Companies in American business history have as much reinvention in their DNA as E.I. du Pont de Nemours and Co. — and these days DuPont needs every bit of it. Today, some 212 years after its birth as a gunpowder mill on Brandywine Creek in Delaware, DuPont again confronts the need to reinvent itself. The company has struggled with this for years. In 1999, CEO Charles Holliday announced that DuPont was abandoning its slogan, “Better Things for Better Living ... Through Chemistry,” which after 64 years was nearly as famous as the company itself. During those six decades DuPont had introduced a variety of synthetic materials synonymous with the modern age: nylon, Orlon, Dacron, Mylar, Teflon, Kevlar, Tyvek, Corian, Stainmaster carpets — not to mention nuclear materials for the atomic bomb.
Under a long run of du Pont family leaders, DuPont became one of the preeminent proponents of growth through scientific research. In the 1950s the company was profitable and large: In the inaugural Fortune 500, in 1955, it was the tenth-largest company in the U.S.
But in the 1970s and ’80s, DuPont began to labor. The company launched forays into oil and pharmaceuticals. By 2000 it had slipped to No. 42 on the Fortune 500. Its stock appreciated 59 percent between 1980 and 2000, well below its R&D-intensive industrial peers’: 3M Co. at 681 percent, Monsanto Co. at 876 percent and Procter & Gamble Co. at 2,269 percent. The company was no longer run by family members; the last du Pont to serve as CEO was Lammot du Pont Copeland, who was succeeded by lawyer Irving Shapiro in 1973. Holliday’s new corporate slogan — “The Miracles of Science” — lacked the appeal of “Better Things for Better Living,” but it did suggest an attempt to transform the company through R&D.
Twenty-five years and three CEOs later, this transformation remains in gestation. The stock hovers around $63, with a trailing 12-month price-earnings ratio of 17. The company’s current CEO, Ellen Kullman, 58, has been in office five years. A mechanical engineer by training who worked at General Electric Co. and Westinghouse Electric Corp. before joining DuPont, Kullman has tried just about everything short of breaking up the company: layoffs, reorganizations, asset sales, reinvestment in R&D, acquisitions. In the fourth quarter of last year, the board agreed to a $5 billion share buyback program. And Kullman has stressed the value of DuPont’s legacy, describing herself in Forbes last year as “transformer-in-chief” while trying to put current efforts at reinvention in context: “The first 100 years we made explosives, the next 100 was modern chemistry, and about 20 years ago we started in biotechnology. The next 100 years is going to be about integrating the sciences.”
But DuPont finds itself in a shareholder environment that’s starkly different from anything that the great DuPont leaders of the past ever faced: global competition, a greater diffusion of science and technology, rapid commoditization of products and, most important, an investor base that is extremely diverse in its interests, aggressive in its demands and impatient for results.
Whether DuPont can once again reinvent itself as a dominant corporate player remains an open question. If it fails, the easy response is to blame executives like Kullman. But the issues are more complex than that in a shareholder-centric world. In a time of share buybacks and dividend increases, can a large and complex science-based company like DuPont engage in a long-term campaign to fundamentally change itself and reignite growth — or will it end up broken into pieces and sold to the highest bidder? Is the company simply too large, too complex, too old? Is it no longer imaginable that a mature company can work the edge of science?
In other words, does DuPont’s DNA mean anything in 2014?
In 1802, Éleuthère Irénée du Pont, a prominent physiocrat and economic adviser to Louis XVI who had fled to America during the French Revolution, built a black-powder gunpowder mill outside Wilmington, Delaware. His company made its first fortune supplying U.S. troops during the War of 1812. A century later the company was still family-owned, and under three du Pont cousins — great-grandsons of Éleuthère, trained at the Massachusetts Institute of Technology — it had reinvented itself by amassing a near monopoly on munitions, only to have that business broken up by the government under the Sherman Antitrust Act.
This would be a recurrent theme in DuPont’s 20th-century history. In the 1930s the company’s munitions business again faced intense scrutiny: The Nye Commission charged that DuPont had profiteered in World War I. By then the company had diversified from explosives to one of the most cutting-edge of then-contemporary sciences, chemistry, producing dyes, lacquers and leather finishes, then synthetic polymers and specialty materials. One of the cousins, Pierre, had invested in General Motors Corp. He went on to become chairman of GM, and in 1920, DuPont stepped in to save the foundering carmaker; Pierre took over as GM’s president. In 1962 the government forced DuPont to unload its 37 percent GM stake under the Clayton Antitrust Act.
Today the U.S. government no longer threatens DuPont. Instead, the industrial giant has more problems with its investors.
Last summer whispers circulated that activist investor Nelson Peltz, through $7 billion-in-assets Trian Partners, was amassing a stake in DuPont. Peltz normally focuses on consumer businesses, though in 2012 he persuaded Dublin-based industrial company Ingersoll-Rand to spin off some of its lower-growth units. More typical of Peltz is his PepsiCo campaign, in which he is urging the company to divest its snack business and merge it with Illinois-based Mondelez International, which manages snack brands formerly owned by Kraft Foods Group. In January, after Pepsi rejected his plan, Peltz joined Mondelez’s board.
Last August, Trian disclosed to the Securities and Exchange Commission that it had snatched up nearly 6 million DuPont shares — more than $300 million of the company’s roughly $58 billion market capitalization. But Peltz has said little about DuPont since then. He has declined to comment publicly on the company, including to Institutional Investor, though DuPont did alter its bylaws in mid-August to make it more difficult to nominate new directors and introduced hefty severance packages for top managers, triggered by a change of control. In October, DuPont announced it would spin off its performance chemicals unit, with products generating $7.2 billion in revenue and $1.8 billion in earnings in 2012. The problem: Competition has been intensifying, and markets like the U.S. and Europe have been weak. Although it throws off cash, the unit is not growing very fast.
DuPont executives deny that pressure from Peltz forced the spin-off, which the company hopes to complete in 18 months. But it would be surprising if activists did not camp out at DuPont. In recent years activist hedge funds have targeted chemicals companies. A year ago Quinpario Partners began agitating at both St. Louis–based materials company Zoltek and Mayfield Heights, Ohio–based Ferro Corp. In April, Jana Partners demanded that Calgary, Canada, agricultural nutrient company Agrium and specialty chemicals maker Ashland, based in Covington, Kentucky, spin off poorer-performing units. In August, Pershing Square Capital Management took a stake in Allentown, Pennsylvania, industrial gas provider Air Products and Chemicals. And in January, Third Point called for Midland, Michigan’s Dow Chemical Co. to separate its petrochemicals from its specialty chemicals business.
DuPont’s latest reinvention has been in the works for years, testing investors’ patience. DuPont’s biosciences foray surfaced as long ago as 1980, when CEO Shapiro announced it to BusinessWeek. Shapiro’s successor, Edward Jefferson, became CEO in 1981, the same year he plunged into a high-profile battle with Joseph E. Seagram & Sons for oil producer Conoco. Oil had nothing to do with bioscience, but buying Conoco ensured that DuPont would have access to reasonably priced petroleum as a feedstock. The high price of oil had been a problem in the crisis-wracked 1970s, though having a captive supplier was less compelling when prices tumbled in the ’80s.
Henry Smith, chief investment officer of Haverford Trust Co., believes Conoco represented the start of DuPont’s attempt at reinvention, particularly because of the presence of Seagram, the Canadian liquor company that ended up with 23 percent of DuPont and four board seats after the takeover battle. Seagram, Smith says, convinced the board of the merits of new shareholder-friendly norms and the need to pull back from traditional paternalistic practices.
At about that time, DuPont made another strategic shift, entering pharmaceuticals. DuPont had bought a small, family-run pharmaceuticals business called Endo Laboratories in 1969, and cash flow from Conoco helped fund a pharma R&D and M&A push; DuPont ballyhooed a joint venture with Merck & Co. in 1991 as a way to become “a competitive force in life sciences.” But in the 1990s earnings and profitability stalled as pharma consolidated, a situation exacerbated by the fact that the fibers business was facing brutal overseas competition.
In 1989, under the CEOship of Edgar Woolard Jr., DuPont began to pare expenses and restructure. Holliday took over from Woolard in 1998 and pressed that restructuring. In 2001 he unloaded DuPont Pharmaceuticals Co. to Bristol-Myers Squibb Co. for $7.8 billion. Three years later he sold DuPont’s textile operation to Koch Industries for $4.2 billion. He retired in 2009; Kullman replaced him.
Today the brightest spot on the company’s balance sheet, by far, is DuPont’s agriculture technology businesses: seeds, crop protection, nutrition and health. DuPont started assembling the building blocks for this strategy in 1999, when Holliday acquired the country’s biggest seed producer, Pioneer Hi-Bred, for $7.7 billion. In 2011, Kullman paid $7 billion for Danisco, a Danish enzyme and food ingredients company. These investments have paid off. Pioneer, crop protection and the nutrition and health divisions now account for some 40 percent of DuPont’s earnings and revenue and look to be its most promising sources of growth. The company’s ag sales jumped 13 percent in 2013 over the previous year; no other business segment experienced more than 4 percent growth. DuPont devotes more than 60 percent of its $2.15 billion R&D budget to its ag and food divisions.
But although DuPont is the world’s second-largest seed company, after Monsanto, it trades at a discount to its biosciences rival, which has a trailing 12-month P/E multiple of 24. New York–based BGC Partners equity analyst Mark Gulley contends that DuPont’s legacy businesses still weigh it down. He says it’s time for DuPont to shed everything but businesses that would make what he calls an ag-tech pure play — that is, a company engaged exclusively in crop protection chemicals, seeds and biotech. He would gather the rest of DuPont — safety and protection, electronics and communication, and performance materials — call it “advanced materials” and form a separate company.
Gulley notes that the market has only two ag-tech pure plays to offer investors: Monsanto and Switzerland-based Syngenta. “I’m looking from the perspective of the shareholder and saying something very simple,” the analyst explains. “I think Monsanto’s and Syngenta’s very focused strategy serves their shareholders well, and there would be a real appetite for a third ag-tech, but DuPont has said no.”
Gulley makes two related arguments about DuPont. Early last year he published a sum-of-the-parts analysis that set the share price at about $73. He cheers DuPont’s decision to spin off performance chemicals; a year ago he recommended that move, and by early February the stock price was in the low $60s, although he believes it could go higher if DuPont got rid of more legacy operations more quickly.
His second argument goes to the heart of how DuPont has long defined itself. The company insists that although its products and business units may seem very different, they’re actually tied together by an underlying science-based R&D process — that, in short, chemistry and biology are fundamentally related. Gulley rejects that integration. He calls DuPont a conglomerate, a grab bag of unrelated businesses. “These businesses have very little to do with each other,” he says. “Management claims they do; they simply don’t. They believe in this marriage of biology and chemistry, but the marriage of biology and chemistry really has yet to pay off in terms of big dividends.”
Is DuPont a conglomerate or a science-based company? Mature or simply in transition? Is the legacy a burden or a boon? It’s all a matter of perspective, particularly investors’. DuPont is a very big and complex organization, and reinventing it takes time. The company has 64,000 employees (down from 135,000 in 1980) and 300-plus manufacturing, processing, marketing and R&D sites in more than 90 countries. At the end of 2013, it had 24,000 active patents (and 20,000 more applications) and had earned $3.6 billion in profits on $35.7 billion in revenue. The company says that in 2012 it introduced 2,047 new products.
“I think the people who want the company broken apart are probably thinking too short-term,” says Dhaval Patel, a commodities and specialty chemicals analyst at $520 billion retirement system TIAA-CREF, which owns 2.6 million DuPont shares. “Ag is the sexy sector in the space right now, and you have companies like Monsanto with a very high valuation, so it looks like ag isn’t getting the full valuation within DuPont’s structure. But DuPont is focusing on what it’s good at.”
The purchase of Pioneer Hi-Bred signaled a shift to businesses DuPont believes will generate the most growth, thanks to what it calls megatrends based on a growing global population: the mushrooming demand for food, dwindling supplies of fossil fuels, the need to protect people and the environment.
Jim Borel, the executive vice president in charge of DuPont Pioneer, points to projections that the earth will have a population of 9 billion by 2050, up from 7 billion today. “To feed people, it’s going to take a doubling of agricultural productivity because we don’t have a lot of additional land. We have to do that in a sustainable way, and to rise to that challenge will require science. Those fundamental, secular trends provide a strong attractiveness to companies like us who are investing heavily in science and have a global position to be able to turn that science into useful products.”
Seeds and food ingredients fit into this framework, but, says CFO Nick Fanandakis, so do other products, like the cellulosic ethanol DuPont is developing as an alternative fuel, lightweight plastics for cars, Kevlar bulletproof vests and Nomex fire-retardant gear.
He says the performance chemicals spin-off and the sale of performance coatings (mostly automotive paint) in 2012 to Carlyle Group for $4.9 billion were necessary because they didn’t promise high-growth opportunities when viewed against the megatrends. “These are businesses that don’t really leverage the sciences that DuPont is going to be driving and integrating across its portfolio,” he explains.
DuPont executives lay out the potential they believe exists within the company’s focus on “integrated science” — that is, developing innovative products by cross-pollinating R&D from different areas. One example: Rynaxypyr, an insect-control product that Fanandakis says couldn’t have been developed without drawing on plant genetics, particle-dispersion chemistry and materials science. In its fourth year of sales, Rynaxypyr netted more than $900 million. In 2012, he says, more than $4 billion in sales resulted from this type of integrated R&D.
In recent years DuPont has made a strategic change by focusing on consumers rather than companies. Three years ago DuPont opened its first innovation center, featuring hands-on displays meant to encourage potential customers to handle company products and sit with DuPont engineers to discuss new offerings. Chief innovation officer Thomas Connelly says one of the first centers was in Japan, where customers’ repeated requests for bio-derived materials to replace those based on oil convinced DuPont that it should commercialize a line of automotive applications based on renewable substances.
Will these moves help DuPont produce the kind of earnings it harvested in nylon’s glory days? John Kenly Smith Jr., a professor of the history of technology at Lehigh University and co-author of Science and Corporate Technology: DuPont R&D, 1902–1980, is skeptical. Market and structural forces make R&D increasingly difficult. Although DuPont was the top science innovator in the first half of the 20th century, competition has significantly risen since World War II as companies and research universities have moved into territory DuPont once owned. That has made it harder to hire top science and engineering talent, Smith says, given that universities now lure talent by promising to help secure venture capital funding for their innovations.
Perhaps most discouraging, Smith says, is that the shareholder governance that emerged in the 1980s has intensified. “Major new discoveries require patience and time,” he says. “Now DuPont has been subject to corporate raiding pressure; there didn’t use to be any of that. They didn’t have institutional investors breathing down their neck all the time, and they didn’t have corporate raiders looking for any sign of weakness.”
DuPont still has shareholders that believe in the company, of course. “They’re very innovative, almost like an early-stage pharmaceutical company,” says Michael Crofton, president and CEO of Philadelphia Trust Co., which owns just over a half million DuPont shares. “They have lots of products in process, and we just need to see how those processes pan out to determine where they should be. I think they should keep the ag businesses and the high-growth businesses together for now and at some point perhaps spin those out. But not right away. I think those synergies are important to maintain.”
Haverford CIO Smith, whose firm holds 1.8 million DuPont shares, also wants the current strategy to play out. But he believes real success will be reflected in a steady progression of dividend increases. “Dividends don’t lie,” he says. “Forget the rhetoric that comes out of the company; just look at the dividends. If you start to see something in the range of 8 to 10 percent increases on a very consistent basis, you’ll know DuPont is really becoming much more of a Steady Eddie type of company, as opposed to a cyclical one.”?
The burden falls to CEO Kullman. By any measure, she made a major impact in her rise at DuPont — all the more impressive as a woman in a traditionally male world. “Her track record within DuPont is fascinating,” says Behnam Tabrizi, a consulting professor in management science and engineering at Stanford University and author of the book Rapid Transformation. “She’s grown just about every business she’s touched.”
After working several years in marketing at General Electric, Kullman joined hometown DuPont in 1986 as a marketing manager in medical imaging. Over the next 23 years, she ran the safety and protection unit, which generated double-digit growth during her tenure; started the industrial biosciences and sustainable-solutions businesses; and headed white pigment and mineral products and a handful of other industrial units.
When Kullman assumed the CEO position in 2009, she had to let go 4,500 employees while mastering a still-giant company in the midst of a wrenching recession. She also reworked the management structure, removing one layer by eliminating a group of vice presidents and handing oversight of most operations to three managers. She consolidated 23 businesses into 13 and regionalized and localized them while boosting market interaction. And since then she has offered shareholders a blend of addition — her acquisition of Danisco was the second largest in DuPont’s history — and subtraction: selling off performance coatings and, currently, performance chemicals.
Not surprisingly, Kullman insists the transformation is on track. “We have been accelerating our strategy to higher growth, higher value markets where our science can deliver even greater value,” she writes in an e-mail. “We are well positioned to leverage our advantaged science in key markets like food, energy and advanced materials.”
Tabrizi agrees Kullman has demonstrated a willingness to shake things up. “Many CEOs I work with are worried about changing the status quo because of the political backlash they’ll receive,” he says. “But Ellen has been taking bold, courageous actions.”
TIAA-CREF’s Patel echoes the sentiment. “DuPont has consistently talked about being a science company for decades,” he says. “Now what you’re seeing is a CEO who’s actually encouraging the company to embrace that even more.”
But that may suggest DuPont’s real shareholder problem. Patel’s comments intimate that Kullman’s predecessors may have been more talk than action when it came to serious change. The Conoco deal was a dead end, though a lucrative one; and the pharma buildup was sold off. Meanwhile, years passed, technologies matured, and the rhetoric of change continued to sound.
No wonder shareholders grow impatient and argue DuPont should take more-radical steps to clarify and simplify its business proposition. In DuPont terms — in Kullman’s own formulation — it can take a century to unleash the commercial potential from basic science: explosives, chemicals, life sciences. Shareholders, however, measure performance in much shorter increments and have learned to fear talk of transformation. For all the chatter about scientific wonders to come, that gap between promise and profits may be DuPont’s biggest reinvention problem. • •
