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Dow, Union Carbide to merge

The $9.3-billion deal would create the world's second-largest chemical company, with combined revenue of about $24-billion.

The Dow Chemical Co. said Wednesday that it was acquiring the Union Carbide Corp. for $9.3-billion in stock in a deal that would join two household names and create a chemical giant second only to DuPont in size.

Although neither company makes consumer products any longer, names they made famous, such as Dow oven cleaner and the former Union Carbide brands Prestone antifreeze, Eveready batteries and Glad bags, still show up on supermarket shelves, made by others. Dow and Union Carbide now make lesser-known products like polypropylene and ethylene glycol, so-called intermediate and basic chemicals that crop up in everything from computers to food wrapping.

Declining profit and a cyclical slump in chemical prices put Union Carbide in the market for a partner, and Dow is counting on trimming its already low costs even further to help it compete in a rapidly consolidating market. The merged company, which will have combined revenue of about $24-billion, expects annual savings of about $500-million. Dow also will assume $2.3-billion in Union Carbide debt.

The new company, which will keep the Dow name and be based in Dow's current home, Midland, Mich., plans to eliminate about 2,000 jobs, leaving a global work force of about 49,000. Although Union Carbide _ and presumably its headquarters in Danbury, Conn. _ will cease to exist as a separate entity, neither company would confirm that the Danbury operations would be shut down or where the cuts would be.

Despite the size of the new Dow, there are so many chemical companies scattered across the globe that the merged company is unlikely to command more than 12 percent of the market for any one chemical market. Thus, analysts say it is unlikely to run into antitrust obstacles.

Carbide's investors have seen their investment stagnate in recent years. But Carbide's shares soared Wednesday, to $59.37{, up $10.56\. In contrast, Dow stock fell $6.06\ to $118.62{ on the prospect that the company will issue new shares to close the deal.

Carbide is one of the 30 companies that make up the Dow Jones Industrial Average _ a spot that many on Wall Street speculated would go to Microsoft Corp. but that history suggests may be taken by the merged company.

The merger comes at a time when the companies that make building-block chemicals _ look-alike products such as ethylene and propylene that are sold by the ton and differentiated primarily by price _ have joined forces throughout the world. Lyondell Chemical, Millennium Chemicals and Occidental Petroleum pooled their basic chemical businesses, while oil mergers such as Exxon and Mobil are creating huge chemical entities in addition to oil giants. Merger mania also has embraced companies that make specialty chemicals _ inks, foams and other technologically complex products with small niche markets and high margins.

Dow and Union Carbide have products in both camps, yet both have marched against a broader trend in the chemical industry _ the shift of many basic chemical companies toward agricultural chemicals, pharmaceuticals and other so-called life sciences businesses.

Dow and Union Carbide, in contrast, have remained focused on using technology to become the lowest-cost producers of older-style chemicals as well as finding more uses for them. Union Carbide is among the largest makers of polyethylene and polypropylene, two of the most commonly used plastics. It also is a leading supplier of solvents and other chemicals to the paint industry, and of various chemicals used in automotive, wire and cable and personal care products.

Dow, too, makes many forms of plastics and solvents. But Dow, more than Carbide, has narrowed its sights in the past six years. It sold its consumer products business to S.C. Johnson & Co. two years ago and also shed its share in the drug company Marion Merrill Dow. And while it has acquired some agricultural technologies, it has expanded primarily by beefing up its existing solvents, coatings and other process chemicals. It has squeezed $2.2-billion out of its costs, and its profits and stock price have risen accordingly.

"This merger now is jump-starting the growth phase of our strategy," said William Stavropoulos, Dow's chief executive and the man who will head the merged company.

Union Carbide has a less successful tale to tell. The company exited consumer products in 1985, primarily to raise cash to fight off an unwanted takeover attempt. It has formed numerous strategic partnerships with other chemical companies over the last few years, but few analysts have been able to define a coherent strategy for growth. Although its stock has run up nicely since April, most say it was because of renewed interest in chemical stocks in general, not any investor love for Union Carbide.

"Union Carbide has long been seen as a disappointment," said James N. Kelleher, an analyst with Argus Research. "It remained static while everyone around was taking aggressive steps, and that was the same as stepping backward."

Both companies have survived potentially catastrophic lawsuits and public outrage over the last few decades.

In 1984, Union Carbide garnered worldwide notoriety when one of its plants in Bhopal, India, leaked toxic gas, eventually killing as many as 10,000 people. Union Carbide paid a $470-million settlement in India's Supreme Court in 1989.

Dow, meanwhile, was the target of widespread student protests in the 1960s because it made napalm _ jellied gasoline _ for use in the Vietnam War. Dow was the focus of litigation over the defoliant Agent Orange, and its lethal byproduct, dioxin, which many Vietnam War veterans said caused severe illness.

The company also was embroiled in litigation over silicon breast implants, made by its joint venture Dow Corning, which some women said caused health problems. Dow Corning has offered to pay $3.2-billion to settle the claims.

The companies at a glance

The Dow Chemical Corp. and Union Carbide Corp. merger will create the world's second-largest chemical business. Here is a closer look at each:

Dow Chemical Co.

Headquarters: Midland, Mich.

Founded: 1897

1998 revenues: $18.4-billion

1998 earnings: $1.3-billion

Employees: 39,000

Products: Plastics, chemicals used in various industries, including Styrofoam insulation; herbicides.

Ranking: Third in the world in sales of chemical products behind No. 1 DuPont Co. and No. 2 BASF AG of Germany, according to Chemical Week. Ranks second to DuPont in U.S. sales.

Union Carbide Corp.

Headquarters: Danbury, Conn.

Founded: 1917, as Union Carbide & Carbon Corp.

1998 revenues: $5.7-billion

1998 earnings: $403-million

Employees: 11,600

Products: Basic and specialty chemicals, including ethylene oxide (used in polyester) and ethylene glycol (used in antifreeze).

Ranking: 21st in the world in sales of chemical products and seventh in the United States.

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