Dow’s Bid for Rohm and Haas Essay

Dow started as a shaper of commercial bleach in 1897, and was founded by Herbert Dow. He merged his community in 1900 with Midland Chemical, which lead to diversification of his portfolio to agricultural and food products. In 1912, Dow started to turn everyplace dividends every quarter without any reductions or interruptions. By doing so, they were the exclusively Fortune 200 firm that established these figures. Dow became a major pseud in the M&a field, since they adoptd between 1983 and 2007 95 business, took stakes in 58 firms and divested 166 businesses. In 2006, Dows CEO Andrew Liveris announce the Dow of Tomorrow st tellgy, which consisted of ii pillars.One was pursuing an asset light approach to its commodity business. In order to do so, he sign a JV accordance with a subsidiary of the capital of Kuwait Petroleum Company, named Petroleum Industries Company. Dow and PIC signed a Memorandum of Understanding, which generated Dow a $7.2 gazillion afterward tax revenue s. Second, Mr. Liveris precious to build a superior- result and high- place added deed business. In order to achieve this objective, Dow concord to purchase Rohm and Haas. This acquisition had the purpose for Dow to become a manufacturing business of high-value chemical substances and travel materials.Why does Dow want to buy Rohm and Haas?As mentioned in the introduction, CEO Andrew Liveris announced the Dow of Tomorrow strategy. This included becoming a high growth and high-value added producer of specialty chemicals, with less cyclicality. Rohm and Haas fitted the picture perfectly, since they were an go material and specialty chemicals company, in operation(p) in 27 countries. Besides the interesting company profile description, on that point were several other reasonswhy Dow was interested in the Rohm and Haas company. Most consequential reason was that the acquisition would entertain Dow reduce its cyclicality and increase its growth prospects. expand product portfoli os, increased geographic mart, improved market channels and modernistic technologies lead obtain the judge growth and cost synergies.Forecasts predict extra growth synergies values between $2.0 and $2.6 billion and $0.8 billion costs synergies, including partd services and governance, manufacturing, supply chain and work process improvements. Besides the preceding(prenominal) advantages, Dow and Rohm could be a global leader in specialty chemicals and advanced materials if they combined forces. Also by combining their R&D, the development of pertly products and innovations could be stimulated. So over altogether, Rohm and Haas fitted the picture projected by Andrew Liveris perfectly. Rohm and Haas supported Dows commitment to maintain their highest standards in pursuing and selecting growth opportunities to satisfy their semipermanent coverholder values.Was $78 per component a reasonable bid?In order to draw a conclusion of the reasonability of the bid, we pack to valuate Rohm and Haas as a firm with and without the synergies created by the acquisition. If this total value exceeds the $78 percentage determine, Dow testament cover the hurt, since it depart be beneficial for them. The benefits of the synergies burn down be leadd by dividing it between the two firms on a quaternary or 50/50 basis.The excel file attached to the duty assignment contained a WACC of 8,5% ground on a tax rate of 35%. In our analysis, we besides calculated a WACC with a tax rate of 26%, since this was the average tax rate. This leads to a WACC of 8,7%. As a basis, we took 2% growth.Rohm and Haas had at time of the acquisition 195,200,000 fates outstanding. From the balance sheet of Rohm and Haas 2008H1, we took the values of immediate topple and debt (long and short term debt). twain inputs were needed in order to calculate the share damage. Below, you can find how we calculated the share price for the placements with and without synergies.The synergies r elate consist of two different types, namely growth and cost synergies. egress synergies include expanded product portfolios, increased geographic reach, improved market channels and innovative technologies. These synergies are expected to create between 2 and 2.6 billion long horses, which gives an average of 2.3 billion. Second, potential cost synergies consist of purchasing synergies, shared services and governance, manufacturing & supply chain improvements and work process optimization. These synergies are expected to generate 0.8 billion dollar. The values of these synergies combined totals a 3.1 billion dollar gross benefit, which is a netted by deducting the 1.3 billion cost of implementation, sledding a value of 1.8 billion dollars.In order to make the around suitable valuation and draw the best conclusion for the reasonability of the share price of $78, we take the original and revised forecast into account. Both events are also used for the sensitivity analysis to be as specific as possible. Below are the sensitivity analyses of Rohm and Haas for the original forecasts.Based on our assumptions, share price of Rohm and Haas is $55.79 without synergies and $65.01 with synergies. These values differ a little from the share price we found in our valuation analysis, however this is due to rounding and scrap of decimals difference in WACC and growth percentages. Lowest value without synergies is $47.10 with a growth of 1% and a WACC of 9% and a highest share price of $95.58 with a growth of 3% and a WACC of 7%. If we now await at the original forecast with synergies, we see an increased share price, which is logical, since value is created by the synergy. The share price of Rohm and Haas is $65.01 based on the growth rate of 2% and a WACC of 8.7%. The share price differ between lowest value of $56.32 and highest value of $104.80, based on the same input as with the analysis with no synergies.In both cases, the share price is down the stairs $78 so if Dow offers this price in both situations, the will not avail from this acquisition. However, we will still perform the 50/50 and multiples valuation in order to see which is the best in the situation if Dow is obliged to acquire Rohm and Haas. Looking atcase were synergies are created and using the 50/50 method, we string a share price of $55.79 + ($65.01 $55.79)/2 = $60.4. As we already mentioned, this price does not match the $78. Now using the gross clams of Rohm and Haas as a percentage of the gross profit of both companies combined, we get a multiple of 26.11%. Using this 0,2611 multiple, the appropriate share price is $55.79 + (0,2611 * (65.01 $55.79)) = $58.20 Again, this is below the share price of $78, which makes the outcomes of both methods un fortunate for Dow.Now let us look at the revised forecast. Since this is a post-crisis forecast, predictions were visited, which lead to a lower boilers suit value. Hence, this will be reflected in our sensitivity analys is by lower share prices. Below are our findings.As already predicted, share prices are lower in the revised forecast due to the crisis adjustments. For the involvement of the case, we will also perform a 50/50 and multiples calculation. If we look at the 50/50 share price, we get a share price of $41.38 + ($50.60 $41.38)/2 = $45.99. The multiples basis will give us a share price of $41.38 + (0,2661 * ($50.60 $41.38)) = $43.79.Re debateing both forecasts and within these forecasts both with and without synergy, we can shut down that a share price of $78 is not reasonable. This conclusion holds in the case of 50/50 and multiples calculations.Major extends risk of exposureinesss and entirelyocationWe will stand special attention to Exhibit 4 when examining the major risks and their respective allocations. The stolon risk comes from the item 1.01 describing the financing of the report. Dow will is fulfil a fix amount of $4 billion in convertible preferred spuds to Berkshir e, Hathaway and Kuwait Investment Authority. This amount is independent of the current stock price of Dow, heart that a drop in Dows share price would need much(prenominal) shares to pay for the pass on, decreasing the relative voting rights of current shareholders. To be even more precise, in paragraph 2.1a it renders that no matter what happens Dow has to pay $78 dollar per share at the time of the merger, transferring all the financialrisk to Dow.Furthermore, a giving part of the deal is financed with a $13 billion loan, issued by a consortium of 19 banks lead by Citigroup, Merrill Lynch and Morgan Stanley, increasing their leverage ratio and overall risk of the company. These high debt values come with high interest payments, leaving fewer coin to march its dividend obligations. In a possible economic downswing this chore becomes larger, increasing the probability of not meeting their dividend payments which devour not been changed for over 97 years.A further interest ing statement is the ticking bung to ensure the deal would close. When the deal is not shut out front January 10, 2009, the payment per share will increase with 8% annually, translating to a higher deal price of approximately $3 million more per day until the deal is closed. In addition if the deal is not closed before October 10, 2009, Dow has to pay $750 million enclosure fee. This will, again, transfer all the risk to Dow if the deal cannot be closed before October 10, 2009.In paragraph 3.1 the Material Adverse assemble clause states that Dow is allowed to invite out from the transaction if the business, operations or financial conditions of Rohm is tot up by a material inauspicious make. This seems fair but there is a large set of exceptions made in the clause for which Dow cannot withdraw from the transaction, including the following events any event which affects the chemical industry, macro economy as a whole, the financial, debt, credit or credential market, any de cline in Rohms stock price or any failure to meet internal or published projections. So, in case of an economic downturn mainly Dow is affected and not Rohm. Roam and Haas are even protect from a decline in their share price. Thus, these statements will, again, transfer almost all the risk to DowFurthermore, Dow takes on another risk by relying on the sum jeopardize with Kuwaits PIC to finance $7 billion of the deal. They do not take into account the possibility that this joint venture could fail due to i.e. a downturn in the overall economy. If it fails it leaves a gap of $7 billion in their financing plan, exposing Dow to even more risk.Finally, the overall high price and ticking clauses make it a dotty deal when compared to the expected synergies. The probability of achieving all expected synergies is a order smaller than the probability of high costs, which is certain. It leaves Dow exposed to a possibly large bolshy when the expected synergies are not met in the future.Th e only risk that Rohm and Haas face is the possible bourne of the deal from their side if the deal is i.e. fetching too long. They subscribe to pay a $600 million termination fee if the decide to do so. Other than that, considering the mentioned risk allocations from above, the total risk of this deal is mainly resting on the shoulders of Dow Chemical.CEO recommendationsTo give a complete view of the picks that both CEOs had at the time we will first describe the situation they were in. Shortly after the deal announcement the financial crisis started, causing an overall recession including in the chemical industry. Dow was hit on many fronts overall share prices dropped with over 50%, a fourth quarter loss of $1.6 billion, quarterly sales decline of 23% and a drop in operating rate to 44% in 2008. Forcing Dow to close off 20 facilities and firing over 5000 employees. Furthermore, after the joint venture deal was closed with KPCs PIC, the failing oil prices and overall recession caused KPC to terminate the set out by paying a termination fee of $2.5 billion to Dow. This caused a gap in the financial plan for the merger for Dow, decreasing their stock price even further and degrading their rating to BBB.As mentioned before, Dow was not the only one affected by the economic recession. Rohm was facing a poor performance as well, forcing it to fire over 900 employees, freeze outlay and a 20% decline in sales.Considering the above, Dow refused to close the deal with Rohm and Haas after approval from the European Commission and U.S. Federal Trade Commission. Arguing that the late(a) macro-economic developments are material adverse effects, enabling them to terminate the deal.Options and recommendation for Dows CEO, Andrew LiverisConsidering the situation as described above, Liveris had three different options continue with the termination of the deal, close the deal for $78 per share or renegociate with Rohm and Haas to concord on different terms. If Dow cont inues to terminate the deal it will go to lawcourt for the approval by the judge. It needs to win in court otherwise Dow is forced to commit to the deal. Given the statements enclosed in the material adverse effect clause, the chances for Dow to win are pretty slim. If Liveris opts to close the deal for $78 per share he will need a lot of superfluous cash. Considering the economic situation, and the fact that the joint venture failed, acquiring this amount of additive cash will be very hard.The possibility to acquire more debt through and through the already existing bridge bank loan from 19 different banks is pretty small considering the low credit rating of BBB. If he does succeed in acquiring more debt he will likely not be able to meet the net-debt-to-total-capitalization restriction in the covenant. This is, fit to the first loan of $13 billion, required to be lower than 65% which they will not be able to meet, thus not creating incentives for the banks to give more mone y.Considering the above, terminating the deal will not be possible and climax the deal for $78 per share lacks financing. The best option Andrew Liveris thus has is to renegotiate the merger deal and buy some time. He will then(prenominal) be able to look for other sources of financing or renegotiate the already existing bank loan. One possible option could be to sue KPC for terminating the joint venture and claiming the $2.5 billion, which in turn could finance the termination fee. Considering that this will destroy the relationship between these two companies this would not be recommended.Options and recommendation for the CEO of Rohm and Haas, Raj Gupta The situation for Raj Gupta is a bit simpler either sue Dow for not completing the deal or renegotiate with Dow to postpone the deal. Both having different advantages and disadvantages.The first option is to go to court and continue the case that Dow has to complete the deal or otherwise pay the termination fee. Considering thee xceptions utter in the material adverse effect clause that macro-economic effects and effect on the chemical industry in general are excluded from this clause, Gupta will have a strong case and is likely to prevail in court. Committing Dow to the deal or otherwise paying the termination fee of $750 million.The second option is to renegotiate the deal with Dow. The most important disadvantage considering this option is that it would almost certainly come to a deal which is less favorable for Rohm and Haas when compared to the original deal. Which term should be reconsidered? For example, a lower price per share would decrease the expected value for the shareholders. Shareholders will not vote for such a deal, especially the Haas family who owns 30% of the company and is waiting to exit for $78 a share. The only option, although shareholders will not be amused in the least, is to delay the due date of the deal, preserving the harmony between the companies.Even if Gupta will win in court, the possibility that the deal will go through considering the financing problems of Dow is still small. Rohm and Haas will in this case only fulfill the termination fee of $750 million. Gupta obviously wants the deal to go through and so do the shareholders of Rohm and Haas, enabling them to exit the company and receiving a high bonus while doing so. Terminating the deal will negatively affect both companies and their shareholders. then it would be better for Gupta to facilitate any possibility that the deal will go through, even implying a possible decrease in price per share. Our recommendation thus is to renegotiate the deal, making sure that it succeeds. The premium for the shareholders efficacy be lower but both companies can benefit from the acquired synergies and shareholders can still opt to exit.Resolving the legal disputeConsidering the above, it would have been in the best interest of both companies to renegotiate the deal. However, Rohm and Haas decided to con tinue their lede against Dow Chemicals. The judge will therefore make a decision based upon the facts presented to him.Based on the facts alone, the most likely option for me, William B. Chandlerthe Third, Chancellor in the Delaware Court of Chancery, is to enforce the merger contract between the two parties. In particular, the specifics of the Material Adverse Effect clause in paragraph 3.1 state that the MAE clause does not include the following events any event which affects the chemical industry, macro economy as a whole, the financial, debt, credit or security market, any decline in Rohms stock price or any failure to meet internal or published projections. To be more specific the argument according to Dow that the recent material developments have created unacceptable uncertainties on the funding and economics of the combined enterprise, justifying the termination of the deal, is overruled by the specific performance clause in paragraph 3.1.Therefore, the specific performance clause, as requested by Rohm and agreed upon by Dow, is binding and herewith enforced. The merger will be executed as planned. Dow will have several different options to solve the financing issue, cutting dividends, renegotiating debt and other intend to generate cash could be used. If the deal is not closed before January 10, 2009, as stated in the contract, Dow will pay a ticking fee of 8% per annum.Dow should have been more careful drawing up the contract as it is signed and before me today. Since the possibility of an economic descent is especially stated in the deal clause, I will make no exception and hereby conclude that the Dow will meet all deal requirements as stated in the contract. Every penny has to sides, if you risk it, you could lose it. Thank you. *slams the hammer*