Dow’s Bid for Rohm and Haas

Dow’s Bid For Rohm and Haas

Synopsis: Dow is acquiring Rohm and Haas from Ingersoll-Rand at an agreed price per share of $78. However, a deal with Kuwait’s Petrochemical Industries Company, which was supposed to generate $7 billion of cash to be used to finance the acquisition, had recently fell-through. The hiccup has led to Rohm taking legal action to force Dow to complete the acquisition as required by the merger agreement. The standalone value of Rohm’s share price is currently at $46.77 while the synergies could almost double that to $94.63 per share. By going ahead with the deal Dow would need to raise capital and that might lead to a lower bond rating.

1. Why does Dow want to buy Rohm and Haas?

Dow believes the acquisition of Rohm and Haas would be a defining step in their transformational strategy to shape the “Dow of Tomorrow”. The acquisition of Rohm and Haas would provide a strong fit strategically and operationally for Dow. The combined companies would bring the best-in-class products and technologies, broad geographic reach and strong industry channels to create an outstanding business portfolio with significant growth opportunities. Rohm would provide Dow with an expanded network into emerging markets thereby increasing Dow’s sources of revenues for the future as well as adding a strong and experienced leadership team with a culture of customer focus and innovation. Together the geographic strengths of each company would help realize economies of scale through the combined R&D, manufacturing and distribution. Furthermore, Dow attempting to transform its production line beyond low value, highly cyclical commodity chemicals, and Rohm’s expertise in specialty chemicals and advanced materials allows Dow to achieve that transformation since the acquisition of Rohm is expected to offset Dow’s cyclical earnings and reliance on commodity products.

2. How much was Rohm and Haas worth (per share) (i) on a stand-alone basis and (ii) including estimated synergies, using forecasts from before the deal announcement was made? Do you think the $78 per share (in cash) takeover offer was reasonable?

2.1Weighted Average Cost of Capital (WACC)

For the purpose of discounting cash flows to determine the present value of cash flows, we have calculated WACC. Using the long-term sustainable tax rates (35%) and debt level (D/V=28%), the WACC is 8.5% as shown in Exhibit 7b below.

Weighted Average

Cost of Capital (WACC)

Risk-free Rate (Rf) 4.92%

Equity Beta (bE) 1.06

Equity Risk Premium (ERP) 5.07%

Cost