What is the ideal size for a company? How small is the real question for Ed Breen, the boss of DuPont de Nemours. The water and electronics divisions of DuPont will be split off from the company that produces industrial materials like Kevlar, creating three distinct businesses. As it has expanded, contracted, acquired, and sold over time, DuPont has created very little value for its shareholders. It may be different this time, after all.
It is a disorienting backstory. In 2017, a $130 billion megadeal saw the old DuPont join with Dow. Over the course of more than 100 years, both have amassed a diverse portfolio of businesses, ranging from electronics to culinary additives. Then, the newly formed corporation remixed itself and split into DuPont, Corteva, and Dow, three more compact industrial companies. DuPont once exchanged a food business for a stake in the listed International Flavors & Fragrances. Breen stood down and then reappeared. Breen stood down and then reappeared. Despite all of this, shareholders have little to show for it: the many components of the former DowDuPont are now valued a combined $127 billion less than they were when they were a single business.
If more specialized investors are drawn to the new separation plan, it may actually do what years of financial engineering failed to do: create parts that trade at better valuations. For example, electronics, as per Visible Alpha, Entegris, the competitor of DuPont in the electronics industry, is trading at almost twice the former's EBITDA multiple. When it comes to water treatment and purification, Xylem and DuPont have comparable stories to tell. If DuPont's shares appreciate at the same rate as those of its rivals, it is estimated that the group's enterprise value may rise by more than $15 billion.
Bigger things could yet come from little ones. Over the years, Breen has attempted to sell off aged companies in order to acquire money for more exciting ventures, often at prices that devalue the company. If nothing else, his successors will be able to use the equity from the split to fund further mergers and operate more narrowly focused businesses. Even better, future mergers won't be as painful if they do trade at better multiples because of the current manias around artificial intelligence and green industrial rejuvenation. Breen's latest plan appears to be the best one after years of torturous tweaking.
