DuPont deal could offer relief for embattled Dow CEO

ATLANTA/NEW YORK - For Dow Chemical Co chief executive Andrew Liveris, a merger with rival DuPont Co would come at a convenient moment, as he faces fresh pressure from a major investor and an ongoing federal investigation into the CEO's spending.

According to people familiar with the matter, Dow and DuPont are in advanced talks to combine the storied companies into a chemicals giant with sales of more than $90 billion. DuPont's new chief executive, Ed Breen, would likely retain a CEO role, and Liveris could be appointed executive chairman. The combined entity would then be split into three parts, say the people familiar with the matter.

Dow and DuPont haven't confirmed the talks and declined to comment on the matter.

For Liveris, Dow's chairman and CEO, a merger could help fend off the possibility of renewed attacks by activist hedge fund Third Point. The fund, led by investor Daniel Loeb, last year pressed for a break-up of Dow in an effort to boost a share price that hasn't gained much during Liveris's 11-year tenure as CEO.

A deal also could resolve questions about succession at Dow. Members of the company's board have recently considered whether Dow should replace Liveris as CEO, according to a person familiar with the matter. Liveris has spoken publicly about the possibility of his retiring in coming years. But the threat from activists and an SEC investigation also have factored into the board's thinking, this person said.

News of the merger discussion comes less than a week before the Dec. 14 expiration of a year-long truce between Dow and Third Point. Liveris came under attack last year from the activist investor, which had acquired a 2 percent stake in Dow.

Loeb launched a campaign chastising Liveris for alleged "broken promises" - from cutting dividend payments to ill-timed acquisitions. Those steps, Loeb contended, left Dow undervalued. Third Point pushed at the time for a break-up of Dow by spinning off its petrochemicals business from its specialty chemicals unit.

A truce began last November, when Dow agreed to appoint two new board directors of Third Point's choosing, and two more selected by the company.

With the truce about to end, analysts and other investors say they were expecting the possibility that Third Point might launch a proxy battle, in an effort to replace Liveris and others on Dow's board.

Dow did not respond to questions for this article.

Whether Loeb will resume his campaign against Liveris is unclear. Third Point declined to comment.

A Dow investor at another fund said pulling off the largest-ever chemical industry merger would likely curb Third Point's pressure on Dow. Following the news of the potential merger, Dow's share price surged as much as 11.8 percent on Wednesday to $56.91, its highest level ever during Liveris' tenure as CEO.

Questions about how long Liveris would continue running Dow already had been swirling at company headquarters in Midland, Michigan.

POTENTIAL SUCCESSORS

In October, Liveris announced the formation of a new leadership team - elevating long-time Dow executive Jim Fitterling to chief operating officer, and giving chief financial officer Howard Ungerleider the additional title of vice chairman.

Those two Dow executives were viewed as the leading internal candidates to replace Liveris as CEO. One director described a transition as potentially only months away, according to a person familiar with the matter.

But some members of Dow's board of directors were also evaluating the possibility of replacing Liveris with an external candidate, according to the person familiar with the matter. Those discussions remained informal, and it isn't clear how far along they were, the source said.

Dennis Reilley, chairman of the board's compensation and leadership development committee, didn't respond to requests for comment. Three other Dow board members also didn't reply to requests for comment.

The uncertainty at Dow has been driven in part by a federal investigation of the company stemming from a series of internal inquiries into Liveris's own spending practices.

Reuters reported in June that the U.S. Securities and Exchange Commission is investigating allegations that Liveris may have misused company funds for personal benefit, according to people familiar with the matter.

Documents detailing internal inquiries into Liveris's spending and other issues are among thousands of pages of records subpoenaed by the SEC.

Dow hasn't commented on the SEC's investigation, but has said that the spending allegations were long ago investigated. The company disclosed in a 2011 proxy that Liveris had reimbursed the company for $719,923 of expenses described as "not primarily business related," without detailing them. The matter is closed, the company says.

"Reuters has simply recycled old allegations that the company made public long ago and addressed through independent review, enhanced audits, and improved controls," Dow said in a statement in June.

Last year, a former fraud investigator at Dow, Kimberly Wood, alleged that company money had financed vacations, sports junkets and other perks for Liveris and his family. Dow settled a lawsuit with Wood earlier this year, and both parties agreed not to discuss the case.

Dow's in-house auditors conducted a series of internal examinations into the CEO's activities from 2008 to 2013, Reuters reported in May.

The SEC investigation does not mean that regulators have found any wrongdoing. Such investigations can lead to civil cases against companies and their employees, or they can end with no charges, sometimes months or years later.

HOMETOWN'S FATE HANGS IN THE BALANCE

Australian-born Liveris, 61, has spent 11 years leading Dow. He has earned more than $20 million annually, served as an adviser on manufacturing to U.S. President Barack Obama, and is often a featured speaker at events such as the World Economic Forum in Davos, Switzerland.

A merger with DuPont could offer him an elder-statesman role leading the board of the new company, while Breen - known for his skill at splitting up companies - would oversee day-to-day operations as CEO.

News of a potential deal raises questions for the residents of Midland, Michigan, the small city where Dow has been headquartered since the late 1800s. One consequence might be more layoffs in Michigan, where Dow has already substantially downsized under Liveris.

In July, Liveris announced plans to build a new 150,000-square-foot headquarters building on Dow's corporate campus, as a symbol of "Dow's commitment to Midland," the company said in a statement at the time. Dow broke ground on the project this fall.

In August, in response to Reuters reporting on Dow and Liveris, more than 100 community leaders and businesses in Midland ran advertisements in the local newspaper praising the company and its chief executive.

"We, the residents and local businesses of Midland, are proud that Dow calls Midland 'home,'" the ad said. "We proudly support Dow leadership and CEO Andrew Liveris, just as Dow has supported us since 1897."

Dow did not respond to a request for comment on what would happen to its presence in Midland in the event of a merger.