Whether the divesture is made from a financial perspective is a function of all underlying factors responsible for producing the expected results. Underlying factors include the financial stability of the company as a holistic organization, and the reasons behind the divesture with respect to the current industry positioning. Additionally, the divesture is anticipated to save money. The expected increase to profits, if any, and the expected decrease in operating costs as a function to the increase in profit, should be estimated.
The notion of the DuPont Company divesting Conoco Corporation is to say that Conoco is a failing brand that is reducing the profitability and perhaps the growth rate of DuPont as well. Financially, the divesture is a means to reduce costs if the expense of maintaining a specific line of business becomes exceedingly prohibitive when considering the current underlying profitability of the business and the function of its future sales and growth rate.
The economic climate of the most recent 15 years within the global business and manufacturing community has experienced, in some ways, exceptional growth in some parts of the world and a tremendous retraction in current and potentially future economic growth. Therefore, the idea of reducing the exposure to a slowing in demand and in growth is expected, especially when operating primarily within the regions expected to experience the reduction in demand and slower growth.
The benefits of divesture is certainly a reduction in operating expenses, such as day-to-day operations and maintaining working capital structure. When operating margins across business lines becomes thin, the most appropriate method to reduce operational expenses is to divest business lines thereby reducing exposure to worsening economic climates. Such divesture is also sensible given the long-term economic outlook of a given region. DuPont's strategic planning assessment undoubtedly revealed a weakened macro-economic climate within their operating markets and very likely forecasted an exceedingly and increasingly weak sales environment and a cost increase to its manufacturing operations.
The disadvantages of divesture is indeed losing out on the revenue production of the business line. Conoco is a familiar convenience mart offering gas and convenience items that travelers and area natives enjoy and depend on. Is the demand for Conoco inelastic? Potentially, Conoco is also synonymous with route 66 gas station and are the same entity. These stations exist throughout major interstate highways across the nation and compete with rivals including Marathon, Pilot, and Mobil Marts.
Revenue generation given the relative inelastic need for gas is also a strong benefit of not divesting. Additionally, the relative ease of transitioning a gas station into a hydrogen station enables DuPont to have potentially strong market share in the soon-to-be hydrogen gas market. Although such a transition would create a new expense on its asset base, the expected ability of Conoco to remain a Cash Cow for DuPont cannot be overlooked or dismissed easily.
The risks are to misjudge the market and make the wrong decision. The long-term expected demand of petroleum gasoline or hydrogen fuel products may not be as strong as when the Conoco locations were opened. The expected increase in inflation and the global demand for these products in developing countries, where Conoco lacks exposure, prevents the real growth of Conoco for DuPont.
The question of divesture is not always of complete divesture or 100% sell-off of business line assets. For example, 65% of the business line may be profitable and an additionally 6% may become profitable in less than five years. Therefore, the divesture of approximately 30% of the business would make sense yet divesture of over 70% of the business may not make sense. According to Conoco President and CEO Archie W. Dunham, "There are a large number of investment opportunities for energy companies today, largely due to widespread privatization and deregulation around the world. The IPO will provide Conoco with the means to capitalize on those opportunities." (Oil & Gas Journal, 1998)
The divesture in the eyes of the President/CEO of Conoco visualized the IPO as an opportunity for greater control of Conoco to harness the power of its brand to capitalize on what ostensibly are global energy opportunities. DuPont can use the money generated from the divesture to propel itself into business opportunities in other arenas throughout the world. Additionally, according to the S&P, "The divesture of this business, which accounted for about 24% of 1997 after-tax income, adjusted for nonrecurring items, and 32% of total assets, would reduce DuPont's business diversity." (Oil & Gas Journal, 1998)
The move is described by Warren (1998), as, "DuPont Co. said it would shed its oil unit, Conoco Inc., and use most of the proceeds, which analysts put at about $25 billion, to invest in its growing life-sciences business. The move delighted Wall Street, which for years has complained that the chemical company's ownership of an oil company was confusing to shareholders and diluted DuPont's market value. With the announcement, DuPont shares, which already had risen almost 30% this year, rose $5.4375, or 7.3%, to $79.50 in New York. Conoco contributed $21 billion of DuPont's 1997 revenue of $45 billion." (Warren, 1998)
Additionally, according to Warren (1998), "The sale of spinoff of Conoco is widely thought to be the prelude to a major acquisition in the life sciences, which Mr. Holliday has called the centerpiece of DuPont's future. Mr. Holliday said that the lion's share of proceeds from the Conoco sale, which ultimately could bring between $20 billion and $30 billion, would go toward building the biotechnology segment. He declined to say if DuPont was mulling one sweeping transaction, or smaller, incremental additions to its portfolio." (Warren, 1998)
Considering that approximately one-half of the 1997 revenue generated by DuPont came from Conoco is to indicate that a full divesture may not make sense. However, enough of a divesture to facilitate enough funding to start a venture in another area is the profitable arena for the DuPont Corporation. The Conoco Corporation contributed $21billion of DuPont's 1997 revenue and the value of the divesture at 100% is estimated to be $20 to $30 billion dollars. Considering the break-even, the minimum to establish the break-even would be a $21billion dollar sale. However, DuPont can play the hard bargain and sell off, if necessary, the entire business at an estimated $30 billion.
At a full valuation of $30 billion, a 50% divesture will net $15 billion and a 60% divesture will net $18 billion. The risk of a 60% divesture is greater than at 50% because the risk of losing $18 billion in a new venture establishes more financial exposure than at 50%, which risks $15 billion in the 'wild catting' if you will, of seeking a new investment. DuPont is a chemical company and it is important to note how Wall Street favorably responded to the real-life divesture of Conoco due to the belief that multiple and unrelated lines of businesses within a company can cause management and financial problems in the future. Wall Street felt the divesture to make sense.
According to Westervelt (2011), "DuPont also says that its board has authorized the previously announced divesture of its 70% stake in its oil and gas venture, Conoco. The company offered a 30% stake in Conoco through a $4.4 billion initial public offering in October." (Westervelt, 2011) The announced 70% stake in Conoco is a large portion of the business to divest when considering a 30% stake is valued at $4.4 billion.
For DuPont to desire an expansion into areas that seem contradictory to its exemplary strength as a chemicals company, ostensibly is an aggressive move to establish market share against new competitors that have a stronger knowledge base within industries such as healthcare, and is a great deal of risk exposure. Conoco is a petroleum company that also operates and maintains a convenience section on each of its gas station properties. The convenience store function is complementary to the oil & gas delivery system. However, many of DuPont's wishes with the money are not complementary to current activities and do represent completely new ventures certainly, in uncharted industries.
DuPont can divest in stages. Perhaps this is the best idea and although many will be quick to point out the relative indecisiveness of Conoco should they divest in stages, the ability to manage the sales proceeds is a sign of maximizing stakeholder value. If DuPont divests 63% of the company all at once and invests the proceeds in stages, with a portion of the proceeds set into an interest bearing account or short-term investment, such an idea also provides a maximization to stakeholder value.
DuPont should divest 47% of Conoco and retain a 53% holding of the company as to retain majority vote and influence over company decision yet also have the financial capital to pursue other endeavors including possible ventures into health care.
DuPont should not divest 100% of the company. A complete sell off will reduce DuPont's profitability by 50%. Even with expected weakness from Conoco in the future and…