Dow's Offer for Rohm & Haas: Too Steep?

By Jennifer Yousfi

The Dow Chemical Co. (DOW) Thursday announced its plans to buy rival Rohm and Haas Co. (ROH) in an $18.8 billion deal, $3 billion of which will come from Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B).

News of the Dow buyout sent Rohm and Haas shares soaring over 60% by midday in New York.

“The transaction delivers on the promises we have made to our shareholders about transforming our earnings profile to one of high-growth and less cyclicality,” Dow Chief Executive Officer Andrew Liveris told a conference call regarding the Rohm and Haas offer, Reuters reported.

Some analysts felt the $78 per share bid - a 74% premium to Wednesday’s closing price of $44.83 - for Rohm and Haas shares was too steep a price for Dow to pay.

BB&T Capital Markets downgraded Dow shares to “hold” from “buy” after the announcement.

“We’ve been negative on Rohm & Haas’s fundamentals for some time now, as its largest feedstock, propylene, has been on a tear and its major end market, coatings, has been under pressure,” said BB&T analyst Frank Mitsch in a note, MarketWatch reported.

But Dow management defended the deal as the company looks to expand its chemical-product line and diversify away from commodities.

“While it’s hard to put a price on a company’s culture and people, this premium recognizes the fact that Rohm and Haas is a highly-coveted asset in terms of both of these critical attributes, as well as the quality and reputation of its businesses, brands, products, and technologies,” Dow Chief Financial Officer Geoffrey Merszei explained via conference call.

Investors should take comfort in Berkshire Hathaway’s $3 billion endorsement of the deal. Studies have shown that following Warren Buffett’s investment track record can lead to profits. Another $1 billion in equity to back the deal is coming from sovereign wealth fund Kuwait Investment Authority.

Dow has struggled lately as soaring oil costs have eaten away at the chemical company’s margins, spurring double-digit price increases in both June and July. Just over 30% of Rohm and Haas revenues come from materials used to make electronic components, a nice complement to Dow’s current line-up, which is heavy on petroleum-based products.

“This deal uses up much of Dow’s firepower,” Martin Evans, an analyst at Cazenove in London, said in a report, Bloomberg News reported. “The premium is high — as is often the case when chemical assets are acquired — and is a necessary part of their transformation away from commodity exposures.”