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How DuPont and Dow Chemical merger could be a 'game-changer'

The combined companies will later split into three separate businesses and will have a large impact in the agricultural, materials, and specialty product industries. 

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DuPont//Reuters
Edward D. Breen (l.), chairman and chief executive officer of DuPont, is pictured shaking hands with Andrew N. Liveris, Dow's chairman and chief executive officer, in this undated handout photo provided by DuPont. Chemical giants DuPont and Dow Chemical Co agreed to merge in an all-stock deal valuing the combined company at $130 billion, with plans to eventually split into three.

DuPont and The Dow Chemical Company have agreed to an all-stock merger that will bring together two of the largest chemical industry titans in the United States. The merger is the first step in a process that will see the merged company broken into three separate businesses. The three companies will focus on agriculture, materials, and specialty products.

The merger-split promises to have a large impact on corresponding industries and will likely please activist investors who have spent years pushing for conglomerates to be broken up.

"This transaction is a game-changer for our industry and reflects the culmination of a vision we have had for more than a decade to bring together these two powerful innovation and material science leaders," Dow CEO Andrew Liveris said in a statement.

Dow Chemical has produced plastics, chemicals, hydrocarbons, and agrochemicals for 118 years. Notably, it produces Styrofoam insulation products and chlorine products and owns half of Dow Corning, a silicone products maker.

DuPont makes products used in a variety of industries, from pharmaceuticals to construction. The company owns the Kevlar brand and previously produced Teflon.

The all-stock merger of the two companies is valued at $130 billion.

The three-direction split will likely occur within 24 months after the merger is complete, expected to be sometime in the second half of 2016. By merging before the split, the companies will receive greater tax allowances. "They need to merge first in order for the subsequent spin offs to qualify as tax free transactions in the United States," SunTrust Robinson Humphrey analyst James Sheehan told Reuters.

Of the three separate companies, the biggest by revenue will be material sciences, which will sell to packaging, transportation, and infrastructure industries. Last year's combined revenue from the two companies was about $51 billion.

The smallest of the three companies would be the specialty products company, which will sell to electronic and communication industries. Revenue estimates place its value at $13 billion.

The agrichemical company is expected to generate $19 billion through the sale of seeds and chemical insecticides to the agricultural industry. It is likely to be the company most scrutinized by regulators.

The seed market is already dominated by the massive multinational Monsanto, says Diana Moss, president of the American Antitrust Institute.

"You're almost creating duopoly in the market, and that's a problem," Ms. Moss told Reuters.

Monsanto recently abandoned a $45 billion offer to buy the Swiss firm Syngenta AG in August. That offer or one similar could be revived. 

"(The question is) how does Monsanto respond to the strategic move by two of its main competitors?" Mr. Sheehan said.

Regulators will be closely monitoring the merging of DuPont and Dow with an eye toward making sure that they do not acquire too much monopoly power.

This report includes material from Reuters.

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