After 20 months of being poked and prodded by regulatory officials, the merger of Dow Chemical Co. and Union Carbide Corp. has been given a clean bill of health.
The combined Dow-Carbide now moves forward as the world's largest polyethylene maker, including market-leading positions in North American low and linear low density PE production. The firm also will rank in the North American top 10 for high density PE and polypropylene.
Its greatest strength will be in LLDPE, where its North American market share will exceed 39 percent. After adding Carbide's capacity to the fold, Dow will be able to produce 18 billion pounds of PE annually.
"The PE industry has been in a state of consolidation for some time," said Len Azzaro, Dow's global PE vice president. "This merger will help Dow to remain competitive globally.
"Competition is still fierce, with more than a dozen major producers of PE resin in the fight for their share of the potential market."
In a recent letter to employees, Dow President and Chief Executive Officer Michael Parker described the merger as "a tremendous opportunity" but acknowledged the challenge that lies ahead.
"I won't pretend this will be easy," Parker said. "Successful mergers require fresh outlooks, an openness to change ... and, of course, hard work."
In total, plastics generated about half of the $28.4 billion in sales that the combined Dow and Carbide operations brought in last year.
The deal, in which Carbide shareholders will receive 1.611 shares of Dow for each Carbide share, was valued at $10.2 billion, including equity and debt. It had been valued at $11.6 billion when initially announced in August 1999. Company officials said they expect annual savings from the deal to exceed $500 million.
The combined company will be based in Dow's hometown of Midland, Mich. The firms currently employ a combined 50,000 worldwide but earlier had indicated that about 2,000 of those jobs could be eliminated.
Although global economic conditions are not as robust now as when the merger was first proposed, the delay in gaining Federal Trade Commission approval probably won't have much of an impact on the merger's success, according to Alex Hittle, a stock analyst with A.G. Edwards in St. Louis.
"When the merger was announced, no one thought energy prices would go as high as they have, but Dow knows that chemicals are a cyclical industry," Hittle said. "It's not like they're going to be surprised if business is bad for a while."
The $500 million-savings target also is within Dow's reach, Hittle added.
"If you put the Dow [profit] margin on Carbide's sales, you get a good part of the way to the $500 million," he said. "Dow's done a very nice job operationally in the last four or five years, handling the dips and wiggles of the cycle better than their competitors. That's what gives a positive feeling to the merger."
As part of FTC approval, Dow agreed to divest to BP Chemicals Ltd. its share of the gas-phase metallocene PE technology the firms developed between 1995 and 1999. Dow also is selling three smaller chemicals businesses.
Metallocene technology, which is used to create stronger, tougher grades of PE, currently is used in 7 percent of the world's LLDPE output, according to Surinder Bahl, a consultant with Phillip Townsend Associates in Houston.
Metallocene PE consumption is expected to increase 25 percent annually through 2006, Bahl said.
One unusual part of the deal has Dow linking with rival Exxon Chemical Co. in Univation Technologies LLC, a joint venture formed in 1997 to commercialize Exxon's metallocene PE technology using Carbide's widely licensed Unipol PE process technology.
This arrangement sets up the possibility of metallocene PE produced through Univation technology competing with PE made via Dow's Insite-brand technology, which produces resins with similar attributes.
Industry consultant Bill Vernon said there is a slight difference between the two product lines — with Univation's being more commodity-focused and Dow leaning toward more high-end applications — but he does not think Dow's presence in Univation will be a conflict of interest.
Commercial acceptance of metallocene PE shouldn't be affected by the move, added Vernon of Houston-based Chemical Market Resources Inc.
"Univation will probably be treated as an operating arm of Dow," he said. "What the FTC really wanted to see was that there was a true alternative to the Unipol process. With Dow's divestiture to BP, BP's Innovene process becomes that alternative."
Dow's Azzaro added that the technology ag- reements "remove barriers."
"The technology licenses ... promote a climate that is favorable to the accelerated development of metallocene and gas-phase technologies and services, and that's of significant benefit to the industry and our customers."