Dow's Bid for Hohm and Haas

QUESTION 1

Why does Dow want to buy Rohm and Haas? Was the 78 USD a share bid reasonable?

Part 1: Why does Dow want to buy Rohm and Haas?

To discover why Dow wanted to buy Rohm and Haas, we first have to discover the rationale behind the corporate takeover strategy and Dow’s own strategy in general. Andrew Liveris, CEO of Dow, had announced the “Dow of Tomorrow” strategy in 2006, which consisted of two parts.

 Thefirstpartwasthepursuitofanasset-lightapproachtoitslow-margin,butcash-rich,commodity

business. This was achieved by creating a joint venture (JV) with Petrochemical Industries Company

(PIC).

 The second part was building high-growth and high-value-added performance businesses. To achieve

this, Liveris agreed to purchase Rohm and Maas.

The question remains why Rohm and Haas was such a good target. First, the Haas family agreed to sell their shares (32%). Second, Rohm and Haas would provide a strong operational and strategic fit and an expended network into emerging markets.

A lookup of companies active in 2006 by SIC code (Compustat) gives insight into other potential targets. Both Dow Chemical Company and Rohm and Maas have a SIC code of 2821. At the time of formulating the new strategy, Liveris had 16 other companies to choose from in that had the same SIC code (January 2006). One potential reason for the attractiveness of Rohm and Maas for Dow was its size. With a market value of equity of $11billion, compared to Dow’s value of $38billion, the combined entity would by far be the largest in the industry. The third largest company in the industry, after Rohm and Maas and Dow, is Eastman Chemical, with an equity value of $5billion. This shows that the present strategical partners for Dow were presumably too small to have a great impact in the business of Dow. Below is a list of top 10 companies in the same SIC code industry of Dow and Rohn and Maas based on equity value (Compustat: data from 2006 and 2008, excluding Dow and Rohm and Maas).

Company Name

Market Value of

Equity 2006 Equity 2008 (x mil $) (x mil $)

Market Value of

DOW CHEMICAL ROHM AND HAAS CO

HEXCEL CORP SCHULMAN (A.) INC POLYONE CORP

38.226 13.948 11.187 12.064

1.633 712 696 291 609 444



EASTMAN CHEMICAL CO





4.954 2.298



2

OMNOVA SOLUTIONS INC RS TECHNOLOGIES INC CEREPLAST INC

ICO INC

LUMERA CORP BAIRNCO CORP

192 30 145 88 123 0

93 0 79 21 75 32

An interesting find is that, indeed, Dow’s market value of equity shrunk to almost the same value as Rohm & Maas by 2008. Moreover, the shortlist of potential targets shows mostly small targets (compared to Dow and Rohm and Maas). Therefore, based on the available other potential targets, Rohm and Maas is an appropriate strategic acquisition.

Part 2: Was the 78 USD a share bid reasonable?

To calculate the full acquisition sum, the number of acquisition shares has to be multiplied by the share bid. In this case, this amounts to $15,23billion. The total deal value (including $3,5billion debt) is $18,73billion and the deal premium is 27% above the 12-month high of Rohm and Maas (74% and 60% above prior day and last month average, respectively). Therefore, by just examining these numbers one can conclude this is very high, at least it is much higher than what the market values Rohm and Maas as a standalone company. Also when looking at how offer prices of usual takeovers are distributed, namely around the 52-week high, Dow’s offer price is relatively far above the average offer price.

However, there is a good reason for a higher offer price. The synergy possibilities between Dow and Rohm and Maas are plenty. Besides synergies, the acquisition of Rohm and Maas would change Dow’s earnings profile (increased growth rate, reduced cyclicality) to an “earnings growth company”. Moreover, growth synergies are expected to create $2-$2,6billion in additional present value, and costs synergies are expected to generate $0,8billion in value annually at a cost of $1,3billion (net present value $1,5billion in the first 4 years). Add this together, a range of $3,5-$4,1billion of synergies are possible in the first 4 years. On a per-share basis, this amounts to $17,77-$20,85 and the offer price range without synergies would equal $57,15-$60,23. From Compustat, the 52-week high, prior day value, and last month average are retrieved. The top (bottom) of the offer price range premiums are -1,7% (-6,7%), 34,3% (27,5%), and 24,3% (18,0%), for the 52-week high, prior day value and average last month, respectively. These values are more in line with the distribution of offer prices around 52-week highs.

In conclusion, the offer price is very high compared to what normally is paid in acquisitions. However, this is mainly due to the high expected synergies. A valuation without the synergies shows an offer price more in line with the distributions of offer prices.

3

QUESTION 2

What are the major deals risks inherent in this deal transaction? How and to whom does the manager agreement allocate these key risks?

When it comes to mergers and acquisitions, there are some critical factors to consider. The risks involved are not merely financial ones. A failed merger can disrupt work processes, diminish customer confidence, damage the company’s reputation, cause employees to leave and result in poor employee motivation levels. In the next section we describe different major risks inherent in this deal transaction. Based on the information in the case we identified three major risks from a company viewpoint. And two other risks, but we only have limited information in this case.