Finding the Active Ingredient in Dow Chemical
Dan Loeb wants Dow Chemical DOW +6.64% to go down a path it was probably already going to take.
The activist hedge-fund investor's Third Point said in a quarterly letter dated Tuesday that a new position in Dow counts as its biggest investment. It went on to say Dow should separate its petrochemicals business from its specialty-chemicals business.
The reason: The shares have "woefully underperformed over the last decade," said Third Point, noting that Dow had returned just 46% including dividends over the 10 years ended Jan. 10. That compared with returns of 101% for the S&P 500 and 199% for the S&P Chemicals index.
Over a shorter time, however, Dow shares have done well. They returned 42% last year, topping the S&P 500's total return of 32%. Much of that outperformance probably reflected the competitive advantage it has gained at its U.S. facilities as a result of cheap natural-gas liquids, as well as steps it has taken to streamline its business. That included the announcement in December of plans to exit 40 facilities that produce chlorine, epoxy and other commodity chemicals.
Some of the gain, though, was probably due to ongoing chatter that activist investors might target the firm.
Activists or no activists, Dow is probably on course to eventually split off its commodity chemical business to get investors to focus on its higher-margin specialty-chemical business. A sum-of-the-parts analysis suggests the combined company should fetch $75 a share, according Hassan Ahmed of Alembic Global Advisors, compared with around $46 Tuesday.
But if Dow was going to eventually split anyway, the lift Third Point has given its shares might spur it to move more quickly. Given the stock is trading at its highest level since 2007, investors think something is in the works.
Dow might not have to heed Mr. Loeb's call. But it will have to address those market expectations.