Rohm and Haas: What It's Worth

Dow Chemical (DOW) has struggled greatly since the joint venture with the Kuwait government has fallen apart, and the stock is near its 23-year low. Additionally, the stock is down more than 70% since the acquisition of Rohm and Haas (ROH) was announced. Yesterday, Dow was forced to slash its dividend in order to conserve cash to put towards its purchase of Rohm and Haas now without the $9 billion of support from Kuwait. However, the company will only conserve $1 billion a year from the reduced dividend, which is a far cry from the $9 million deficit from what it had expected, and a spokesman for Dow denies that it is because of the ROH deal,

“The decision to reduce the dividend is consistent with conserving capital while preserving our long-term shareholder value.”

Given the massive loss in shareholder value over the last year, it is not a surprise to see the dividend cut, and Rohm and Haas has been asking Dow to cut the dividend to a penny in order to help finance the deal, as they sue Dow to compel them to complete the acquisition. As much as we don’t like it, because of the massive amount of wealth lost in these stocks, we can see the argument for why the Kuwait Petrochemical Industries Company got cold feet on the deal. The deal was announced in a very different market climate last summer and it seemed even at that the time Dow was willing to pay quite a high price for Rohm and Haas, offering a premium of almost 66% above the market value.

We believed that ROH was Undervalued at the time of the offer, but the offer price seems too rich for the current environment. Given our research, we think a price closer to the mid-$50s, a bit below where ROH is trading right now, would have been much more suitable price given the amount of cash and sales ROH is currently generating. This is a sad situation that shows the dangers of overpaying for an acquisition, especially during a downturn. It seems that the Kuwaiti agree as Squawk Box reported on Tuesday,

“The Kuwait investment authority is considering increasing support for the takeover of Rohm & Haas for the terms are adjusted to reflect the economic downturn.”

Comments

[UserThunder...:]

It is shameful to see "research companies" (and I am taking liberties is using that term) doing Dow's bidding to talk down the M&A price. I wouldn't be the least bit surprised to see your "analysis" picked up by Dow Jones or Reuters.

Feb 13 03:13 PM

[WestonHess:]

Your "creative" use of quotation marks must be your "effort" at displaying your "superior knowledge" of "'research firms.'" I've used these guys (and their predecessor) for years, and it's some of the best stuff out there.

Some "advice:" know whereof you speak before you speak.


On Feb 13 03:13 PM UserThunderBolt wrote:

> It is shameful to see "research companies" (and I am taking liberties
> is using that term) doing Dow's bidding to talk down the M&A
> price. I wouldn't be the least bit surprised to see your "analysis"
> picked up by Dow Jones or Reuters.

Feb 13 03:48 PM

[Jake Berzon:]

A deal is a deal. Kuwait agreed to a deal with DOW, obligating themselves to fulfill contract terms. You can't negotiate after you sign a deal. Just as if the price of plastics would have exploded since deal signing, DOW would not be able to ask for more money or walk away from the deal.

Furthermore, DOW depended on the Kuwait deal completion to acquire ROH and now they can't. I believe that Kuwait must be held responsible for this damage, as well. Unfortunately, since Kuwait is a sovereign country it will be extremely difficult to get them to pay up

Oh where is that Sadam when you need him? Oh, that's right, Bush had him hung...

Feb 13 04:00 PM

[Tom Armistead:]

Dow's presentations said they were paying 11 X EBITDA for Rohm and Haas. As a rule of thumb, 8X EBITDA would be the maxumum prudent purchase price if the deal is expected to be repaid from the cash flow of the acquired company.

That would imply an economically feasible price in the mid 50s.

Feb 13 04:01 PM

[ockham:]

ThunderBolt,

Thanks for the taking the time to read and comment on our article but I assure you we have no interest in doing Dow's bidding. It seems clear to us that the acquisition was made prior to the market meltdown and thus looks increasingly expensive to Dow. Even a ROH shareholder would have to agree.

As for our research appearing in Dow Jones, I am not sure what that has to do with Dow Chemical. The confusion of one Dow for another Dow leads me to "DOW-t" your intentions.

Many thanks to User for the kind words as well, I do appreciate them!


On Feb 13 03:13 PM UserThunderBolt wrote:

> It is shameful to see "research companies" (and I am taking liberties
> is using that term) doing Dow's bidding to talk down the M&A
> price. I wouldn't be the least bit surprised to see your "analysis"
> picked up by Dow Jones or Reuters.

Feb 13 04:05 PM

[that's why ...:]

a completely reasonable analysis except for one thing -- DOW signed a contract to buy ROH for $78 cash. Frankly, it doesn't really matter what it is "worth" now -- it is worth $78 per share. Words are important, and contracts matter. DOW has the means to do the deal. They may not like the price, but that is a matter for their shareholders and their Board of Directors.

The best thing DOW could do now is to figure out how to go forward with ROH in their corner and ride out the recession, because they own it.

Feb 15 09:59 PM

[UserThunder...:]

On Feb 15 09:59 PM that's why they call them contracts wrote:

> a completely reasonable analysis except for one thing -- DOW signed
> a contract to buy ROH for $78 cash. Frankly, it doesn't really matter
> what it is "worth" now -- it is worth $78 per share. Words are important,
> and contracts matter. DOW has the means to do the deal. They may
> not like the price, but that is a matter for their shareholders and
> their Board of Directors.
>
> The best thing DOW could do now is to figure out how to go forward
> with ROH in their corner and ride out the recession, because they
> own it.
>
> I concur completely. It is the hope that if one or a collection of individuals repeats the same thing enough times and in enough forums, it shall make it true. In this cae, that thing is 50 for ROH. Nevertheless, 78 is the agreed upon price.

Feb 16 12:58 PM