Shares of Dow Chemical (DOW) fell another 7% last week - a reflection the markets felt CEO Andrew Liveris's $18.8B takeover of Rohm and Haas (ROH) was too rich. Barron's Andrew Bary thinks they may have a point:
The $78-a-share purchase price translates into about 21 times Rohm's estimated 2008 profits of $3.70 a share, and nearly 12 times estimated 2008 pre-tax cash flow, or earnings before interest, taxes, depreciation and amortization. By comparison, Dow Chemical trades for under 10 times projected '08 profits of $3.30 a share, and less than six times estimated '08 pre-tax cash flow of $6.7 billion.
He contends investors would have been better served by a hefty share repurchase.
While investors may be tempted to pick up Dow at today's depressed prices, Bary notes peer DuPont (DD) looks like a better bet: It trades at just 12x 2008 profits (vs. 11x for DOW), and also has an attractive agriculture and seed business. Citigroup chemical analyst P.J. Juvekar says the ROH deal showcases DuPont - because its business mix is very similar to that of ROH. He thinks DuPont ($41) is worth $60.
Todd Sullivan notes that with its "rock-solid safe" 5.25% yield - at $32/share - Dow buyers can snag themselves a better deal than stakeholder Warren Buffett.
Commenter Jim Hawthorne is unimpressed: "I was trying to remember when and if I ever saw a dog sicker than this one get better. I can't; and my whiskers are pretty much all grey now."