Dow's Bid for Rohm and Haas
Posted: 4 Dec 2010
Date Written: November 23, 2010
This case analyzes Dow Chemical Company’s proposed acquisition of Rohm and Haas in July 2008. The $18.8 billion acquisition was part of Dow’s strategic transformation from a slow-growth, low-margin, and highly-cyclical producer of basic chemicals into a higher-growth, higher-margin, and more stable producer of performance chemicals. Simultaneously, Dow had signed a joint venture agreement with Petrochemical Industries Company (PIC) of Kuwait, a deal that would generate $7 billion of cash that could be used to finance the all-cash offer to buy Rohm and Haas.
The focus of the case is on what happened after the financial crisis hit in the Fall of 2008. Dow suffered as the global economy fell into recession and as capital markets froze. To make matters worse, PIC cancelled the joint venture in December 2008. As a result, Dow was hurt on three fronts: first, it lost an important funding source for the proposed acquisition; second, Dow’s financial condition and its internal cash flow deteriorated dramatically (its stock price was down more than 70% during 2008); and third, Rohm’s forecast sales, earnings, and value have declined precipitously thereby reducing its attractiveness as an acquisition target. Given this confluence of events, Dow refused to close the deal as scheduled in January 2009. Rohm immediately filed a lawsuit attempting to force Dow to close the deal as required by the merger agreement. As of February 2009, Dow’s Chief Executive Officer (CEO) Andrew Liveris has to decide what to do first and foremost about the Rohm acquisition and the pending lawsuit, but also about the firm’s declining financial performance and the PIC joint venture.
This case is designed for an advanced corporate finance course. It is also appropriate for courses on mergers and acquisitions (M&A), valuation analysis, and negotiations in business schools. While this case can be used with business school students to describe the legal aspects of M&A including key contractual terms in merger agreements, it can also be used with law students to describe the relevant financing and valuation issues inherent in merger transactions. The case has four pedagogical objectives: 1) It exposes students to the legal side of M&A transactions. By exploring detailed contractual provisions (e.g., consideration, ticking fees, termination fees, "no talk" clauses, etc.), the case shows how a merger agreement identifies, mitigates, and allocates important deal risks. It also exposes students to legal theories of enforcement such as "specific performance". 2) It provides an opportunity to value an acquisition target including potential synergies using discounted cash flow (DCF) analysis. 3) It analyzes the impact the global economic and financial crises had on the M&A market from the Fall of 2008 through 2009. In addition to reducing the value of target firms, the crisis severely limited the internal and external financing options available to acquirers. 4) It helps students understand and use information contained in capital markets to assess the dynamics of merger transactions. In particular, the case presents data on the arbitrage discount (cash bid price minus the target's current trading price) and the pricing of credit default swap (CDS) spreads as ways to understand the likelihood of consummation and the probability of bankruptcy, respectively.
Keywords: Mergers & Acquisitions, Valuation, Contracts, Due Diligence, Risk Management, Negotiations
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