Activist Funds Shape Chemical Firms

Finance: Hedge funds gave voice to disgruntled shareholders

Alexander H. Tullo


Credit: Will Ludwig/C&EN

In September, Seifi Ghasemi stood before a financial conference in New York City and said he had personally met more than 3,000 employees at Air Products & Chemicals in the 75 days since he took over the top job at the firm. Ghasemi said he wants to cultivate an entrepreneurial spirit at Air Products and a culture of “motivating” people instead of “shouting and screaming” at them.

Ghasemi became chief executive after William A. Ackman, who leads the activist hedge fund Pershing Square Capital Management, succeeded in pushing out his predecessor, John E. McGlade.

Ghasemi pledged to turn things around at Air Products and help it recapture the leadership in industrial gases that it enjoyed decades ago. He put other businesses that compose about one-quarter of the firm’s revenues—specialty chemicals and electronic materials—on notice: significantly improve profit margins, or else.

“If they improve their performance in such a way that their returns are not dilutive to our industrial gases performance, we will keep them,” Ghasemi said.

That Pershing Square, which holds a 9.4% stake in Air Products, can catalyze such change is a reminder to all managers at publicly traded chemical firms that their companies are democracies, not dictatorships. An activist shareholder with a convincing case can sway the institutional investors who collectively own majorities of these companies into ousting directors and management.

The past year has seen a spate of such initiatives. Third Point wants Dow Chemical, in which it owns a 2.3% stake, to split into separate commodity and specialty chemical makers. Companies focused on commodity chemicals, such as LyondellBasell Industries, are more profitable than Dow, Third Point argues.

Some stock analysts are sympathetic. “Dow’s recurring attempts at transformation have resulted in a misallocation of resources over a long period of time, creating a situation where almost every segment substantially underearns its potential,” noted Cowen & Co.’s Charles Neivert earlier this year. “We see the greatest earnings capture in its petrochemical business. Dow should sell everything else.”

Dow has resisted this criticism. CEO Andrew N. Liveris maintains that his strategy of integrating specialties and commodities allows Dow to maintain profits in unsteady economic times.

After Third Point CEO Daniel S. Loeb threatened to thrust two new directors on Dow, the parties came to terms. Dow will add four independent directors to its board in exchange for a one-year truce with Loeb.

Trian Fund Management called for even more radical change at DuPont, in which it owns a nearly 3% stake. Trian head Nelson Peltz wrote to DuPont management in September boasting that its market value—$60 billion at the time—could double if the firm followed his advice. DuPont’s plan to spin off its performance chemicals unit isn’t enough for Peltz. He said the company should further split in two.

One of the new companies would be a high-growth firm with DuPont’s agriculture, nutrition and health, and industrial biosciences businesses. The other would be a cyclical, cash-generating company running its performance materials, electronic chemicals, and safety and protection businesses.

DuPont CEO Ellen Kullman said she welcomes the advice; so far, though, she hasn’t followed it.

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