“Third Point Takes Significant Dow Position; Calls for Strategic Review”
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Third Point LLC discusses for the first time an investment in The Dow Chemical Company this morning on Hvst.com. The following is an excerpt from the firm’s Quarterly Investor Letter dated January 21, 2014:
The Dow Chemical Company
Third Point’s largest current investment is in The Dow Chemical Company (“Dow”). Dow shares have woefully underperformed over the last decade, generating a return of 46% (including dividends) compared to a 199% return for the S&P 500 Chemicals Index and a 101% return for the S&P 500.
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Indeed, in April 1999, nearly 15 years ago, an investor could have purchased Dow shares for the same price that they trade at today! These results reflect a poor operational track record across multiple business segments, a history of under-delivering relative to management’s guidance and expectations, and the ill-timed acquisition of Rohm & Haas. The company’s weak performance is even more surprising given that the North American shale gas revolution has been a powerful tailwind for Dow’s largest business exposure – petrochemicals.
We believe that Dow would best serve shareholders’ interests by engaging outside advisors to
conduct a formal assessment of whether the current petrochemical operational strategy
maximizes profits and if these businesses align with Dow’s goal of transforming into a
“specialty” chemicals company. The review should explicitly explore whether separating Dow’s
petrochemical businesses via a spin-off would drive greater stakeholder value.
Dow’s petrochemical operational strategy has been to migrate downstream, supposedly to earn higher margins, to become more “specialty,” and to increase the number of customer-facing products. Over the past five years, the shale revolution in North America has led to a boom in natural gas liquids production which has dramatically reduced raw material costs, while China and other emerging market economies have aggressively grown downstream derivatives capacity. This combination has led to significant upstream margin expansion in North America,