Merger Arbitrage Spread Widens on Rohm and Haas / Dow Chemical Deal

The spread between Dow Chemical's (DOW) offer and Rohm and Haas' (ROH) stock price has widened despite reassurance that the deal will go through. Xinhua Financial News reports that Dow Chemical Co stated on Monday that it considered altering the structure of its bid for specialty chemicals maker Rohm and Haas and was committed to completing the acquisition.

"...[W]e're committed to closing the deal," Chairman and Chief Executive Officer Andrew Liveris said on a conference call in response to a question from an analyst.The company also said it would take an estimated $700 million in pretax charges, or 50 to 60 cents per share, in the fourth quarter to implement the job cuts and operational reductions announced earlier on Monday.

My stock investing advice for this deal would be to get in as soon as possible, especially with Rohm and Haas at $67 a share.

As always, place a stop price on your stocks because there is the slight chance that the deal falls through. You don't want to be stuck with the declining stocks. Pick your loss tolerance for the trade. For example, if you set a $65 stop on ROH, then the maximum you can lose from its price today is 3%, or $2 a share.

Current Merger Arbitrage Spread

Rohm and Haas Co. (ROH) to be bought by Dow Chemical Company (DOW).

Premium offered: 16.42% or $11.00
Cash offered per share: $78.00
ROH current price: $67.00
Expected closing: Jan. 2009/ Very early 2009

Disclosure: Author holds a long position in ROH

Comments

[BlueOkie:]

What's the target price for ROH?

2008 Dec 22 08:48 AM

[Augustus:]

A Stop will not give any protection on this deal. If Dow announces that therre will be a price change, ROH may just go to $40 for the next trade. It won't be a smooth decline but a very abrupt and immediate one. A Sell Stop will get you a sale, just not at the Stop Price.

2008 Dec 22 10:35 AM

[Rosen:]

Yeah, whats a stop going to do? It is very likely they would announce any changes to the deal after hours or after a trading halt.

2008 Dec 27 10:18 AM

[Paul Price:]

DOW will be killed long-term if they complete the ROH purchase at the agreed upon price.

The same type of deal almost bankrupted Hercules after they overpaid for Betz Labs.

DOW should pay the break-up fee and cancel the deal.

They might be able to renegotiate the same buy at much better terms later.

2008 Dec 28 10:14 AM

[Paul Price:]

Rosen and Augusta are right regarding the stop order.

If this deal gets cancelled ROH shazres will gap down and the idea that you'll get taken out for just a couple of dollars loss/share is absurd.

2008 Dec 28 10:16 AM