Dow Chemical, Rohm & Haas announce “game-changing” M&A

July 11, 2008 – In a blockbuster consolidation in the chemicals segment, Dow Chemical is acquiring Rohm & Haas in a cash deal worth about $15.3M ($78/share, a 74% premium from the day before — and trimmed to just over 5% the day after). The deal also will require a $3B equity investment from Berkshire Hathaway (becoming Dow’s largest shareholder) and $1B from the Kuwait Investment Authority.

Under terms of the deal, Dow will contribute some specialty chemicals assets to the Rohm & Haas portfolio where they have greater synergies. For its part, Rohm and Haas — whose corporate name will be retained for Dow’s new “Advanced Materials” division — will bring core strengths in coatings and electronic materials, while Dow offers deep R&D and analysis capabilities and “complementary” offerings in coatings, biocides, and personal care products. Together they claim to an overall projected $13B in combined sales with a “global leadership position” in various specialty chemicals and materials segments.

By technology end-market, for example, they cited Rohm’s photoresist materials + Dow’s SiLK low-k technology. They also cited “at least $800M” in synergies to be phased in over two years, in areas such as purchasing, manufacturing/supply chain work process improvements, bizdev overlap, and shared services.

In a presentation, company execs called the acquisition “a defining step in Dow’s transformation to a high growth, diversified chemicals and materials company,” and “an unbeatable combination.” They calculated a $2.0-$2.6B increase in “value creation” with $1.7B in combined R&D investment, “among the largest in the industry,” with key growth opportunities in electronic materials, specialty chemicals, and coatings. They also projected an increase in EPS outlook in 2010-2011 (seen as the next industry trough) to ~$4.00 instead of $3.50.

Buckingham Research Group analyst John Roberts, quoted by the Associated Press, noted that Dow Chemical had been attracted to Rohm and Haas for a while but considered it an “unobtainable enterprise,” and that even if Rohm & Haas had been on the market other suitors would have appeared (e.g. BASF). “It would appear that Dow offered a pre-emptive price that ROH’s board would have a hard time refusing,” he wrote in a research note.

“We believe Dow is paying a very high price,” added Oppenheimer & Co. analyst Edward Yang in a separate AP-referenced report. The deal, when added to recent price hikes by both firms (and others in the supply channel), should give a temporary valuation lift to the sector, he wrote, “but we are hesitant to predict similar strategic deals at similar multiples.”


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