Welcome to The Business Buying Academy with Sieva Kozinsky.

🔑 They bought a $7 billion oil company (at the exact wrong time)

In 1802, a French immigrant started a small gunpowder manufacturing business in Delaware.

It later became one of the US military's largest suppliers.

And two centuries later, it's one of the largest chemical companies in the world.

The company: DuPont.

A $17 billion company, DuPont manufactures and sells chemicals and materials like sealant, pesticides, nylon, polyester, Teflon, and Kevlar.

You likely have several DuPont products within a few feet of you.

Today we're diving into how DuPont vertically integrated amid a supply crisis, but later reversed course..

Let's jump in.

The 1970s Oil Crisis and the M&A Deal to Fix DuPont's Expense Problem

Oil and gas were primary inputs into about 80% of the products DuPont produced in the 1970s.

That became a crisis in 1973 as an oil shortage choked supply.

Profits fell from $586 million in 1973 to $273 million in 1975.

DuPont recovered later in the decade (1979 sales were about $12.6 billion and earnings $939 million).

That same risk reared its head during Q4 of 1979. Hydrocarbon costs in that quarter were nearly 65% higher than a year earlier as the world faced another oil shortage.

But management vowed to never let this happen again.

The next oil shortage could be an existential crisis for DuPont.

By 1980 the company was still the industry’s blue chip, but it was cyclical and exposed.

Sales that year were about $13.6 billion and net income $716 million.

Competitors such as Dow, Monsanto, and Allied already had captive oil or gas positions.

But DuPont did not.

Chairman Edward G. Jefferson’s answer was vertical integration: own the crude rather than keep buying it from Shell and others.

Conoco, then the 9th-largest U.S. oil company and a major coal producer, was the answer.

Jefferson called Conoco chairman Ralph Bailey. Within days they had a deal.

The Bidding War

DuPont first agreed to buy Conoco for about $7.3 billion in cash and stock.

Seagram, the liquor company looking to diversity into energy, bid cash for a controlling stake.

Mobil, the No. 2 oil company, then piled in with a higher cash offer that eventually reached $120 a share.

Conoco’s board preferred DuPont.

Mobil’s bid looked better on paper, but shareholders doubted antitrust authorities would let one major oil company swallow another.

DuPont’s offer was friendlier and more certain to close.

Terms of the Deal

DuPont paid in cash for 45% of Conoco and DuPont shares for the rest.

Total value at close was $7.8 billion.

Combined, that was more than twice Shell’s 1979 Belridge deal, the previous record for the sector.

DuPont borrowed about $3 billion for the cash portion and ended up with roughly $3.9 billion of new debt.

The companies before and after the merger:

• DuPont (1980): sales $13.6 billion, earnings $716 million.
• Conoco (1980): sales $18.3 billion, earnings $1.02–$1.03 (larger than DuPont on both sales and profit).
• Combined 1980 sales: about $32 billion, which would have made the new company the 7th-largest U.S. industrial firm, just behind Ford.

How the Deal Turned Out

The oil market did the opposite of what DuPont assumed.

Prices softened, then collapsed in the mid-1980s.

The acquisition had solved a 1970s feedstock panic with a 1980s oil glut.

Feedstocks (a term in industrials referring to a raw material that's turned into a final product or energy) became plentiful, not scarce.

Conoco quickly accounted for a huge share of DuPont’s revenue.

By the mid-1980s petroleum refining and marketing alone was nearly half of sales, but a much smaller share of profit.

One analysis had Conoco contributing about 42% of revenue and only about 17% of after-tax operating income.

DuPont sold more than $1.5 billion of Conoco-related assets in the first three years post-deal to cut debt.

The stock, around $53 just before the deal, fell into the high $30s.

However, DuPont viewed the acquisition as a hedge.

In some sense, the deal was a success.

DuPont got bigger and more financially resilient in the 1982 recession than it would have been as a pure chemical play.

Strategic Reversal

By the late 1990s the thinking reversed.

CEO Charles Holliday wanted life sciences, agriculture, and higher-margin chemicals, not a $20-billion oil company inside a chemical business.

In 1997 DuPont’s total sales were about $45 billion; Conoco was responsible for a large slice of revenue and nearly half of earnings.

In 1998 DuPont sold a minority stake in one of the largest IPOs of the era.

In 1999 it split off the rest of the business.

Conoco was valued "in the mid-teens of billions of dollars" at exit, a single digit annualized return for DuPont after 17+ years of holding the oil business.

DuPont re-focused on its agriculture business and later merged with Dom Chemical in 2015.

Sieva

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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