Dow, Union Carbide to Merge

Dow Chemical Co., exploiting a slump in the chemical industry to bolster its long-term position, agreed Wednesday to buy struggling rival Union Carbide Corp. for $8.9 billion in stock.

The surprise merger would make Dow--perhaps best-known to consumers for its Styrofoam containers--second only to DuPont among the nation’s largest makers of chemicals and plastics that are used in everything from trash bags to cosmetics, food packaging to antifreeze.

The deal would also meld two long-standing, and sometimes controversial, symbols of U.S. heavy industry. Indeed, the purchase would require changes to the Dow Jones industrial average, because Union Carbide is one of 30 stocks in the venerable market indicator.

After the merger, Dow Chemical would have annual sales of $24 billion, operate in 168 countries, have 49,000 employees and rank 50th on the Fortune 500 list of U.S. industrial companies.

The firms struck the deal amid difficult times for the chemical industry. Prices are slumping because of excessive supplies worldwide and slowdowns in the economies of Asia and other regions, which pared demand.

Also, some of the companies’ costs for raw materials, such as energy-based commodities they need for production, are climbing and further squeezing profits.

The situation is similar to what has happened in other industrial fields beset by falling prices and oversupply. For example, a long slump in oil prices prodded several of the biggest U.S. energy producers, such as Exxon Corp. and Mobil Corp., to join forces in recent months.

Dow, based in Midland, Mich., hopes that by absorbing Union Carbide it not only can ride out the slump, but also extend its reach in global markets and wring excessive costs from the combined companies’ operations.

Dow would also effectively be removing a competitor’s contribution to the supply glut in chemicals.

“This merger jump-starts the growth phase of our strategy,” Dow Chief Executive William Stavropoulos said in a statement.

The deal gives Dow “new performance businesses as platforms for growth while strengthening the ones we already have,” he said.

Dow said it hopes to save at least $500 million a year in operating costs after the merger, part of which would come from slashing about 2,000 of the combined companies’ 51,000 jobs. It said it would try to make the cuts through hiring freezes and attrition, not by layoffs.

“In the near term, they’re going to have to get over some integration issues, but eventually it will be good for Dow,” said analyst Frank Mitsch of investment firm Deutsche Banc Alex. Brown in New York.

Under the merger deal, Dow would swap 0.537 share for each Union Carbide share. Based on Dow’s closing price Wednesday, that equals $63.70 per Union Carbide share, or a total of $8.9 billion. Dow said it would also assume $2.3 billion of Union Carbide debt.

The announcement sent Union Carbide’s stock soaring $10.56 a share to close at $59.38, and Dow Chemical dropped $6.06 to $118.63 a share, both in New York Stock Exchange composite trading.

The extent of Dow’s slide caught some analysts by surprise. They attributed the drop, in part, to some concern that Dow might have paid too much for Union Carbide.

But Mitsch said Dow could justify the price because it’s paying with its “very rich” stock, which, before Wednesday, had jumped 37% over the prior 12 months.

“If this deal had been done with cash, I would be extremely concerned” over the price Dow is paying, he said.

Even so, the price tag for their merger points up how the stock market these days places more of a premium on fledgling companies involved in the Internet, new media or other cutting-edge technology than on century-old producers of crucial yet obscure products such as chemicals and plastics.

Only two months ago, for instance, Internet access provider @Home Network used its highflying shares to buy Internet search engine Excite Inc. for stock valued at $7.2 billion, even though both firms are a fraction of the size of Dow Chemical and Union Carbide.

The chemical industry’s downturn has hit Union Carbide, based in Danbury, Conn., particularly hard. The company last year earned $403 million on sales of $5.7 billion, a much smaller profit than the $915 million it earned three years earlier on only slightly higher sales.

Dow has fared better, in part because it has boosted its effort in specialized chemicals and high-performance plastics that carry bigger profit margins and aren’t suffering the same supply glut.

Dow has also been investing heavily in biotechnology ventures to boost crop production. And last year it sold its consumer products division--which makes such items as Ziploc plastic bags and Saran Wrap--to S.C. Johnson & Son Inc., otherwise known as Johnson Wax.

But even Dow hasn’t escaped the profit crunch. The company last year earned $1.3 billion on sales of $18.4 billion, a substantial drop from the $2-billion profit it earned in 1995.

The merger would also join two firms that have been involved in enormous health-related crises that badly tarnished their reputations.

A leak at Union Carbide’s pesticide plant in Bhopal, India, in 1984 killed more than 3,000 people and injured 50,000 in the world’s worst recorded industrial accident. Union Carbide paid a $470-million settlement in 1989.

Dow Chemical, meantime, owns 50% of Dow Corning Inc., the former maker of silicone breast implants that has offered to pay $3.2 billion to settle complaints from 170,000 women who claim illnesses resulted from their implants.

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Times wire services were used in compiling this report.

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* HISTORY LESSON: The two companies have seen their share of negative publicity. C3

* TECH’S TURN?: Talk is focusing on a tech firm to take Union Carbide’s spot on the Dow. C4

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Chemical Reaction

The surprise merger between Dow Chemical Co. and Union Carbide Corp. would create the nation’s second-largest chemical company. A brief look at both companies and the largest chemical concerns in the U.S.:

Dow Chemical Co.

Headquarters: Midland, Mich.

1998 sales: $18.4 billion

Employees: 39,000

Chief executive: William Stavropoulos

Key products: insulation (Styrofoam), adhesives, sealants, engineered plastics, specialty chemicals, polyethylene (film wraps, plastic bags), agricultural additives.

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Union Carbide Corp.

Headquarters: Danbury, Conn.

1998 sales: $5.7 billion

Employees: 12,000

Chief executive: William Joyce

Key products: polyethylene, ethylene glycol (resins, antifreeze), polypropylene (carpet, food packaging, toys), solvents (paints, coatings)

Biggest U.S. Chemical Companies

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Rank Company 1998 revenue in billions 1 Du Pont $39.1 2 Dow Chemical/Union Carbide 24.1 3 Monsanto 8.6 4 PPG Industries 7.5 5 Sherwin-Williams 4.9 6 Air Products & Chemicals 4.9 7 Praxair 4.8 8 Eastman Chemical 4.5 9 FMC 4.4 10 Engelhard 4.2

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Sources: Company reports, Fortune