Robert H. Heath

Dow Chemical / Rohm & Haas Rhetoric Takes a Turn

I have to say these last few "ROH is caving..." posts are a near perfect example of the selective filtering investors engage in to justify a previously formed and strongly held opinion.

Todd - I encourage you to go back and read your posts with a critical eye. You write:

"Less than a month ago Dow Chemical (DOW) was begging Rohm & Haas (ROH) to come to the bargaining table. Now, after a new agreement with their lenders and some chiding from the judge, they are essentially telling Rohm, 'give us the deal we want or we'll see you in court'..."

"Notice the change? Dow has taken Rohm's arguments off the table..."

It would take a diviner of bird entrails or a cold war Kremlinologist to find any new information in the Sunday press release by Dow. But you seem to have found (as in earlier posts) evidence that ROH was caving. The reality is that ROH's comments on the matter have largely been "A deal's a deal" or "no comment". This is not the PR behavior of a company that's making concessions when they are in control of a negotiation.

ROH has had the upper hand in this negotiation from the start and Dow's available arguments in court have been the equivalent of a "Hail Mary" pass with one second left on the clock.

You seized upon the "60,000 jobs lost" argument, without (so it would seem) considering the absurdity of that claim as I indicated in this earlier response to one of your posts.

seekingalpha.com/user/...

See also Highwater 888 here:

seekingalpha.com/user/...

Finally, this comment from 'the surfer' explains very well why ROH had no incentive to cave on the $78 takeover price:

seekingalpha.com/user/...

At the end of the day, DOW's "What about all the lost jobs?" argument was based on the assumption that the original deal would leave them over-leveraged and vulnerable. But no judge was going to accept that argument without asking the question, "So how might you reduce the leverage?" And so we saw DOW lower its dividend for the first time in its history. That was pretty objective evidence that DOW was preparing to close the deal. And the news slipped out that DOW was shopping its AgroSciences business to raise cash. That was pretty objective evidence that DOW was preparing to close the deal. And DOW was accruing the ticking fee on the ROH deal... more objective evidence. And DOW was negotiating with its lenders to extend its bridge lines... more objective evidence.

(Here I find it ironic that you saw this renegotiation as essentially a "bad faith" ploy on DOW's part to install a credit downgrade trigger in the new loan terms, which would trip if the ROH deal closed, which would -- I'm not sure what you were thinking -- give DOW a financing out? No judge would tolerate a walk-away argument based upon DOW's affirmative attempt to sabotage it's own credit facilities, especially when the bridge lines were in place and the deal was fully financed on the ORIGINAL CLOSING DATE, which DOW breached.)

At the end of the day, it looks like the judge did a masterly job here. He pushed the parties to a renegotiation, he probably gave them some private instructions about his tolerance for certain arguments; and DOW was led to take actions that drove its stock price down to levels where the Haas family and John Paulson were willing to take some DOW paper in lieu of cash. Leverage problem solved; sanctity of private contract upheld.

While I'm sure he expressed some concern for the fate of 60,000 employees at DOW, I'm equally sure that the possibility of diluting DOW's existing shareholders was not going to be a factor in any equitable balancing of the various interests at play here.

On to the next deal...

Dow, Rohm Are Talking Again - Some Thoughts

I think you're right... it looks as if this isn't going to trial.

Will Rohm & Haas Beat Dow in Court? Not So Fast

HIGHWATER -

We are indeed in agreement and thanks for the additional observations, amplifying the point.


On Feb 26 10:48 AM HIGHWATER 888 wrote:

> We are, I think, on the same page with respect to the inane 'spin'
> that completing the merger of DOW/ROH would risk a Chapter 11 bankruptcy
> of the merged entity and the loss of "60,000 Jobs". But before we
> go too far down the road of 'sweet reasonableness' -- by dignifying
> the boogy-man invocations by DOW of the specter of Chapter 11-- perhaps
> we should take note of the fact that the "Z SCORE" of the merged
> entity would probably be in a range of 2.4 to 2.8.
>
> In other words, no real risk of bankruptcy at all.
>
> IMO, The Deleware Chancery Court will quickly reject any argument
> of a 'prospective' Chapter 11 because the only possible support for
> such an argument would require Chandler to SPECULATE on the state
> of the DOW/ROH business (and the economy) two or three years down
> the road.
>
> PS - Paulson correctly pointed out that the elimination of the DOW
> dividend alone would provide the bulk of debt service on the merger
> financing and many other comments have correctly stated that the
> corporate debt market is ready, willing and able to refinance the
> bridge loan.
>
> So perhaps the only 'reasonable' response to DOW's attempt to spark
> a media discussion of Chapter 11 is : LOL, LOL, LOL.
>
> On Feb 24 06:00 PM Robert H. Heath wrote:

Will Rohm & Haas Beat Dow in Court? Not So Fast

Not surprisingly, the heat-to-light ratio on this topic is pretty high.

Mr. Sullivan's article is a nice overview of the equitable relief issues at play here, but I believe Mr. Sullivan, like Joe Nocera of the NYT, is too quick to assume that completing the deal will "jeopardize 60,000 jobs" and destroy "billions of dollars of value."

Dow's problem is that completing the deal will leave it with a huge overhang of debt even as the markets for commodity and specialty chemicals struggle against the global recession. In a prolonged recession, that could make it impossible for Dow to service the deal-related debt, resulting in a bankruptcy filing.

As a general rule, bankruptcy proceedings do not "destroy value" (other than transaction costs and other secondary effects). Bankruptcy proceedings TRANSFER value from equity holders to debt-holders. In fact, in an efficient market, the value transfer generally takes place long before the bankruptcy filing itself as stock and bond prices react to the declining fortunes of the company. All the bankruptcy proceeding does is transfer title, long after the values have settled out.

Nor do bankruptcy proceedings necessarily result in layoffs. In fact, the goal in the U.S. is to preserve value for the benefit of creditors and that means preserving businesses with operating profits. To the extent that operational restructuring occurs simultaneous with bankruptcy proceedings, it is more likely that operating problems led to the bankruptcy, not the other way around. At any rate, if Dow completed the deal with Rohm & Haas on the agreed terms and declared bankruptcy the very same day, it is absurd to think that 60,000 jobs would go away.

As the judge in Delaware considers the equities involved, the primary issue is whether he should enforce a transfer of wealth from DOW shareholders to ROH shareholders that DOW agreed to. If forcing DOW to abide by its agreement increases the likelihood that a subsequent transfer of wealth may occur from DOW's shareholders to its debt-holders, I don't see how that's terribly relevant from a public policy perspective. At most, the judge should consider the direct costs (lawyer's fees, transaction costs, costs of financial distress) that are a concomitant of bankruptcy, but not the potential value transfer between Dow's shareholders and its lenders.

At any rate, if the judge decides on a remedy (other than specific performance) that causes DOW's shares to rise from its current levels, you can be pretty sure that he unilaterally effected a transfer of wealth from ROH to DOW.

Some commentators have suggested a $1-$2 billion payment from DOW to ROH as a "remedy", which would be a win for DOW and a miscarriage of justice for ROH. A truly equitable solution would involve a remedy ($5+ billion) that would make DOW indifferent between 1) paying the damages, 2) closing the deal on the original terms or 3) offering ROH a new deal using cash and DOW stock equal to original terms, or at least satisfactory to the ROH shareholders. The latter option would greatly alleviate the financial pressure DOW would face post-closing, honor the sanctity of contract and satisfy the greatest number of equities. It would also mean that ROH's current shareholders would likely end up with a majority of DOW's shares, as in Mr. Eisenberg's clever suggestion here:

seekingalpha.com/user/...

Full disclosure: I own a small position in ROH, whose total value and risk/reward characteristics approximate a lottery ticket. So while I'm rooting for ROH economically, this post is motivated by what I think is the right answer from the perspective of public policy and fairness (equity).