This paper examines DuPont's 1998 decision to divest its Conoco subsidiary through a two-stage IPO, evaluating the transaction from a CFO perspective. The analysis reviews DuPont's rationale for the spin-off — primarily low crude oil prices and the desire to raise working capital — and compares the actual long-term outcome with an alternative strategy of retaining a majority stake. Drawing on revenue data, earnings-per-share figures, and PE ratios, the paper argues that management undervalued Conoco's long-term potential. The subsequent acquisition of Conoco by Phillips Petroleum and the dramatic rise in oil prices after 1998 demonstrate that a partial divestiture of only 20% would have produced substantially higher returns for DuPont over the following decade.
Over the last several years, corporate America has frequently turned to spin-offs as a way to improve financial performance. A corporate spin-off is an effective tool that helps a firm divest itself of an unprofitable division and raise large amounts of new investment capital. This money can be used to repurchase stock or make strategic acquisitions that allow the firm to adapt to changes in the marketplace. Once this occurs, a company can refocus on core segments that will dramatically increase profit margins.
In the case of DuPont, the 1998 divestiture of Conoco illustrates how the company used this mechanism to raise new capital. Executives believed that this segment had reached its peak profit margins, with oil prices sitting at $20 per barrel. At the same time, Conoco's involvement in different aspects of the industry had helped protect DuPont against sudden drops in the price of crude oil and had contributed substantially to overall revenues. The spin-off gave executives the opportunity to address both issues simultaneously. To determine whether this was the most appropriate course of action requires examining the situation from the perspective of a CFO — analyzing the actions that took place and considering possible alternatives in order to assess whether the spin-off was a financially prudent transaction over the long term.
In 1998, the price of crude oil went into a major decline, with prices collapsing to $20 per barrel. For the industry as a whole, these lower costs created widespread pressure. In some cases — such as Conoco — integrated producers were partially protected against this kind of collapse because they had operations across multiple segments of the industry, including drilling, refining, transportation, and production. The combination of these factors meant that Conoco was providing DuPont with consistent profits. At the same time, it was not performing as effectively as executives had hoped when the company was purchased in 1981. At that time, oil prices had risen to nearly $40 per barrel and supplies were feared to be tightening. To hedge against future price increases, DuPont acquired Conoco with the expectation that it would provide a long-term buffer against rising energy costs (Spitz, 2004, pp. 31–69).
This was part of a broader strategy that many chemical manufacturers were pursuing at the time. The net effect of integrating oil and gas firms with chemical producers was that a number of these companies saw their underlying profit margins increase substantially. Evidence of this can be seen in the revenue tables below, which compare the top-ranked firms in the industry in 1979 and 1989.
Table 1: Top Ten Oil/Gas and Chemical Producers in 1979 — Revenues (in millions)
DuPont: $9,700 | Dow Chemical: $6,634 | Exxon: $5,807 | Union Carbide: $5,300 | Monsanto: $5,215 | Celanese: $3,101 | WR Grace: $2,619 | Shell Oil: $2,599 | Gulf Oil: $2,437 | Allied Chemical: $2,150 (Spitz, 2004, p. 46)
Table 2: Top Ten Oil/Gas and Chemical Producers in 1989 — Revenues (in millions)
DuPont: $15,249 | Dow Chemical: $14,179 | Exxon: $10,559 | Union Carbide: $7,962 | Monsanto: $5,782 | Hoechst Celanese: $5,685 | Occidental Petroleum: $5,203 | General Electric: $4,929 | BASF: $4,461 | Amoco: $4,274 (Spitz, 2004, p. 46)
These figures demonstrate how oil and gas mergers with chemical producers drove exponential earnings growth among the industry's top players. Despite this performance, many DuPont executives saw the situation as an opportunity to increase working capital and exit a business segment constrained by low crude oil prices (Spitz, 2004, pp. 31–69).
DuPont executed the divestiture in two stages. First, the company conducted an IPO that sold 20% of Conoco in 1998. The remaining stake was subsequently sold through a secondary offering. For executives, this transaction was viewed as providing the greatest possible amount of working capital. This perspective is reflected in comments from CEO Charles Holliday: "An IPO gives us maximum flexibility. DuPont will have access to cash from the IPO and, at the same time, will benefit from Conoco's ongoing financial contribution as we consider the options for divestiture" ("DuPont Plans IPO," 1998). This statement illustrates how executives believed that divesting Conoco was the best option for increasing earnings (Spitz, 2004, pp. 31–69).
From a CFO's perspective, this rationale makes sense to a degree. However, the eagerness to sell suggests that management did not fully consider the long-term implications. Executives concluded that low crude oil prices were squeezing profit margins and that the Conoco acquisition had failed to achieve its original objective of hedging against rising energy costs. This view took hold despite the fact that the acquisition had helped increase DuPont's revenues from $9.7 billion to $15.24 billion over ten years. At that point, management began examining strategies to divest Conoco (Spitz, 2004, pp. 31–69).
On the surface, the divestiture appeared to be a financially sound decision. However, Conoco was subsequently acquired by Phillips Petroleum, and crude oil prices eventually climbed to as high as $150 per barrel. This is significant because DuPont's decision to exit when prices were at multi-year lows meant the company did not realize Conoco's full value. Had management been more patient, they could have divested or sold Conoco when oil prices were approaching their all-time highs, capturing substantially greater value (Spitz, 2004, p. 46).
"Partial spin-off scenario and comparative revenue data"
"Two-stage 20% divestiture as optimal strategy"
Clearly, the management of DuPont made a major error in judgment when they divested themselves of Conoco. They needed working capital and wanted to exit a subsidiary they viewed as underperforming, as crude oil prices were placing pressure on profit margins — despite the fact that the Conoco division had helped the firm's revenues nearly double over a ten-year period. Believing that better strategic opportunities existed elsewhere, management chose to sell Conoco to investors in its entirety.
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