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Dow, Dan Loeb Sign Peace Treaty to End 'Board Seat' Battle

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Dow Chemical (DOW - Free Report) and activist investor Dan Loeb's Third Point hedge fund reached a crucial agreement last Friday, under which, the former agreed to add four new, independent directors to its board (including two suggested by Third Point), thus avoiding the possibility of a proxy battle between them.

All four new directors will be included in Dow’s nominations for election at the 2015 annual meeting. Under the agreement, Third Point will vote in favor of the nominees at the meeting. Third Point has also agreed to a one year customary standstill agreement. Both companies have agreed to refrain from making any public comment on the issue and are content to settle the matter agreeably.

Dow said that three of the new directors – Mark Loughridge, Ray Milchovich and Robert Miller – will join its board on Jan 1, 2015, while Richard Davis will join in May 2015 after the annual meeting. Both Ray Milchovich – the former CEO of Foster Wheeler – and Robert Miller – the non-executive chairman of the board of American International Group (AIG - Free Report) – have been nominated by Third Point. Dow also agreed to cut the size of its board to 12 members from 13 before its 2016 annual meeting.

Dow’s shares gained around 2.6% to close at $52.84 last Friday, after rising as much as 4.5% in the trading session on that day. The stock is up around 22% year-to-date and roughly 37% over a year.

The agreement came after Third Point increased pressure on Dow with its demand for board seats and follows several negotiations between Dow’s CEO Andrew N. Liveris and Dan Loeb, according to sources. Third Point, earlier this month, launched a website criticizing Dow for its “broken promises” to shareholders. The hedge fund also considered launching a proxy fight and named Ray Milchovich and Robert Miller as members of an advisory board that it formed to put forward its suggestions for Dow.

Dow, in response, said that it disagrees with the position sketch out by Third Point and the latter’s statements show a “fundamental lack of understanding” of the company. The company also added that its board and management are actively pursuing the best interests of all shareholders.

Dow came under pressure in early 2014 after Third Point bought a major stake in the company by reportedly forking out $1.3 billion. Loeb urged Dow to spin off its sluggish petrochemicals business and focus instead on high-margin, fast growing businesses with a view that the move will create more value for the company’s shareholders. Both companies have been exchanging dialogues since then.

Dow remains actively focused on seeking opportunities to optimize its portfolio by selectively spinning off or selling its underperforming assets and gradually shift focus to high growth businesses. The company is carving out a major portion of its chlorine business that has been in operation for over 100 years. Commodity chemicals assets that are being identified for separation represent up to $5 billion in revenues.  

Dow, a few days back, divulged a raft of strategic actions aimed at boosting shareholder value and drive growth. These moves include a raise in its dividend and share repurchase program, an increase in asset divestment target and a reduction of the company’s equity position in Kuwait Joint Ventures.

Dow also said that it is realigning its external reporting segments (to five operating unit from six) that will enhance visibility regarding value drivers of each unit and allow more transparent peer comparison.

Dow’s compatriot DuPont is also being pressed by renowned activist investor Nelson Peltz’s Trian Fund Management for breaking itself up into two distinct companies. Trian, in Sep 2014, said that DuPont’s current conglomerate structure and flawed business plans are destroying shareholder value and the suggested move could materially improve the company’s financial performance and double the value of its stock within next three years.

However, both Dow and DuPont have been actively defending themselves against such ‘breakup’ calls while remaining focused on executing strategic actions including portfolio optimization, disciplined capital allocation and cost control.

Both Dow and DuPont are Zacks Rank #3 (Hold) stocks.

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