Dow's Bid for Rohm and Haas
Posted: 12 Mar 2012
Date Written: December 22, 2010
This case analyzes Dow Chemical Company's proposed acquisition of Rohm and Haas in 2008. The $18.8 billion acquisition was part of Dow's strategic transformation from a slow-growth, low-margin, and 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 in cash that could be used to finance the all-cash offer to buy Rohm and Haas. Dow and Rohm announced the Rohm merger on July 10, 2008, just before the financial crisis in September 2008. The focus of the case is on what happened after the financial crisis turned into a global economic crisis. Dow, like all chemical producers, suffered as the global economy fell into recession during the second half of 2008, and as financial markets froze. To make matters worse, PIC cancelled the joint venture with Dow 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 internal cash flow deteriorated dramatically (its stock price was down more than 70% during 2008); and third, Rohm's forecast sales, earnings, and value declined precipitously thereby reducing its attractiveness as an acquisition target. Given this confluence of events, Dow sued to cancel the merger agreement with Rohm in January 2009. Rohm responded with its own lawsuit to force consummation of the deal. As of February 2009, Dow's board of directors and its CEO Andrew Liveris have to decide what to do first and foremost about the Rohm acquisition and the pending lawsuits, but also about the firm's declining financial performance and the PIC joint venture.
Learning Objective: This case is designed for a module on the market for corporate control in 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 students to describe the legal aspects of mergers and acquisitions, it can also be used with law students to describe the relevant financing and valuation issues inherent in merger transactions. Specifically, the case has four pedagogical objectives. First, it exposes students to the legal side of M&A transactions by exploring detailed contractual provisions in a merger agreement. Second, it provides an opportunity to value an acquisition target as well as potential synergies using discounted cash flow (DCF) analysis. Third, It analyzes the impact the global economic and financial crises had on the M&A market from the Fall of 2008 through 2009. And Finally, it helps students understand and use information contained in market securities to assess the dynamics of merger transactions. In particular, the case presents data on the arbitrage discount and the pricing of credit default swap (CDS) spreads as ways to understand the likelihood of consummation and the probability of bankruptcy, respectively.
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