CORPORATE

RESTRUCTURING

Group Assignment

Case 1: Dow-DuPont Case

SUBMITTED BY:
Group Members:
Harshit Verma (PGFB2017)
Lunamoni Gogoi (PGFB2022)
Medha Mukherjee (PGFB2024)
Richa Sharma (PGFB2038)

SUBMITTED TO:
Prof. Rajesh Mohnot
Question 1
Solution:
A hostile takeover occurs when one firm attempts to obtain control of another without first
reaching an agreement. In this technique, the aggressor business buys a large portion of the
company's stock to take control of it. After acquiring enough shares, the aggressor firm will
begin to remove former board members and eventually remove all former company members.
When it comes to the consequences of hostile takeovers as an external tool for corporate
governance, it's important to remember that they have benefits and drawbacks that can be
analyzed as below.
Benefits:

 Due to the substantial benefits offered to individuals who can identify low performing
firms, hostile takeover is an effective technique for disciplining management.
 Other incentives driving the takeover include recovering agency expenses, market
dominance, economies of scale and scope, low priced resources, and future costs.
 The association between takeover activity and shareholder returns suggests that
takeovers benefit both the shareholders of acquired enterprises and the managers of
acquiring firms.
Drawbacks:
There have been a few complaints regarding the hostile takeover's function in the corporate
governance process, which can be summarized as follows:

 The prospect of a takeover may push executives to prioritize short-term profits over
long-term investment decisions.
 The takeover method may allow new investors to disregard implied claims between
the company and other stakeholders, as well as extract rents from other stakeholders.
The impacts of a hostile takeover on the underperforming managers specially can be
impeding. Decrease in morale, anxiety toward the uncertainty of the environmental factors
can cause a toll on the workforce in terms of their productivity. Managers who are able to
understand how such type of situations are taken by the workforce, they are in a position to
find ways to ease out a portion of the worries and also decrease the possible slowdown in the
production activities by the workforce.
In a normal takeover the board can find ways to reduce the issue from the beginning.
Employees can be educated regarding the organization plans and executions and accordingly
what steps are being taken to ensure the occupations of workers. As the employees are
informed about the upcoming changes, they accordingly makeup their minds to adapt to the
upcoming change. But in case of hostile takeovers, they occur without notice and leave
everybody, including the board, in a condition of shock. With changes in administration,
layoffs are a typical event, and layoffs frequently stream down a couple of people at a time,

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leaving employees unfortunate in terms of who’ll be the next person to leave the
organization.
Question 2
Solution:
The process of maximizing shareholder value has been lengthy and complicated, and it has
included the following steps:
a. A merger of equals between Dow and DuPont
b. The subsequent break up into three distinct publicly traded shares, which were issued as
stock dividends to DowDuPont stockholders.
As stated in the lawsuit, finalizing the merger proved to be a difficult, time-consuming, and
expensive procedure. Separating the company into three separate firms will be both time-
consuming and costly. It may have made more sense for Dow and DuPont to stay separate
and reorganize their respective business portfolios rather than go through the extra
complications of becoming DowDuPont.
Given the transaction expenses connected with these sorts of acquisitions, would it have been
more effective to just break apart Dow and DuPont as independent firms as Advisory, legal,
and investment banking fees are all included in the costs.
Question 3
Solution:
The deal between Dow and DuPont was structured as merger of equals because the two firms
were almost about the same size. Apart from this, the structure of the deal included that the
shareholders of Dow and Dupont would receive a fixed exchange rate ratio of a particular
share of DowDuPont for each Dow/DuPont share. Another term of the transaction was that
both the firm’s shareholders would own 50% of the merged company and the new board of
directors of the new firm would include 16 directors, 8 from each of the combining firms.
All of the above-mentioned terms of the transaction form a structure of merger of equals. The
point when two organizations choose to consolidate in a merger of equals, they execute this
in order to work on both of their organizations.
Advantages of merger of equals are:

 Decrease in competition, as the two organizations are not going after each other
anymore.
 Synergy creation as well as expanding into the new market or expanding into new
segments of the existing market.
 Reduction in costs in terms of operating activities.

Disadvantages of merger of equals are:

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  Different working styles of both the firms. The combing firms may find it difficult to
adapt to each other’s working styles.
 Different corporate cultures. Every organisation has its own culture and values. So,
the employees may not easily adapt to other firm’s culture and understand the values
as well. It may eventually lead to a conflict between them, if not handled well.
 The employees may feel unsecure about their job in a new and combined firm, in
terms of if there will be any layoffs, which eventually reduces their overall
productivity.
Question 4
Solution:
The key assumptions DowDuPont is making in arguing the merger are as follows:
DowDuPont's first major assumption in claiming that this merger will be approved by
regulators. There will surely be regulatory inspection as two big chemical corporation’s
merges. The merger is expected to be approved by regulators, according to management.
The second presumption that DowDuPont is making is that the legal system will agree with
them that no change of control will occur, and that the purchase will be permitted to proceed
tax-free. This is an important assumption because, according to the argument, tax
considerations are the key driving force for the deal.
Third, DowDuPont is hoping that within a period they can efficiently divide their business
into three units that is: Agriculture, Material Science, and Specialty Products. If this
assumption is incorrect, DowDuPont will face higher integration costs and would be unable
to realize synergies as rapidly as predicted, resulting in a loss of shareholder value. Similarly,
DowDuPont believes that cost synergies will be realized through economies of scale and
scope that will outweigh the expenses of reorganizing the merged firm. Lastly, DowDuPont
is assuming that they can smoothly merge the cultures of their two companies without facing
huge productivity or profitability losses.
Question 5
Solution:
The payment is made in the form of stock in the new firm in return for Dow and DuPont
shares.
A merger is a type of acquisition in which all known and undiscovered assets and liabilities
are automatically transferred to the new firm under the law. The use of stock allows
participants to claim the agreement is a merger of equals, allowing management to argue that
they are not transferring control to another firm.
Advantages of it are unless the contracts indicate that customers and suppliers have approved
to assignment, intellectual property and contracts transfer to the new company when stock is
purchased in the new company.

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DowDuPont can further argue that no change in control has occurred and that the planned
spinoffs following the conclusion should be tax-free as well. The absence of any price for
shares acquired and the possibility of undesired obligations being incorporated in the creation
of the new business are both disadvantages of the merger of equals procedure.
Question 6
Solution:
Exchange Ratio for each Dow share in DowDuPont = 1.00
Exchange Ratio for each DuPont share in DowDuPont = 1.282
Number of Dow shares outstanding at the time of announcement = 1.160
Number of DuPont shares outstanding at the time of announcement = 0.876
Total number of DowDuPont shares outstanding = (Exchange Ratio for each Dow share in
DowDuPont * Number of Dow shares outstanding at the time of announcement) + (Exchange
Ratio for each DuPont share in DowDuPont * Number of DuPont shares outstanding at the
time of announcement)
Total number of DowDuPont shares outstanding = (1 * 1.160) + (1.282* 0.876)
Total number of DowDuPont shares outstanding = 1.160 + 1.121
Total number of DowDuPont shares outstanding = 2.281
Dow ownership in total share = (1.160/2.281) *100
Dow ownership in total share = 50.9%
DuPont ownership in total share = (1.121/2.281) *100
DuPont ownership in total share = 49.1%
As we can see that Dow has more percentage in total ownership of shares, which means they
have more control over the new firm DowDuPont and also, they will be responsible for
creating more wealth and synergy than DuPont.
Question 7
Solution:
Number of Dow shares outstanding = 1.160 billion
Dow’s price per share on 11.12.15 = $54.91
Dow’s market cap on 11.12.15 without synergy = $54.91 x 1.160 = $63.75billion
Number of DuPont shares outstanding = 0.876 billion
DuPont’s price per share on 11.12.15 = $74.55
DuPont’s market cap on 11.12.15 without synergy = $74.55 x 0.876 = $65.31 billion

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Total market cap of DowDuPont excluding synergy = (Dow’s market cap on 11.12.15
without synergy + DuPont’s market cap on 11.12.15 without synergy)
Total market cap of DowDuPont excluding synergy = $63.75 billion +$ 65.31 billion
Total market cap of DowDuPont excluding synergy = $129.06 billion
Annual cost of synergies = $ 3.0 billion
DowDuPont’s cost of capital (Discount Rate) = 10%
PV of synergies = Annual cost of synergies/Discount rate
PV of synergies = $3 billion/0.1
PV of synergies = $30 billion
Total market cap of DowDuPont including synergy = (Total market cap of DowDuPont
excluding synergy + PV of synergies)
Total market cap of DowDuPont including synergy = $129.06 billion + $30 billion
Total market cap of DowDuPont including synergy = $159.06 billion

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