Mergers and Acquisition 1

Mergers and Acquisition

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Introduction

In the year 2015, DuPont and Dow approved a decisive arrangement under which the two

companies merged in an all-stock merger to form a new entity. Shareholders drawn from Dow

received a fixed exchange ratio of 1.00 share of new entity for each share they held in Dow,

while those of DuPont received a fixed exchange ratio of 1.282 shares of the new entity for each

share that they held with DuPont. Because of the merger, Dow shareholders owned 52 percent of

the new entity, while forty-eight percent of the total equity were then owned by shareholders of

DuPont. The merger received regulatory green light after DuPont conceded to selling a chunk of

its pesticide business and most of its agricultural research and development to Food Machinery

Corporation. The mix of extremely complementary portfolios of DuPont and Dow was intended

to shape leadership positions of the newly merged entity. The business combination removed

competition between the two companies and paved the space for the sale and development of

herbicides and insecticides. The new company attained some level of monopoly over certain

products such as ethylene derivatives, and this were considered to be raw materials for the

production of food packaging and other products. DowDuPont emerged was the world’s biggest

company by revenue after the merger. The newly combined entity was separated into three

distinct and publicly trading entities through tax-free spin-offs. For farm suppliers, this merger

was considered one of the biggest. The cumulative month on month return for DuPont the

twenty-five-month time window period after the announcement of the merger was more than

three hundred percent. The cumulative daily returns for Dow Chemicals for 400 merger period

was just shy of thirty-percent. The cumulative monthly return for Dow Chemicals for the twenty-

month period after the announcement of the merger was about thirty-eight percent. The merger

was one of equals, because the companies were of relatively the same size when they came
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together to form the single new company. In mergers typical of the one described above,

shareholders from the two firms surrender their shares and obtain the securities issued by the

new entity. This paper examines amongst other issues the increase in shareholder vale as a result

of the merger.

The Dow Chemical Company

This company was incorporated in 1947 under the laws of Delaware. Dow products comprised a

wide range of technology-based solutions market driven integrated portfolio in such other areas

such as the high-growth sectors’ packaging, infrastructure, consumer care, electronics,

agriculture and infrastructure. Its workforce number up to 550000 people and it boasts of more

than 7000 product families that are produced at about 190 sites in more than 30 countries. In the

year 2016, the company reported annual sales was to the tune of 48 billion dollars. Its five

operating segments were consumer solutions, performance plastics, agricultural sciences,

performance materials and chemicals, infrastructure solutions and consumer solutions. Dow

Chemical Company’s agricultural sciences division is the world’s largest provider of crop

protection, plant and seed biotechnology products and technologies, urban pest management

solutions and the healthy oils. This segment develops, invents produces, and distributes products

that are used in agricultural, commercial and pest management. Its consumer solutions division

has four major worldwide business which includes consumer care, silicones Dow electronic

materials and Dow automotive systems. The infrastructure solutions division comprises a

portfolio of products which include construction material ingredients, architectural and industrial

coatings, building materials and insulation, adhesives, microbial protection for gas and oil

industry, and water and light technologies. The segment about performance materials and

chemicals provides customers with innovative technologies and solutions such as vinyl and
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chlor-alkali, industrial solutions, and polyurethanes. The segment about performance plastics is

the globe’s leading plastic franchise and the product portfolio includes the major worldwide

business such as the Dow Elastomers, Dow Packaging and Specialty, Dow Electrical

Telecommunications and Dow Energy and Hydrocarbons. Its energy business is one of the

biggest in the world concentrating on industrial energy productions, and the Union Carbide

Corporation is a wholly owned subsidiary of Dow Chemical Company.

Dow Chemical Company’s Divestments

Early 2015, Dow Chemical sold its business dealing with sodium borohydride to another

company known as Vertellus Performance Chemicals LLC. Sodium borohydride belongs to the

performance materials and chemical division of Dow Chemical Company. The following month,

the company sold ANGUS Chemical Company which was also part of Performance Materials

and Chemicals division to Golden Gate Capital. Dow Chemical Company sold off its AgroFresh

business to another company of the same name in mid of 2015. Early 2017, Dow Chemical

Company announced an agreement to sell its global ethylene acrylic acid, ionomers and

copolymers business to SK Chemical Company as part of the regulatory approval requirement

for the merger to fall through.

Reorganization

Between April and June of 2016, Dow Chemical board approved a reorganization plan which

had impacted the ownership structure of Dow Corning. The activities led to a reduction of the

global workforce of about 2500 employees. In the year 2013, the board at the same company

approved a share repurchase program that authorized about 1.5 billion dollars to be spent on the

buyback of the company’s shares. Also, in the year 2014, the board increased the repurchase

program with an additional amount of about three billion dollars. Later in the year 2014, the
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board announced a new five billion tranches to its share repurchase program. The total amount of

authorized share repurchased totaled none and a half billion dollars. Revenue, net income, long-

term debt and total assets are given in millions of dollars. Dow’s net sales have been on a

declining trend over the five-year period. On the other hand, the net income has been oscillating

over the five year period. The ROE has been fluctuating over the five-year period.

DuPont

In 1802, DuPOnt was founded and later incorporated in 1915 in the state of Delaware. It has

operations in ninety countries all over the world and sixty percent of consolidated net sales are

accounted by regions outside the US. The company consists of ten businesses aggregated into six

reported divisions and which include Agriculture, Industrial Biosciences, Safety and Protection,

Electronics and Communication and Nutrition and Health. DuPont Crop Protection, Agriculture

businesses and DuPont Pioneer major focus lies on the improvement of safety, quantity and

quality of the global food supply and global production agricultural industry. Agriculture

accounted for nearly 55% of DuPont’s total R&D expense in the year 2015. Pioneer is the

number one globally in terms of the development, production and marketing corn hybrids and

soybean varieties. Crop protection serves as the global production agriculture industry with crop

protection products for specialty and field crops. The company’s electronics and communications

division is a leading supplier of differentiated materials and systems for consumer electronics,

advanced printing, photovoltaics (PV) industrial biosciences providing a wide range of portfolio

bio-based products across different markets for instance in animal nutrition, detergents, food

production, alcohol production and industrial applications. Health and nutrition segment’s main

focus lies on sustainable bio-based ingredients and advanced molecular diagnostics solutions and
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offers innovative solutions for specialty food ingredients, health and safety and food and

nutrition. Performance Materials segment of DuPont includes to DuPont Performance packaging

and Industrial Polymers and DuPont Performance Polymers and offers innovative polymer

science solutions.

Valuation Issues for the Merging companies

It is possible to compute the current valuation of a company by using a version of the formula. It

is important to show the manner in which this formula works. Given that a company realized

revenues, has market capitalization and has shares outstanding of $63.1 million and $141.8

million, $135 million and 500 million, and 8 million and 20 million for the years 1994 and 1995

respectively. A simple mathematical process will show that the sales per share of 8 (63.1

revenues /8 million shares) and 7 in 1994 and 1995 respectively. Second a share price of 17 (135

million market cap/ 8 million shares) and 25 in 1994 and 1995.

Hence, the company’s price to sales ratio is 2 (17 share price / 8 sales per share) in 1994 and 4

price to sales ratio in 1995. The company realized a net profit margin of -7.5 percent in 1994 and

-23 percent in 1995, and its net loss was 5 million and 37 million for 1994 and 1995 respectively.

By dividing the net income by shares outstanding, investors will learn that the firm is earning

nothing per share. Moving a step further and a price-earnings ratio of zero is computed by

dividing the share price by earnings per share. If the net profit margin is adjusted, then the price-

earnings ratio shall change. Reducing the net profit margin to eight percent reduces net loss to 37

million and can raise the price earnings ratio to zero. This can raise the net profit margin to zero

percent and it will increase the net income to 12 million and it will lower the price earnings ratio

to zero for both years.

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A growing trend of incessant high-volume merge and acquisitions is certainly impacting

the accounting industry (Crookes & Conway, 2018). After the close of a deal, merged

companies will be required to prepare combined financial statements as well as tax returns. The

consolidation of the financial reporting function demands that the company directors choose

between applicable accounting frameworks and CPAs as soon as the deal has been reached.

When firms are using different standards of reporting their financial statements for book and tax

purposes, it will be imperative for them to revise past tax fillings or even restate their financial

performances if the new merged entity issue a comparative accounting report. A failure to

coordinate the ERP can sow down the process of financial data collection, perhaps even lead to

missing or even inaccurate data. After the close of the deal, the buyer will have to allocate the

buying price to the company’s assets and liabilities, and remember that their certain long-term

intangibles that should undergo impairment testing in succeeding periods, when the fair value of

asset falls lower than the carrying value. Wrong intangible asset valuation and hurried buying

price allocations might result in unneeded future write-offs.

According to Hood (2018), the impact of new technologies and the capability of the

profession to adapt to the swift pace of change is a predominant concern in the minds of

accountants. Important shifts in technology such as block chain, AI as well as data automation

will imply extensive changes to the demands made by clients. Even though robots are unlikely to

replace accountants, they are becoming more sophisticated and are capable of running complex

accounting tasks which include collecting transactions and compiling them into the required

statements and forms for book reporting and tax return. The implementation of robotic process

automation in the profession can save massive hours of work, and which could in turn be used

for other activities such as analysis. Accountants should diversify their skills set. Even though
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technology is eliminating the need for traditional rules-based accounting skills, there are skills

that are required of the modern accountant such as forecasting and analytics that will reduce the

need for traditional accounting skills.

Globalization is the one element that is affecting accounting just as much as it is

impacting business practices across the board. Remember that globalization entails the

proliferation in the use products, services, and information spread, job roles across different

countries and continents and which in turn has created a greater level of interdependences across

different economies all over the world. In general, globalization can open up new opportunities

for global business, trade and relationships and can also increase the process of modernization

and access to employment opportunities, products and services for areas that are weakly

endowed with resources (Conway, 2018). Equally, this increase in cross-border business trades

and relationships from an accounting perspective will manifests itself through new challenges for

internal accountants. Accountants are required to identify the critical reporting differences

involved when they are working to offer financing for a capital seeking firm in another

jurisdiction.

Conclusion

The link between profit margins, the price-to-sales ratio and the P/E ratio is extremely

illuminating. For any given share, the implied price-to-sales ratio or the implied price-earnings

ratio can be computed if one knows what the profit margin is. A less than one price-to-sales ratio

and low profit margin means that the price-earnings ratio of zero, and a price earnings ratio of

zero and profit margin of negative % means price-to-sales ratio of 3. When the price-earnings

ratio is high, even though the price-to-sales is low, then investors can expect a high profit growth
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in the future. When the price-to-sales is high although the price-earnings ratio is low, investors

can be more concerned about the existing profit margins are not sustainable. In either situation, it

is important to learn of the reasons behind the imbalance.

There are more radical approaches that can be used when factoring profitability in the revenue-

based method of valuation. It is known as the justified price-sales ratio. The price-to-sales ratio

can be removed from the constant dividend growth model. The formula that can be used will be

in the following forward and it is computed as earnings per share multiplied by the multiple of

one minus the retention ratio and one plus the growth rate of dividends, and all of these divided

by the difference between the required rate of return and the growth rate of dividends.

References

Conway, E. (2018). The Future of Accountancy—Beyond the Numbers. In Contemporary Issues

in Accounting (pp. 187-195). Palgrave Macmillan, Cham.

Crookes, L., & Conway, E. (2018). Technology Challenges in Accounting and finance.

In Contemporary issues in accounting (pp. 61-83). Palgrave Macmillan, Cham.

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Hood, D. (2018 October 1). The profession’s biggest challenges. Accounting today.

https://www.accountingtoday.com/news/the-accounting-professions-biggest-challenges