Dow’s Bid for Rohm and Haas

Dow’s Bid for Rohm and Haas

Due Date: 4/15/2014, 6 pm

MGT 6060

Thursday

6:06 pm

• Why does Dow want to buy Rohm and Haas?  Was the $78 per share bid reasonable?

Dow’s CEO, Andrew Leveris, had a mission to change the company.  Instead of Dow being a cyclical commodity company, by purchasing Rohm and Hass (R&H) it would transform into a producer of high margin niche materials and specialty chemicals. The purchase of R&H would not only create growth synergies (2 billion – 2.6 billion), but to also create annual cost savings of $800 million (after initial investment of $1.3 billion). This strategy by Dow would reflect in higher earnings for shareholders, a top priority for most CEOs. At this point in time, R&H had an attractive portfolio of businesses (i.e. Morton salt), sales in China were expanding, costs were being reduced in North America, and new specialty products were being introduced; a prime acquisition by Dow. In addition, R&H long-time shareholders were looking to close most or all share positions, another prime reason for Dow to initiate negotiations.

All factors considered, pre- economic crisis:  Enterprise Value of R&H of $11.98 billion (using a WACC of 8.7% and a 26% tax rate), growth synergies of $2 billion - $2.6 billion, NPV of cost synergies of $6.85 billion (accounting for the $1.6 billion initial investment), minus Present Value of the after-tax payment of $548 million, brings the total value of this acquisition to $20.2 billion to $20.8 billion (before subtracting the $3.5 billion cost of debt).  For Dow, a gain of $1.495 billion or $2.095 billion over R&H’s valuation of $18.8 billion ($3.5 billion in debt and $15.3 in cash).  The $78 per share price offer from Dow seemed reasonable and justified, prior to the down-turn in the global economy (See excel calculations).

As stated in the case, the down-turn in the economy ending 2008 and beginning 2009 along with the cancellation of $7 Billion cash making project by Kuwait's Pertrochemical Industries  caused Dow to re think its offer and evaluation of R&H.

All factors considered, post economic crisis:  Enterprise Value of R&H of $8.6 billion (using a WACC of 8.7% and a 26% tax rate), growth synergies of $2 billion - $2.6 billion, NPV of cost synergies of $6.85 billion (accounting for the $1.6 billion initial investment), minus Present Value of the after-tax payment of $548 million, brings the total value of this acquisition to $16.9 billion to $17.5 billion (before subtracting the $3.5 billion cost of debt).  For Dow, a loss of $1.88 billion or $1.28 billion over R&H’s valuation of $18.8 billion ($3.5 billion in debt and $15.3 in cash).  The $78 per share does not seem reasonable, after the down-turn in the global economy.  A share price offer between $68.72 and $71.79 would have been a more appropriate offer by Dow (Please see excel calculations).