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Dow Chemical is one of the most respected companies in America. A large
chemical company they are known to all of us. Rohm and Haas is a
smaller speciality chemical company. Much of the Rohm and Haas stock
was owned by the Haas family, who wanted to sell out to diversify their
holdings. On July 9 of last year, Dow stock closed at $33.96 per share
and their market capitialization was over $31 B. Rohm and Haas’ stock
price was $44.83 per share and the market capitialization was just
under $8.8 B. So Dow was more than 3.5 times larger than Rohm and
Haas.On July 10th Dow’s purchase of Rohm and Haas was announced. One
way to do a deal would be what is called stock for stock, and Dow would
have given Rohm and Haas shareholders Dow stock for their Rohm and Haas
stock. Another is a cash price for the stock. I suspect that Rohm and
Haas held out for cash, and Dow agreed to pay $78 per share or $15.3 B,
a 74% premium over Dow’s closing price of $44.83. So on July 9 Dow was
3.5 larger than Rohm and Haas based on market cap, and about twice as
large based on the premium price Dow was willing to pay.Many thought
the premium was too high. Now look at what’s happened since.We all know
that stock markets around the world has falled dramatically. Dow’s
stock price has falled to $13.19/share on January 27th. Dow’s market
cap is now about $12.2, so Dow is actually worth less than what they
agreed to pay for Rohm and Haas. Rohm and Haas has not fallen nearly as
much, probably because of the Dow deal. Rohm and Haas stock is
$58.75/share, actually higher than the $44.83 on July 9th.Dow says that
they can not close the deal at this time. They are other factors
involved as Dow is having trouble raising the capital. My point is
never to be too sure about anything when it comes to investing. Dow had
to know Rohm and Haas inside and out. Dow probably had plans to cut
costs and recover much of the premium. However by tying themselves to a
price they subjected themselves to market risk, and the market has been
very harsh.If Dow had done a stock for stock deal, then it might have
looked something like this. Dow would agree to give 2.3 shares of its
stock for each share of Rohm and Haas stock. At $33.96/share the 2.3
times would be worth the same $78/share. However, at today’s price of
$13.19, then Dow would be paying $30.30 per share for Rohm and Haas or
just under $6B for Rohm and Hass, which is a far piece from the $15.3 B
then Dow agreed to pay.The companies are headed for the courthouse. It
will be fun to watch it play out.

~ by webconsuls on January 28, 2009.