Dow’s Bid for Rohm and Haas

1.Why does Dow want to buy Rohm and Haas? Dow, a producer of low-valued cyclical commodity chemicals, had future aspirations of being not only the largest but as well the highest valued chemical company in the United States. Its strategy was simple: to be an asset-light company with extremely high growth potential fuelled through advanced technology, geographical reach, strong industry channels and an overall switch in to the advanced specialty chemical and materials market. As a result when the option to purchase
Rohm and Haas was put to market Dow jumped immediately on the opportunity. Rohm and Haas brought with it mass amounts of experience in the specialty chemical business, strong management and a diverse portfolio of businesses that Dow was searching for. As well it provided an establish foundation within the specialty market in which Dow could further mould to fit within its general corporate structure. In a perfect world, Rohm and Haas was the perfect match for Dow’s two tiered growth strategy, and appeared to be in a vulnerable state with the sudden announcement of its sale.
Was the $78 per share bid reasonable?
In valuing Rohm and Haas at the time of the bid we believe the price of $78 per share was in fact reasonable. In our calculation of the standalone Rohm and Haas value we used the company’s projected FCF from Exhibit 7a with the provided WACC of 8.5% to complete the DCF. Although the provided calculation of WACC uses the long-term sustainable rate versus the effective tax rate, we believe the increase in the rate itself accounts for some of the increased risk associated with this transaction. Upon calculating the total enterprise value we deducted all debt to arrive at a total equity value and found the standalone share price to be $46.44 (Appendix A). However, this share price does not account for a major part of this acquisition; the synergies that are created by combing the operations of both Dow and Rohm and Haas.
As stated in the case, Dow will experience a cost synergy of $800 million annually (to be realized in two years), an additional $2-2.6 billion in additional present value (assumed to be realized in two years) all at the one time price of $1.3 billion. When valuing the benefits as a result of these synergies we found it to be an additional $38.2 per share (Appendix B). This led us to arrive at a total estimated bid price of $84.6 (Appendix C). Although this bid price is $6.60 higher than the actual bid price, our assumptions pertaining to a revenue synergy of $2.3 billion along with very optimistic cost synergy assumptions of $800 million annually make the $78 dollar bid reasonable for the total operations of Rohm and Haas.
2.What are the major deal risks inherent in this merger transaction? How and to whom does the merger agreement allocate these key risks? Hint: analyze the various provisions in case Exhibit 4.
What risk does each provision address and which party ultimately bears the risk?
I.

Risks of delay and termination

Contractual Terms included: Closing Date §1.2, Ticking Fee §2.1a, Reasonable Best Efforts §5.6,
“Hell or High Water” Provision §5.6b, Termination Fees §7.2a, Enforcement and Jurisdiction §8.5.
The risks are made explicit and clear by listing the closing date, ticking fee, termination fees and the responsibility to enforce the terms and provisions. Both parties are required to take all actions to complete the acquisition. Most of the terms are made to protect the benefits of Rohm and allocate the risks to Dow. But Termination Fees §7.2a protects both parties from breaching the contract by the other party.

II.

Risk of Solicitation

Contractual Terms included: §5.3 No solicitation, §8.10 Third-Party Beneficiaries
As a attractive acquisition target, there are other buyers who are interested in Rohm. Therefore, Dow faces the risk of other bidders who make better offers. §5.3 No solicitation limits Rohm not to solicit other parties to competitive bid, therefore reduces Dow’s risk. Also, §8.10 protects both parties by prohibiting any other person benefit from the merger.
III.

Risk from Financial Side

Contractual Term included: § 3.17 Fairness Opinion
The fairness of the valuation of Rohm is important to both Rohm’s and Dow’s shareholders. The financial evaluation is provided by Goldman Sachs & Co, so Goldman Sachs & Co will be responsible for any mispricing effect.
IV.

Risks of unpredictable circumstances

Contractual Term Included: § 3.1 Material Adverse Effect (MAE clause)
The MAE clause protects buyer’s interests by allowing the buyer to terminate the deal under special circumstances and changes that had a material adverse effect on the target company’s business.
However, it is extremely hard to define whether an event is under MAE or not. So in real world, MAE clause does not necessarily protect buyer’s benefits. In this case, the MAE actually favors Rohm since the financial crisis affected the whole chemical industry and financial market, and Dow was required to close the deal under huge financial pressure.
3. As of early February 2009, what should Andrew Liveris (Dow’s CEO) do and what should Raj Gupta
(Rohm and Haas’ CEO) do?
Andrew Liveris (Dow’s CEO)
According to the recent events, Dow refused to close the deal as the recent material developments have created unacceptable uncertainties on the funding and economics of the combined enterprise. This is due to several macroeconomic factors such as the continued crisis in global financial markets and stunning failure of Petrochemicals Industries Company of Kuwait (PIC).
Dow cannot fulfill its obligation to complete the formation of the K-Dow joint venture in late December
2008.
Dow remains the interest on completing the acquisition of Rohm and Haas because the potential benefits of mergers are still attractive. However, the timing is not right at this moment. Dow strongly believes that closing the deal would jeopardize two great firms under these circumstances.
Therefore, the best option for Dow is to delay the deal, and if possible, renegotiate the merger terms.
To implement that option, Dow first needs to persuade Rohm and Haas giving Dow more time to be well prepared for the acquisition. Andrew Liveris should let Raj Gupta understand the M&A action at this moment is an economic disaster for both firms, while they are fine on a standalone basis. All
Rohm and Haas need to do is to wait a bit longer for a good timing, and then both of firms can have a win-win outcome eventually. At the same time, Dow should renegotiate the merger terms with Gupta.
By offering more attractive terms, shareholders of Rohm are more likely to agree the delay. Then, when Dow has more time to fund money, Dow is able to fulfill the obligation for the renegotiated deal.

Raj Gupta (Rohm and Haas’ CEO)
Although Gupta believes that Dow had the ability to raise the necessary funds to close the deal, he cannot ignore the influence under the global financial crisis and the failure of merger with PIC.
Under the global financial crisis, merger with Dow may not promote Rohm and Haas’s future development, as Dow is not able to serve the best interest for Rohm and Haas after closing the deal.
Right now, Rohm and Haas is fine on a standalone basis. In order to promote the success of this merger, Gupta can choose to give Dow more time to fund money. By delaying the closing date, Gupta is able to renegotiate with Dow to pursue more rights and benefits for Rohm and Haas. Shareholders are more likely to agree for renegotiated deal with better conditions.
If the renegotiation is not going well, Gupta can choose the first option to litigate to close the deal at
$78 per share. Dow will have to make a Reasonable Best Effort to complete the deal as there are several feasible way to raise necessary funds for the deal.
4. If you were the judge (Honourable William B. Chandler, III) in the Delaware Court of Chancery, how would you resolve this legal dispute?
As a result of the market crash in 2008, the already over valued deal for Rohm and Haas at $78 per share became even more unrealistic and foolish if exercised. However, due to the tight MAC agreement that was drawn between the parties Dow was left with very few options to remedy the situation. If the deal was to be completed at the stated price Dow threatened the result would lead to complete insolvency of the newly formed conglomerate and a complete write down of held debt. As a result, we believe neither terminating the agreement nor clothing the deal at 78$ is a suitable option to ensure the economic prosperity of both firms. Instead, we encourage the deal to proceed according to the MAC agreement with a newly negotiated price per share for the following reasons:
I.

The side effect of the financial crisis cannot be ignored. Several well-performing firms suffered from this economic recession, and some of them even went to bankruptcy. We are more willing to see a successful commercial corporation in this circumstance in order to regain the confidence among the entire market, and forcing Dow to pay at the original price will definitely set huge financial burden in this company, which can effect its future development and is harmful for Rohm and Haas at the same time.

II.

Terminating or delaying the Rohm acquisition will not only result in a big sum of the ticking fee for Dow, but also impact the long-running Dow’s strategic transformation process. There are a lot of competitors covet Rohm and Hass, so if Dow choose to give up this time, it may never have the opportunity to get it back in the future.

III.

It is a win-win strategy for both companies if they choose to merger. They will both enjoy the benefit through acquisition, and even in this economic recession, the joint between them will help them to face the turmoil together, and find feasible plans in doing business. A reduction on price per share in this transaction seems to lower profit Rohm and Hass can get in the short term, but holding more money on hand instead of spending too much on the acquisition will enables more possibility and opportunity for Dow to operate more flexible in the long run. And at the same time, Rohm and Hass can get the benefit from it.

IV.

By allowing Dow to renegotiate terms we believe there will be no need for them to end the dividend streak, thus avoiding a complete fire sale of the firm’s equity. Also, a renegotiated price would help establish a more comfortable financial position for Dow and overall greater liquidity, thus avoiding a junk rating from Moody.

The long-term benefit should be considered more in this acquisition case, so renegotiating the price and insisting on merger is more preferable since it can combine the two companies’ strength and help them to transform

Appendices
Appendix A.

Appendix B.

Appendix C.