Breaking Up Is Hard to Do

October 15th, 2015 by Phil Mattera

Alcoa is doing it. So is Hewlett-Packard.

They’re following the lead of corporations such as General Electric, Time Warner, Gannett and W.R. Grace. The “it” is splitting up the company into two independent firms.

The reasons for these break-ups are not always clear. In announcing the plan for Alcoa, Klaus Kleinfeld declared: “In the last few years, we have successfully transformed Alcoa to create two strong value engines that are now ready to pursue their own distinctive strategic directions.” Why those “engines” cannot remain under the same corporate roof was not explained. Kleinfeld described the split as “the next step” for two businesses ready to “seize the future.”

What are really being seized are the giant fees charged by investment banks to cook up these schemes, often for companies that previously retained their services to arrange marriages they are now seeking to undo. Like much of what passes for corporate strategies, “demergers” as well as mergers are expensive guesses as to what will result in maximum profits. They need not be taken too seriously.

Yet sometimes breakups are a lot less benign. Take the case of chemical giant DuPont, which a few months ago split itself up with the creation of a spinoff called Chemours. Sounding like the Alcoa guy, then-DuPont CEO Ellen Kullman announced the plan late last year by saying that the parts of the company being divided from one another had “distinct value creation strategies.”

Yet it turned out that the businesses to be transferred to Chemours included those with the most serious environmental, health and safety problems. There was immediate concern expressed by groups such as Keep Your Promises DuPont that the ownership change would impair the commitments DuPont had made to deal with toxic waste sites and other contaminated areas.

One of those areas was Parkersburg, West Virginia, where DuPont had produced Teflon. In 2004 the Environmental Protection Agency charged that for two decades DuPont failed to report signs of health and environmental problems linked to perfluorooctanoic acid (or PFOA), which is used in making Teflon. Residents living near the plant sued the company, which agreed to pay out about $100 million to settle the case and spend up to $235 million on medical monitoring of residents, which is ongoing. That obligation has presumably transferred to Chemours, but there are concerns that the new firm may not be able to handle the costs.

DuPont’s initial SEC filing about Chemours disclosed that the new company would begin life with some $298 million in environmental liabilities but acknowledged that the total could rise to 3.5 times that amount.

If DuPont thinks that it has washed its hands completely of these liabilities as a result of the Chemours spinoff, a case involving Anadarko Petroleum suggests that it may be mistaken. A decade ago, Anadarko acquired Kerr-McGee, on oil and nuclear fuel company made infamous in the scandal involving Karen Silkwood. In preparation for the takeover, Kerr-McGee had broken itself up, dumping its major liabilities into a new firm called Tronox, which later when bankrupt.

A legal battle over Tronox’s environmental obligations was finally resolved earlier this year with Anadarko having to pay more than $5 billion to cover cleanup costs. DuPont and Chemours, like Anadarko and Kerr-McGee and Tronox, may learn that breaking up can indeed be hard to do.

Note: The Anadarko settlement turns out to be the second largest entry in the Violation Tracker database my colleagues and I at the Corporate Research Project of Good Jobs First will release on October 27.

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