DuPont’s Divestiture of Conoco
Analysis of the Merger
DuPont began life in 1802, as a gunpowder manufacturer supplying the US Army under President Thomas Jefferson. The company had a long tradition of technological innovations in business and it continues to serve worldwide markets including food and nutrition; health care; agriculture; fashion and apparel; home and construction; and electronics. Among some of its inventions are nylon stockings invented in 1939, Teflon for pans, Kevlar for bullet-proof vests, stainmaster for carpets, the synthetic fabric lycra, and Dacron for clothing. In 1999 the company held a portfolio of 2000 trademarks and brands. DuPont was the 15th largest company in the US with its 1998 revenue reaching $45.1 billion. The company operated 200 manufacturing and processing facilities in 65 countries with 98,000 employees worldwide.
Conoco began in 1875 as the Continental Oil and Transportation Co., one of the first petroleum marketers in the West. The company has made it through plenty of tough and challenging times from the stock market crashing just a month after Conoco took its stock public, to overseas expansion, to the oil crisis of the 19070’s. Then in 1981 a simple proposal by Canada's Dome Petroleum about acquiring a Conoco subsidiary, Hudson's Bay Oil and Gas left the company wide open. In order to assure an adequate supply of petroleum products to use as chemical feed stocks, DuPont bought Conoco on Sept. 30, 1981. Conoco became a wholly owned DuPont subsidiary in the largest merger ever at that time, costing DuPont $7.8 billion. As a subsidiary of DuPont, Conoco became a major, integrated, global energy company operating in 40 countries worldwide. The company was involved in both downstream and upstream activities like exploring for, developing, refining, marketing, transporting, and selling crude oil and natural gas. In 1998, Conoco ranked 8th in worldwide production of petroleum liquids by US companies, 11th in natural gas production, and 8th in refining throughput.
In 1997 both DuPont and Conoco planned to pursue new corporate strategies: DuPont wanted to transform into a life sciences company focused more on biotechnology and less on petrochemicals, and Conoco desired financial independence to make significant foreign asset investments. While part of DuPont, Conoco doubled its value between 1986 and 1996, and realigned its assets. By late 1998, DuPont divested Conoco in a two-step process. First it would sell a minority stake in Conoco through an IPO otherwise known as an IPO carve-out. Then it would execute a spin-off and sell the rest of its ownership interest in the subsidiary at a later time. Under the split-off, DuPont shareholders would be given the opportunity to exchange their DuPont shares for shares in Conoco at a predetermined ratio of 2.5 to 1. Participation in the exchange rate would be completely voluntary. On October 22, 1998 the Conoco IPO netted $4.4 billion for 30% of Conoco culminating in the largest IPO in history. Then on August 9, 1999 the swap of DuPont stock for Conoco stock was finalized. DuPont secured about $21 billion in after tax value through the IPO and stock swap.
I think DuPont’s two-stage divestiture worked the best because the company was able to make the transaction tax-free at both the corporate and personal levels. This basically means that DuPont sold off shares of Conoco in two separate stages. The company avoided the corporate capital gains tax by structuring the deal as a primary offering, which is the first of issuance of stock for public sale from a private company. Under this approach Conoco would sell new shares to the public and use the money from the offering to pay down an equivalent amount of its debt. If a second offering had been used, DuPont would directly sell a portion of its Conoco shares for cash, possibly creating a capital gains tax liability for itself if the sale proceeds...
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