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Something that Will Be Fun to Watch

Wednesday January 28, 2009

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Dow Chemical is one of the most respected companies in America. A large chemical company they are known to all of us. Rohm and Haas is a smaller specialty chemical company. Much of the Rohm and Haas stock was owned by the Haas family, who wanted to sell out to diversify their holdings.

On July 9 of last year, Dow stock closed at $33.96 per share and their market capitalization was over $31 B. Rohm and Haas’ stock price was $44.83 per share and the market capitalization was just under $8.8 B. So Dow was more than 3.5 times larger than Rohm and Haas.

On July 10th Dow’s purchase of Rohm and Haas was announced. One way to do a deal would be what is called stock for stock, and Dow would have given Rohm and Haas shareholders Dow stock for their Rohm and Haas stock. Another is a cash price for the stock. I suspect that Rohm and Haas held out for cash, and Dow agreed to pay $78 per share or $15.3 B, a 74% premium over Dow’s closing price of $44.83. So on July 9 Dow was 3.5 larger than Rohm and Haas based on market cap, and about twice as large based on the premium price Dow was willing to pay.

Many thought the premium was too high. Now look at what’s happened since.

We all know that stock markets around the world have fallen dramatically. Dow’s stock price has fallen to $13.19/share on January 27th. Dow’s market cap is now about $12.2, so Dow is actually worth less than what they agreed to pay for Rohm and Haas. Rohm and Haas has not fallen nearly as much, probably because of the Dow deal. Rohm and Haas stock is $58.75/share, actually higher than the $44.83 on July 9th.

Dow says that they can not close the deal at this time. They are other factors involved as Dow is having trouble raising the capital.

My point is never to be too sure about anything when it comes to investing. Dow had to know Rohm and Haas inside and out. Dow probably had plans to cut costs and recover much of the premium. However by tying themselves to a price they subjected themselves to market risk, and the market has been very harsh.

If Dow had done a stock for stock deal, then it might have looked something like this. Dow would agree to give 2.3 shares of its stock for each share of Rohm and Haas stock. At $33.96/share the 2.3 times would be worth the same $78/share. However, at today’s price of $13.19, then Dow would be paying $30.30 per share for Rohm and Haas or just under $6B for Rohm and Hass, which is a far piece from the $15.3 B then Dow agreed to pay.

The companies are headed for the courthouse. It will be fun to watch it play out.


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