Dow Pays Big for Rohm & Haas

Tag : Chemical Industry

Apparently, Dow Chemical ( DOW ) really wanted Rohm & Haas ( ROH )—so much so that Dow on July 10 announced a bid for thespecialty chemical company 74% above the previous day's closingprice. That's a huge premium at a time when the chemical industryis getting burned by high energy costs and weak demand for itsproducts in a slowing economy.
But the goal of the $18.8 billion deal is clear: Dow is trying toupgrade its image with investors, turning its focus from commoditychemicals to more advanced products.
Dow Chemical Chairman and Chief Executive Andrew Liveris said Rohm & Haas is the "ideal company to accelerateDow's transformation." Dow's strategy is to "shape the'Dow of Tomorrow'—a high-value, diversified chemicals andmaterials company with a leading global position in performanceproducts and advanced materials," he said in a statement. Investors Get Sticker Shock
Dow shares fell 4.2%, to 32.54 on July 10, a decline Morningstar ( MORN ) analyst Ben Johnson said might reflect some "stickershock" at the $78-per-share cash bid. Rohm & Haas sharesspiked 65% on news of the deal.
But HSBC ( HBC ) analyst Hassan Ahmed advised investors to buy Dow stock onweakness. "We believe the company, particularly after the Rohm& Haas acquisition, is on its way to being re-rated as aspecialty chemical company," Ahmed wrote. After theacquisition, 70% of Dow's sales will come from specialtybusinesses, up from 55% now, he estimated.
Investors value specialty businesses because they are more stable,i.e. less sensitive to the ups and downs of the economic cycle.Morningstar's Johnson said the acquisition is a "solidstrategic move," which will cover its high price tag over thelong term. Tough Time for Chemicals
As part of the deal, Dow is picking up an investor who specializesin long-term opportunities. Warren Buffett 's Berkshire Hathaway ( BRKA ) is pitching in $3 billion and will become Dow's largestshareholder, with a 9.5% stake. The Kuwait Investment Authority is also investing $1 billion as part of the deal.
The current environment for chemical companies like Dow isdifficult. "Things are pretty grim right now," Johnsonsays. Raw materials—especially oil and natural gas, mainingredients in many chemicals—are at record prices.Meanwhile, end markets like housing and the automotive industriesare in recession. So far this year, Dow has already announced twomajor price hikes of up to 20% or more each, to cover its highercosts.
Dow is also promising to find $800 million per year in cost savingswhen the two companies are combined. As usual after an acquisition,some analysts were skeptical that Dow could find so many costsavings, but Johnson says Dow has a good track record of meetingacquisition synergy goals. Rohm & Haas won't be completelyfolded into Dow. It will keep its name and headquarters inPhiladelphia, a sign that Dow doesn't want the acquisition to spoilRohm & Haas' well-respected, innovative culture. No Massive Share Buyback Program
"Dow is adding very valuable assets to its portfolio,"JPMorgan ( JPM ) analyst Jeffrey Zekauskas wrote. An especially attractive part ofRohm & Haas' specialty business is its electronics materialsdivision. However, there was some skepticism from Oppenheimer ( OPY ) analyst Edward H. Yang, who said Rohm & Haas' reputation forspecialty, vs. commodity, chemicals is overblown. By hisclassification, "roughly half of [Rohm & Haas'] portfoliois commodity-like, similar to Dow," he wrote.
One side effect of the deal is that, after it's complete, Dow won'tbe able to use its cash on a massive share buyback program. That'sa negative aspect of the deal for Dow investors. According to Yang,the deal could raise hopes for other large mergers and acquisitionsin the chemical industry. Shares of specialty chemical companiesrose 9% on July 10 on the news, according to Standard & Poor's.
That's welcome, though perhaps temporary, relief for the sufferingchemical industry.
Steverman is a reporter for BusinessWeek's Investing channel.