After dealing with activists, officials with materials makers Dow Chemical Co., DuPont Co. and Omnova Solutions probably would welcome a few passive investors.
All three firms have battled with activist investors in the last 18 months. The skirmishes have pitted Dow vs. Third Point LLC, DuPont against Trian Fund Management LP and Omnova opposite Barington Capital Group LP.
Investors have criticized all three firms for alleged financial underperformance. In the financial press, “alleged financial underperformance” means “you better get your act together or you'll be out like Beanie Babies, MySpace and the girl who sang that ‘Friday' song.”
The messiest of the three situations is taking place at Wilmington, Del.-based DuPont, where the two sides might be heading to a proxy fight for board control after DuPont in early February rejected all four candidates that Trian had nominated for the board. Those four included Trian founder Nelson Peltz, who in recent years has waged similar battles with H.J. Heinz, Cadbury, Kraft Foods, Ingersoll Rand, Wendy's, PepsiCo and Family Dollar. Peltz challenges companies in his sleep — and with a net worth estimated at $1.65 billion, I'm guessing he sleeps well.
DuPont instead nominated petrochemicals veteran James Gallogly and Tyco International chairman Edward Breen to the board. DuPont officials have said that Trian's proxy fight is based on “misrepresentations, inaccurate data and flawed analyses.” They also pointed out that Trian's involvement in plastics additives maker Chemtura ended in bankruptcy in 2009.
Midland, Mich.-based Dow had been jousting with Third Point since late 2013, leading Dow boss Andrew Liveris to make a TV appearance with financial legend Warren Buffett — a Dow investor — to defend the firm's strategies.
Dow and Third Point reached a settlement in November, when Dow agreed to add four new directors to its board. Like Trian, Third Point is led by an activist veteran in the form of Daniel Loeb, who has led the firm's crusades against Yahoo, Sotheby's and Sony.
Beachwood, Ohio-based Omnova appeared to be heading to a proxy fight with Barington until three board members — two nominated by Barington, one by Omnova — were added in February. One of the Barington nominees is founder James Mitarotonda, who has spearheaded activist efforts at several companies, including auto parts retailer Pep Boys and more recently at Eastern Co., a maker of industrial hardware.
Somewhat ironically, the other Barington nominee for the Schulman board is Joseph Gingo — who became CEO of materials maker A. Schulman Inc. after a Barington-led challenge in 2006. Gingo retired from Schulman at the end of 2014.
Why is this happening? Activist involvement is up throughout the stock market, as investors have continued to plow money into stocks in the absence of better investments. As a result, they've been more focused on getting better and better returns from the stocks they pick.
Dow, DuPont and Omnova each have been accused of underperformance — and their 2014 results didn't help their causes much. Dow's 2014 profit fell 20 percent, even as sales grew almost 2 percent to almost $58.2 billion. At DuPont, 2014 sales slipped 3 percent to $34.7 billion as profit tumbled 25 percent. Omnova's sales for the year were down 3 percent to $987 million, with profit swooning more than 40 percent.
Recent per-share stock prices for Dow and Omnova also have given activists fuel for their fires. In the year ended March 19, Dow's per-share price was down more than 5 percent, while Omnova's slid 22 percent. By comparison, the benchmark Dow Jones Industrial Average was up 11.4 percent in that period. DuPont's per-share stock price grew 12.2 percent in that period, outpacing the DJIA and giving activists one less thing to complain about.
Each firm also is being called upon to spin off or sell units that activist investors have decided are no longer good fits and, as a result, create drags on profitability. The shedding of assets isn't a strange occurrence in petrochemicals or many other sectors. Plastics-related companies like Shell Chemical and Hoechst Celanese took the same actions more than a decade ago.
And 10 years ago would any plastics market watcher have believed that Eastman Chemical no longer would be involved in PET resin? Markets change and profitability wavers. Activists, however, don't have a lot of patience to wait for this process to play itself out.
Cleveland-based stock analysts Kevin Hocevar and Dmitry Silversteyn each said that activist investors can be good for public companies under the right conditions. Hocevar and Silversteyn cover several plastics and petrochemical firms, but neither covers Dow, DuPont or Omnova.
“In chemicals, activists have been aggressive in finding companies that have been slow to react to the macro environment, or companies they perceive to be poor stewards of capital,” said Hocevar, who's with Northcoast Research. “In many cases, these companies have poor margins or return on capital metrics compared to their peer group, underperforming business units or are not allocating capital in a way that maximizes shareholder value.
“In our experience, from the time activists have gotten involved, shareholders have generally been well rewarded, as the activists add pressure to the company's board and management teams to accelerate actions to address these issues,” he added.
Silversteyn, who's with Longbow Research, cited Schulman as an example of successful activist involvement. “Schulman was at death's door,” he said. “But investors were able to fix things up and not only make the firm viable, but make it a consolidator.
“The situation at Omnova might not be as extreme as it was at Schulman, but activists can still improve returns for investors.”
He also said that as conglomerates, Dow and DuPont might not be getting enough credit from Wall Street for their more specialized businesses such as biotech.
How will this play out? It looks like DuPont has dug its heels in, while Dow and Omnova have won reprieves, even if those truces might be temporary.
There's no doubt that all three firms will continue to make the quality products and materials that have led them to prominence. But customers and shareholders will be watching to see what the next moves will be in the corporate offices of Midland, Wilmington and Beachwood.
