QUESTION 1Why does Dow want to buy Rohm and Haas? Was the 78 USD a share bid reasonable? Part 1: Why does Dow want to buy Rohm and Haas? To discover why Dow wanted to buy Rohm and Haas, we first have to discover the rationale behind the corporate takeover strategy and Dow’s own strategy in general. Andrew Liveris, CEO of Dow, had announced the “Dow of Tomorrow” strategy in 2006, which consisted of two parts. The first part was the pursuit of an asset-light approach to its low-margin, but cash-rich, commodity business. This was achieved by creating a joint venture (JV) with Petrochemical Industries Company (PIC). The second part was building high-growth and high-value-added performance businesses. To achieve this, Liveris agreed to purchase Rohm and Maas. The question remains why Rohm and Haas was such a good target. First, the Haas family agreed to sell their shares (32%). Second, Rohm and Haas would provide a strong operational and strategic fit and an expended network into emerging markets. A lookup of companies active in 2006 by SIC code (Compustat) gives insight into other potential targets. Both Dow Chemical Company and Rohm and Maas have a SIC code of 2821. At the time of formulating the new strategy, Liveris had 16 other companies to choose from in that had the same SIC code (January 2006). One potential reason for the attractiveness of Rohm and Maas for Dow was its size. With a market value of equity of $11billion, compared to Dow’s value of $38billion, the combined entity would by far be the largest in the industry. The third largest company in the industry, after Rohm and Maas and Dow, is Eastman Chemical, with an equity value of $5billion. This shows that the present strategical partners for Dow were presumably too small to have a great impact in the business of Dow. Below is a list of top 10 companies in the same SIC code industry of Dow and Rohn and Maas based on equity value (Compustat: data from 2006 and 2008, excluding Dow and Rohm and Maas). Company Name DOW CHEMICAL ROHM AND HAAS CO EASTMAN CHEMICAL CO HEXCEL CORP SCHULMAN (A.) INC POLYONE CORP OMNOVA SOLUTIONS INC RS TECHNOLOGIES INC CEREPLAST INC ICO INC LUMERA CORP Market Value of Market Value of Equity 2006 Equity 2008 (x mil $) (x mil $) 38.226 11.187 4.954 1.633 696 609 192 145 123 93 79 13.948 12.064 2.298 712 291 444 30 88 0 0 21 the offer price is very high compared to what normally is paid in acquisitions.3billion (net present value $1. A valuation without the synergies shows an offer price more in line with the distributions of offer prices. indeed. The synergy possibilities between Dow and Rohm and Maas are plenty. respectively). the 52-week high. The total deal value (including $3.8billion in value annually at a cost of $1.77-$20. Besides synergies. this amounts to $17.15-$60. In this case. From Compustat.5billion in the first 4 years). the acquisition of Rohm and Maas would change Dow’s earnings profile (increased growth rate. namely around the 52-week high. Therefore.3% (18. However. respectively.6billion in additional present value. On a per-share basis. Dow’s offer price is relatively far above the average offer price. QUESTION 2 What are the major deals risks inherent in this deal transaction? How and to whom does the manager agreement allocate these key risks? When it comes to mergers and acquisitions.7%).5%). and 24. Moreover. prior day value and average last month.5-$4. by just examining these numbers one can conclude this is very high.73billion and the deal premium is 27% above the 12-month high of Rohm and Maas (74% and 60% above prior day and last month average. The top (bottom) of the offer price range premiums are -1. the shortlist of potential targets shows mostly small targets (compared to Dow and Rohm and Maas). at least it is much higher than what the market values Rohm and Maas as a standalone company. The risks involved are not merely financial ones.3% (27. this amounts to $15.23billion. Moreover. diminish customer confidence. Also when looking at how offer prices of usual takeovers are distributed. cause employees to leave and result in poor employee motivation 2 .1billion of synergies are possible in the first 4 years. A failed merger can disrupt work processes.0%).BAIRNCO CORP 75 32 An interesting find is that. In conclusion. based on the available other potential targets. Dow’s market value of equity shrunk to almost the same value as Rohm & Maas by 2008. and costs synergies are expected to generate $0. reduced cyclicality) to an “earnings growth company”. However. These values are more in line with the distribution of offer prices around 52-week highs. Part 2: Was the 78 USD a share bid reasonable? To calculate the full acquisition sum.5billion debt) is $18. there are some critical factors to consider.7% (-6. for the 52-week high. the number of acquisition shares has to be multiplied by the share bid. a range of $3. prior day value. Add this together. Rohm and Maas is an appropriate strategic acquisition.23. 34. this is mainly due to the high expected synergies. there is a good reason for a higher offer price. growth synergies are expected to create $2-$2. damage the company’s reputation. Therefore. and last month average are retrieved.85 and the offer price range without synergies would equal $57. Moreover. and is classed as an equitable remedy commonly used in the form of injunctive relief concerning confidential information or real property.6 both parties should use there reasonable best effort to complete the terms of the agreement mitigate this risk.2a&d. A specific performance is an order of a court which requires a party to perform a specific act. This ticking fee of 8% simple interest. by stating a closing date in the contract the risk of delay is mitigated. It is stated in §8. In the next section we describe different major risks inherent in this deal transaction.17 there is a fairness opinion. §2. but we only have limited information in this case. For this reason in §3. Based on the information in the case we identified three major risks from a company viewpoint. In this case an incorrect valuation of Rohm’s financial position might have a negative influence on the shareholders of both companies. It is an alternative to awarding damages. So this condition allocates these risks to both parties to complete the deal before the specified closing date. The other provisions mainly favor Rohm but allow for damages to be granted to Rohm and Dow. Goldman. usually what is stated in a contract. The terminations fees are stated in §7.and stakeholders of both companies.1a is stated that if the merger does not close by 10 January 2009 there will be a ticking fee. Other risks 3 . Sachs & Co gave an independent opinion about the effect that the consideration is fair to the Rohm shareholders from a financial point of view. And two other risks. Moreover. based on §5.5.levels. Non-performance is addressed by this agreement exclusively in the Delaware Court of Chancery. In paragraph 5. involving several assumptions. Risk of delay In paragraph 1. The part described in b &e favors Rohm and holds Dow responsible with respect to any intentional delays in finalizing the acquisition. Integration of the pre-merger entities is a demanding task and has to be managed skillfully. This fairness opinion is in the interest of the share. controls also for the risk of delay. Major risks Risk of non-performance To control for non-performance there are two termination fees and a specific performance provision.6 is stated that each party shall use its reasonable best efforts to take all actions to do or assist for the merger.2 the closing date provision is described. The risk is allocated to Dow. The provisions for non-performance mainly allocate the risk to Rohm but allow for damages to both parties in case of non-performance. Risk that the transaction is valuated not properly Valuation is a subjective matter. Risks of material adverse change of the target In §3.2 describe some closing conditions of the merger.Risk of competitive bids evolving the others buyers In paragraph 5. Rohm is responsible not to talk or shop to other parties. §6. All the closing conditions protect the shareholders of Rohm and Dow. This is a legal provision to refuse to complete the acquisition or merger or financing with the party being acquired if the target suffers such a change. these shareholders bear the highest risk.1 there is a Material Adverse Effect clause (MAE). The rationale for such a clause is a means to protect the acquirer from major changes that make the target less attractive as a purchase. It listed five different conditions for example risk of non-approval by shareholders and the risk of non-compatibility of the deal with the interests of European capital and money markets and the risk of non-approval under antitrust law. According to the conditions Dow bears the risks after the merger. Risks related to the closing conditions Closing conditions generally provide that the obligations of each party to consummate the transactions contemplated by an acquisition agreement are subject to the satisfaction (or waiver) at the closing of an agreed upon set of condition. it prevents that other additional parties (other buyers) might enter the bidding process.3 there is a “no talk” or “no shop” clause. This might drive the price up.1 and 6. This clause is in favor of Dow. In this case it favors Rohm and it holds Dow responsible to act in accordance with the clause. 4 . Since Dow is unwilling to suspend its dividend and/or issue another public offering of shares to raise cash. The bridge loan is quite risky. what should Andrew Liveris (Dow’s CEO) do and what should Raj Gupta (CEO Rohm and Haas) do? Part 1: Wat should Andrew Liveris (Dow’s CEO) do? The current economic climate created a vacuum of liquidity within the financial markets. also because it could influence the credit rating by Moody’s. Andrew Liveris will try to not cut the dividends. Due to the selloff to the announcement of the deal with Rohm and Haas and the market conditions. This is a very unlikely and difficult route to let a Judge rule in Dow’s favor and to terminate the deal with Rohm and Haas. Changes in the markets as general market conditions. renegotiate specific terms. it will influence the stock price in a negative way. financing at liquidity markets. If Dow want to close the deal at $78 per share. 5 . they need to raise cash. Dow will probably not consider to sell any of their assets since it is very probable that it will happen at sale prices. There are doubts in the capital markets if Dow could comply with the bridge loan’s covenants on cash flows and total leverage ratio. So the options are cutting dividends. 2. First option. He will probably not consider a public offering since this will influence the stock price.8 billion). there are few options to finance the deal for Dow. But due to the PIC deal. completing the deal at $78 per share either voluntary or forced through litigation. Dow is required to the Reasonable Best Efforts Clause that they must do everything that they can do in their power to complete the deal. Dow is not making a Reasonable Best Effort. Then Andrew Liveris has the option to do a public offering of shares. $10. or Dow could use this breakup fee as leverage to renegotiate the deal with K-Dow and raise more cash. is difficult given the state of the financing markets.QUESTION 3 As of early 2009. Dow can negotiate with K-Dow (the Kuwaiti entity who terminated their agreement) and other lenders. Second option is terminating the deal through litigation. Three options are given within the case: 1. Last option is to delay and/or renegotiate the deal. and Dow’s market capitalization had fallen below the market capitalization of Rohm and Haas ($10. The PIC deal of Dow put them in a position of not having enough cash to close the deal with Rohm and Haas. asset sales and using a bridge loan with a one year repayment term to complete the deal at $78 per share. terminate the deal through litigation or 3. This breakup fee could be used to fund the deal. Then we have the option to sell assets. because since Dow has started. Dow’s stock had dropped to $11 per share. 97 years of consecutive dividends has been paid out.7 billion vs. Dow is planning to sue K-Dow to recover the breakup fee from their failed deal. affecting the specialty chemical industry or the financial markets are not covered in the Material Advers Clause. Dow can look for other longer-term financing options or the credit markets may open up with more time. which was the acquirer. The court ruled against the Hexion. If Dow blows up the deal with Rohm and Haas. He must try to complete the deal with Dow at $ 78.Another option is to delay the deal which would allow Dow to negotiate for a bridge loan. In the summer of 2008 the Delaware Court (the same court that would hear the Dow and Rohm and Haas case) heard the case of Huntsman Corporation vs. the court did not rule in Hexion’s favor and stated that Hexion did not use its Reasonable Best Effort to complete the merger agreement..per share. but the cost would likely rise and the banks have to be willing to extend the loan. Considering above the first two options are not real options for Andrew Liveris. Since Dow refuses to make their best effort to raise capital or to cut dividends. Hexion Specialty Chemicals. So it is vital for the shareholders that the price of Dow is the selling price. The deal don’t give the Rohm and Haas’ shareholders any shares of Dow and so Gupta doesn’t have to take into account if Dow can or cannot afford the deal they closed. So with the shareholders best interest in mind and precedent that the Delaware Court would favor the target company in mind.83 pre-announcement price. 6 . suing Dow would be a smart choice. due to the changed market conditions. the share price would drop below the initial $ 44. Finally. Though Hexion argued that Huntsman had experienced a material adverse effect. Dow may try to extend maturity of the bridge loan. Completely opposed of Dow it would be their best option. Part 2: Wat should Raj Gupta (Rohm and Haas CEO) do? As for Raj Gupta. forcing Hexion to complete the deal it agreed to earlier. The third option would be the best considering the options Andrew Liveris has. Gupta has a compelling case when he points out that Dow didn’t make Reasonable Best Effort. Therefore Gupta should force Dow to complete the deal with or without litigation. he has the fiduciary duty to the shareholders of Rohm and Haas and so Raj Gupta must do what is in the best interest of the shareholders. Since the second option is very unlikely to succeed and the first option is not good for the financial position of Dow Chemicals. Raj Gupta should pursue the first option and have the deal completed at the agreed price of $78 per share or otherwise force Dow through litigation. but shall not include: a) events or changes generally affecting the specialty chemical industry or generally affecting the economy or the financial. detrimental for all people in the society..”. operations or financial condition of Rohm. This implies that the court has to obligation to the public to follow the rules stated by the law and act accordingly when asked to do so. “A “Material Adverse Effect” means such state of facts. 7 . event. the contractual terms in the merger agreement that Dow Chemical Company and Rohm and Haas have both signed. Examples are cutting dividends. In this case.widely recognized as the nation’s preeminent forum for the determination of disputes involving the internal of the thousands upon thousands of Delaware corporations and other business entities”. it is “. how would you resolve this legal dispute? The Delaware Court of Chancery is one of three constitutional courts in the state of Delaware.. The court should also set a date before which the deal must be completed. eventually. When the courts fails to do is. This will force Dow to consummate the merger at the price which both parties have agreed upon. Chandler III) in the Delaware Court of Chancery. However.. This means that Dow has various options to raise capital to complete the deal. As the court states itself. Furthermore. B. In this case. It is probable that Dow will state that Rohm experienced a “Material Adverse Effect” (MAE). both parties agreed to “. credit or securities markets. operations or financial condition of Rohm. The monetary nature of the transaction of this deal make specific performance the appropriate order.QUESTION 4 If you were the judge (the honorable William. this has to be done in a manner that is transparent and consistent with previous rulings. proper.. The price paid will be $78 per share with a ticking fee of 8% per annum. sale of asset. The event affected the whole economy and the MAE-clause would therefore not stand in court. We therefore think that the court should follow the contractual terms as found in exhibit 4. issue a secondary offering to raise equity or use a bridge loan. or advisable to consummate the merger. 2009. This means that the court should enforce the specific performance clause of the merger agreement.”.use its reasonable best efforts to take all actions and to do or assist in doing all things necessary. exhibit 4 is very clear on this specific subject. debt. With that being said. starting of January 10. circumstances. or change that has had a material adverse effect on the business. there is no event that had an adverse effect on the business. The goal of such contractual terms is to provide clarity when needed. plays a very important role in the ruling of this dispute. the need of clarity could be the result of the two parties disagreeing or when an event takes place that would have effects on the outcome of the acquisition. It would undermine the very existence of the contractual terms and merger agreement to make exceptions to or bend the rules and terms in this contract. Besides that. the authority of the court will be questioned and that is. Concluding. the sole goal of the contractual terms in the merger agreement is to give us guidelines in disputes like this. The court should follow these contractual terms and force Dow to consummate the acquisition using the specific performance clause. 8 .