Back to Basics: The DuPont Proxy Battle

As part of Activist Strategy here’s a look at how the DuPont proxy battle will shake out. But it’s really a story of the market’s inefficiency and inability to do independent due diligence - driven by retail investors and passive investors.

We’re truly in the 11th hour of this historical proxy battle. Peltz is already downplaying the action, noting that he’s only expecting to get 1 of the 4 board seats he’s vying for - which would be the one for himself. But in early news, it looks like index funds are voting for DuPont, meaning that Peltz might not get any seats.

All this comes as many have come to DuPont CEO Ellen Kullman’s defense, this includes @Bill_George, whose current role includes teaching at Harvard (as well as part-time DuPont marketing liaison - that’s off the record). His Twitter timeline looks like a lot like something you’d see from @DuPont_News.

There’s something about the academics. Recall that Yale @JeffSonnenfeld has been an avid Ellen Kullman supporter as well, taking Trian to task over its performance. As Bill George has so graciously pointed out, using DuPont’s own scrupulous internal research, since Kullman took over through 2014, shares of DuPont are up 266% on a total shareholder return basis.

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But beyond George’s questionable relationship with DuPont, that’s not all that bad of a return even in the context of chemical and agri peers. Over the same period, Dow Chemical is up 266%, BASF is up just 165%, Monsanto is up 87%, Syngenta up 91%, Scotts Miracle up 150%.

So in the grand scheme of things, shareholder returns haven’t been all that bad under Kullman. But you have to be more focused on where we’re going and not where we’ve been. The question becomes; is it possible that even though the company is two centuries old, the market still doesn’t fully understand how DuPont works?

Peltz and Andrew Ross Sorkin had a conversation last year where Sorkin asked Peltz what he thought of when someone mentioned DuPont? His answer, “paint.” DuPont sold its paints business in 2013. The idea is that there are a lot of complexities with the business and no one really knows what DuPont does - leading to an inherent conglomerate discount. But beyond that, there’s also the idea that this complex business model leads to excess costs.

The proxy battle is what’s driving the story right now. The fundamentals of the company haven’t changed but multiples have expanded. With multiples already re-rating higher, Peltz’s campaign has at least helped the market/investors better understand DD’s business. But ultimately, the index managers like Vanguard and BlackRock, and DuPont’s large base of retail investors, just can’t grasp Pelt’s long-term vision.

The numbers under Kullman have been “impressive.” Longer term, things haven’t been as great. Over the last decade, shares of DuPont are up 58%, while the S&P 500 is up 81%. Kullman shouldn’t get all the credit for DuPont’s. It’s a cyclical company and Kullman got the luck of the draw, with a rising market pushing DuPont shares higher. The six years prior to Kullman, DuPont and its chemical peers grossly underperformed the S&P 500 - upwards of 40 percentage points for DuPont. That’ll be the story again when we finally do see an end to this six-year bull run. The agribusiness, and the whole idea of using large research and development budgets to invent products, has changed a lot over the last six years. Competition is fierce. The big question is; would DuPont become less cyclical if you broke it up? It would certainly seem so.