Will DowDuPont help make America great again? Don't bet on itWill DowDuPont help make America great again? Don't bet on it
While activist investors Nelson Peltz, Don Loeb and fellow travelers are feeling their oats and Wall Street nods its assent, will the rest of America benefit from the $130 billion Dow-DuPont merger? Opinion pieces in Fortune and the Wall Street Journal suggest not. Financial engineering to deliver short-term gains are gutting U.S. research capabilities, while China and Germany stand in the wings to fill the R&D vacuum, say a pair of columnists.
December 14, 2015
"America's vaunted research prowess is under attack. Not from China, Japan, or Germany, but from within, led by impatient investors eager to gain immediate boosts in stock prices," writes Bill George in a commentary on fortune.com on Dec. 12. Research takes a long time, it costs a lot, and it is fraught with risk, comments George—who, as former Chair and CEO of medical device manufacturer Medtronic, knows what he's talking about. Such long-term commitments don't play well in a culture of immediate financial gratification. But it took time, money and a whole lot of patience to develop nylon, rayon, Teflon and solar cells, to name just a few of the advances to come out of the DuPont labs over the years. As the newly merged company is split into three businesses and synergies are harnessed (corporate speak for layoffs), that "could spell doom for DuPont's central research labs, and presages further research cuts at Dow, as well," writes George. Germany's BASF and Bayer, and China's Sinopec and Sinochem will be eager to pick up the slack, he adds.
Activist investor Peltz lost his battle with former DuPont CEO Ellen Kullman, but she retired only six months after that victory, with Ed Breen stepping into the CEO role. Now Breen, CEO of DowDuPont, has engineered precisely what Peltz wanted. Loeb has been highly critical of Andrew Liveris' leadership at Dow and led the charge against that company through his hedge fund Third Point, which has a 2% stake in Dow. Incidentally, Loeb doubled down on his critique yesterday, saying that making Liveris Executive Chairman of the newly merged company was an "insult to Dow shareholders," according to CNBC.
The DowDuPont deal is part of a larger narrative that includes pharma giant Pfizer and food group Kraft, which have been through the M&A mill and had R&D budgets slashed as a result. In addition to activist investors seeking short-term financial gains, this trend is also driven by slow global economic growth, leading companies to increase shareholder value by cutting costs, writes Wall Street Journal business editor Dennis Berman.
China and Germany are ready and able to take the R&D long view as U.S. firms focus on financial innovation. Writes Berman: "Few in the U.S. know much about [Chinese] companies like the state-owned Sinochem, which are increasingly advanced players in the global market for chemicals and agriculture technology. It's not hard to imagine a future where Sinochem slowly takes market share in small markets, and then works its way across Asia, Africa and into Europe and the Americas."
China's universities churn out 150% more scientists and engineers than America produces," adds George, "and it is building, not dismantling, global champions in every industry to compete for world dominance of their respective fields."
Germany, meanwhile, concentrates on its strengths—automobiles, machine tools, chemicals and construction—and is the envy of the world in its exporting ability despite its high labor costs, says George.
What is the U.S. response? "The argot of American business has been reduced to ‘sensible growth,' ‘dividend return' and ‘listening to shareholders,' " writes Berman. "This is not an America playing to win. It's an America playing not to lose."
We can do better than that. Can't we?
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