from being more focused on their respective products.
Granted, FMC may be a cleaner breakup story. A crucial plank in Dow’s defense is that the company benefits from an integrated supply chain, with commodity petrochemicals often serving as building blocks for higher-margin specialty products. It’s harder to see such synergies at FMC. Its main minerals â€" lithium, used in batteries, and soda ash, used in glass manufacturing â€" have little to do with pesticides and drug capsule coatings.
Still, it’s tougher for Dow to argue against a breakup when a rival with similar growth businesses is doing the same. Mr. Liveris may manage to keep Mr. Loeb at bay for now. FMC’s stock market performance after its split, though, could make a potentially uncomfortable yardstick for measuring the Dow boss’s judgment.
Kevin Allison is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
