The making of a megadeal: Howard Ungerleider on the merger of Dow and DuPont

The combination of Dow Chemical and DuPont in 2017, followed by a split into three separate companies, was a huge and highly complex transaction that transformed the chemical industry landscape. In this episode of the Inside the Strategy Room podcast, Howard Ungerleider, president and CFO of Dow, explains how the management teams of the two global giants approached the merger that produced three market-leading players. He spoke with senior partner John Warner, who co-leads McKinsey’s Global Energy and Materials practice, during a virtual event we recently hosted for finance executives. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, subscribe to the series on Apple Podcasts or Google Podcasts.

John Warner: Could you start by giving us a sense of how you viewed the prospect of this very large, complicated, and lengthy transaction as the then CFO of Dow Chemical?

Howard Ungerleider: For context, we are talking about 300 years of corporate history—more than 120 years for Dow and more than 200 years for DuPont. But there was a lot of complementarity. We were not direct competitors. Many of our businesses were in similar markets but in different parts of the value chain or in different applications. From the Dow chessboard perspective, we viewed the combination as potentially very value-creating.

The idea dates to the early 2000s, before I joined as CFO in 2014. Successive DuPont and Dow CEOs met over the years, but they could never reach a meeting of the minds. That changed when Ed Breen came in as the CEO of DuPont. He and then-CEO of Dow, Andrew Liveris, agreed to meet in the fall of 2015, and we announced the transaction pretty quickly thereafter. From the legacy-Dow perspective, what made us most excited was the agriculture space. At the time, Dow AgroSciences was 80 percent in crop protection or chemistry-related markets and only 20 percent in seeds and traits. We were one of very few companies innovating in the germplasm [genetic resources needed for plant breeding] space and bringing new traits, but we did not have scale in the seed market. DuPont was almost the opposite: they were 80 percent seeds and traits and only 20 percent chemistry. It was a natural fit. Also, both businesses were headquartered in the Midwest, so they shared many cultural attributes.

When we thought about the other businesses, both companies were big players in many chemistry areas, in different parts of the value chain but in similar markets or applications. So, the original thought was to combine the ag businesses and form the leading agriculture company, then bring legacy Dow and DuPont into a single materials and specialty-chemicals entity. At the time, both companies had activist investors who were part of the dialogue, and we evolved our thinking and decided to create three companies: a leading materials-science company, a leading specialty-chemicals company, and a leading ag company that later became Corteva.

John Warner: How did you persuade all the investors that this is the right transaction to make?

Howard Ungerleider: Both companies’ leadership teams had a similar approach to interacting with activists, which was to engage. Activist investors are no more or less important than other large investors, so you treat them with the same respect. You can only share with them what you share with the others, but it’s a chance to listen and learn their perspectives and share your point of view.

John Warner: It took four years to consummate this deal. How did you approach all the challenges you knew you would face?

Howard Ungerleider: I am a big believer in finance being the company copilot, and I view my role as CFO of Dow as the copilot to the CEO. A copilot in the cockpit has to do everything the pilot does. You have to know how to fly the plane, navigate, take off and land, and work with your passengers and crew.

We had to make a choice: Do we create one company and later spin out three, or do we immediately upon close go from two companies to three divisions with a thin holding-company structure on top? We did the latter, which meant that DowDuPont essentially had no employees. DowDuPont officers were the two CEOs of legacy companies, me as the CFO of both, the three COOs of the divisions who would become CEOs of the new companies, and the two general counsels. It was a very light-touch steering team, but that allowed us to, on day one, start operating as if we were three companies. That reduced employees’ concerns. It took about 90 days to make sure everybody knew where they would land, but that one decision helped streamline the decision making and figure out who was accountable for what.

John Warner: As part of going from two to three companies, you announced big synergy targets. Given the deal’s complexity, how did you ensure you could capture that $4 billion of synergies?

Howard Ungerleider: We approached it both from the top down and bottom up. The top-down was the easier part requiring a few different metrics. Dow had been involved in many transactions, so we knew roughly the percent-of-revenue targets to top-down cost synergies. We had the corporate functional view as well between the legacy Dow structure and the legacy DuPont structure, and the teams worked collaboratively.

The one area where we used a clean-team approach was in procurement. You never know if something might go wrong, so you don’t want to share competitive information with too many employees. We hired third parties and relied on a few retired staff from both companies to form the clean team. They analyzed all the procurement contracts and on day one of the merged entity, they sat together with the procurement team of legacy Dow and legacy DuPont and went through the playbook. I would encourage creating a clean team for procurement so you can hit the ground running and start to achieve synergies.

The bottom-up portion was a little more difficult because you were essentially negotiating with yourself, and everybody wanted a low cost-reduction target. That is where the DowDuPont steering team served as the governing body to resolve any conflicts.

John Warner: You were in that cockpit in two roles, as CFO of DowDuPont and as future CFO of Dow. How did you balance both roles to get the full synergies while ensuring Dow would be successful going forward?

Howard Ungerleider: At that point, we were merged. There was no more Dow stock or DuPont stock; it was DowDuPont stock, so our job was to maximize long-term enterprise value for DowDuPont, which ultimately would be captured by Dow plus DuPont plus Corteva. From a workload standpoint, I streamlined the organizational structure inside the materials-science division that would become Dow and gave more day-to-day responsibility to that finance team, because it took a fair amount of energy to make sure we were doing the right things for each future company and to work through the regulatory issues.

John Warner: What did you learn during this process that you would pass on to other CFOs managing a large transaction?

Howard Ungerleider: I would say, take a deep breath and make sure the effort will be worth it from a value-creation standpoint, because any big deal will take time. We announced the transaction in December 2015, merged in 2017, but didn’t spin out the companies until 2019. It was almost a four-year process, so the value has to be there versus other initiatives you could pursue over that time frame.

Another piece of advice is, don’t think in terms of one outcome; think in terms of scenarios. With anything we do, we think about the best-case scenario, the worse-case scenario, and the most likely scenario. Then I take the best case and throw it away because if the best case happens, it’s not a problem. The reality is probably somewhere between your most likely case and the worst case. And make sure that even in the worst case, either you have adjusted for risk or you remain confident that the deal still makes sense.

Companies also need to be aware that the regulatory environment has become more challenging. Ten or 15 years ago, one jurisdiction would take the lead and others would follow. That is not the case anymore. In our case, we had the US, China, the EU, and Brazil, and everyone wanted something specific for its jurisdiction. You have to model that out, making sure that even with the remedies each regulator may require, you still feel good about the decision.

John Warner: How did you communicate the value of the merger and spinout, both to investors and within the two organizations?

Howard Ungerleider: The investors were easier because Dow and DuPont were both diversified industrial companies and at that point, conglomerates in the industrial space were not viewed positively by the investment community. The value proposition was that we would take two strong diversified industrial companies and create three streamlined industry leaders with best-in-class cost positions, market positions, and products. Then we would achieve cost and growth synergies that would unlock a lot of value.

The employee pitch was more challenging, but those investor messages were also beneficial to employees. If you were in agriculture, whether in Dow or DuPont, you may not have been getting the capital or resources you needed because the companies had a lot of mouths to feed, from commodities to specialties to agriculture. The value proposition for the employees was that you would work for a focused market leader that only does one thing every day.

John Warner: Given how long it took for the full transaction to play out, how did you maintain the enthusiasm for the deal?

Howard Ungerleider: The length of time it took made it essential to communicate—even overcommunicate. You have to set out milestones and keep everybody informed along the way about what will happen when. Maintaining employee morale and motivation was one of the things that drove us to immediately become three companies, because we felt it would minimize the disruption.

John Warner: What kind of tactical steps did you take to spin out the three companies?

Howard Ungerleider: The DowDuPont steering team handled that. We hired an entity to help with the accounting carve-outs and tax agreements, and we used outside legal resources for all the regulatory remedies, but the steering team chaired all those decisions. Leading up to the merged state, we met monthly. Afterward, we met weekly and would rotate topics every week. We did not change the legal entity structures—we kept the Dow tower and the DuPont tower most of the way through the merged entity—and if a decision had to be made on a remedy, we would handle that at the steering-team level but involve the legacy company that owned that business unit. DuPont, for example, needed to sell a chunk of its chemistry business and the DuPont legal and finance team did that. Any decisions got elevated to DowDuPont.

My recommendation to others doing a major deal would be to set up your governance structure, bring in the resources you need, and make sure the people working on that governance are doing it full time. Then you just work the list. That allows you to minimize the issues that slip through the cracks.

John Warner: How big a role did portfolio management play in the decision to do this transaction?

Howard Ungerleider: It was extremely critical. Ultimately, you start with the strategy: what are you trying to achieve? From the Dow perspective, it was having a focused portfolio, market-leading positions, and global scale. We brought benchmarking on top of that. For example, we wanted to be in the top quartile in the cost structure, and wherever we had a gap, we set a target. We also wanted to be a more disciplined allocator of capital. To use a baseball analogy, we went from pursuing big projects and trying to hit home runs to going for more singles and doubles—lower-risk, faster-payback projects with a higher likelihood, on a risk-adjusted basis, of high earnings growth and cash flow. Then we set the target that 65 percent of our net income would go back to shareholders, primarily in the form of dividends. We would use about 20 percent as a flywheel in the form of stock buyback and put the other 35 percent back into the company for long-term growth.

John Warner: Less than a year after the spinout, the pandemic hit. How did your finance team navigate the crisis?

Howard Ungerleider: We were fortunate in many respects. We already had a robust enterprise risk-management process and, with the avian flu and other earlier events, we already had a playbook for responding to crises. Because we are a global company, we saw what was happening in China early on. We have regional crisis-management teams in Asia–Pacific, chaired by the president of Dow Asia Pacific, and they started meeting weekly in the first quarter of 2020. When we realized this was going to get worse, we initiated our corporate crisis-management team, which I co-chair.

From a finance perspective, first thing is protecting your liquidity. As finance people know, the banks want to lend you money when you don’t need it and when you need it, they have a slightly different point of view. As part of our enterprise risk-management approach, we don’t wait until a crisis hits to ensure the right level of liquidity. We think about liquidity in several layers. We have the base layer, which is a five-year, $5 billion revolver that we do not ever want to touch. The next layer is committed bilateral lines outside the revolver that we can tap. We also have accounts receivables securitization that we only use when economically advantageous. Then we have uncommitted lines, which the banks are not committed to fund but in reasonable times will do so. Once we realized the pandemic would have a big global impact, we immediately tapped the uncommitted lines, figuring, let’s put some extra money in the bank. We were able to weather the storm without going into any of the committed lines or the revolver.

Additionally, when we had to shut down in March, we immediately started thinking not only about working from home but how to do a quarterly close remotely. We have always been an early investor in IT, so we had the ability to do the close remotely even though we had never tried it. We used the crisis-management team to continue operating, since we were deemed essential in almost every jurisdiction around the world, and that same team is overseeing the return to the workplace.

John Warner: How do you envision the COVID-19 crisis affecting your business into the future?

Howard Ungerleider: Digital was a big differentiator for Dow while we were in the pandemic, and I think it will be a big differentiator for every company as you look for ways to innovate. I talked about the remote close, but we have also been implementing robotic process automation since 2018. We have taken about 25,000 hours of work through automation, analytics, and robotics. The auditing function used to rely on a random sample. Now, with data analytics, you can do a 100 percent census and have the analytics point you toward any concerns. The same is true in the tax space. Many tax jurisdictions are getting more aggressive, and by bringing in automation and data analytics we have been able to stay ahead of the curve.

We have also taken that technology inside the plant gates. We use drones and robotics to minimize, for example, confined-space entry that can be hazardous for people, and we get more accurate analysis of those entries. More broadly, we did billions of revenue or turnover transactions on our Dow.com portal before the pandemic and have only extended that during the crisis. We have also used technology for contactless customer visits and virtual trade shows.

The pandemic forced us, as it did most companies, to make decisions faster, with maybe less accuracy to the right of the decimal place. That is hard for finance people. We are typically very comfortable to the right of the decimal place, and the pandemic has obliged everybody to get comfortable to the left of the decimal place.

John Warner: You have been a CFO for a long time. What advice would you give others who aspire to become great CFOs?

Howard Ungerleider: I love the role because you can touch every part of the company, from developing the strategy together with the management team, to collaborating with the board on establishing governance, to making sure investors understand the strategy, to working inside the company to execute the strategy. The advice I would give is simple: be curious. Make sure you have a point of view based on logic and data but ask questions. As my grandmother used to say, “You’ve got two eyes, two ears, and one mouth, so use them in that proportion.”