Dow’s bid for Rohm and Haas
February 23, 2015
Katherinne Ortiz Espinoza
Stephanie de Waard
In this case the acquiring of Rhom and Haas will be discussed. Dow is an American multinational company who produces commodity chemicals. Their mission is to passionately create innovation for their stakeholders at the intersection of chemistry, biology and physics. As of 2009 it is the third-largest chemical company in the world. Rhom and Haas is a manufacturer of specialty chemicals for end use markets. The CEO of Dow, Andrew Liveris wanted to transform Dow from a producer of lowvalue, highly cyclical chemicals to a producer of high-value, specialty chemicals and advanced materials. His vision was to become the largest firm in the United States. In order to build his strategy and become an ‘asset light’ producing high value chemical he was pursuing two deals. First, he was planning to generate lot of cash from Kuwait’s Petrochemical Industries Company (PIC). This could be used for the second deal, the acquisition of specialty chemical Rohm and Haas. His idea was that the specialized resources of Rohm and Haas could become even more valuable if it would be combined with the resources of Dow. His strategy was to exploit the different strengths of the three companies. On the one hand, PIC would lead to vertical integration. This would lead to synergy because the chain of production would become more complete. On the other hand, Rohm and Haas would have a more functional integration. This could lead to increasing profit margins and sales, which in turn could lead to increasing market power of Dow.
1.1 Why does Dow want to buy Rohm and Haas? Was the 78USD a share a bid reasonable?
As mentioned in the introduction, Rohm and Haas would bring synergies and benefits in products, namely high-value specialty chemicals. It would create a diversified business portfolio. Which in turn reduces the risk for its investors and makes it more attractive investment. Also, Dow would expand its market share on the chemical market. Furthermore, there could be tax benefits. Taxes paid by two individual firms could be higher than taxes paid by one firm. Lastly, Dow could increase their debt capacity because they become less risky. They could use that to invest in more value creating 1
projects or in Research & Development.
1.2 Was the 78USD a share a bid reasonable?
In exhibit 7b the discount rate from Rohm and Haas Free Cash Flow valuation of Goldman Sachs are shown. The following assumptions are provided:
In order to calculate the firm value of Rohm and Haas, the original forecast of the free cash flow in exhibit 7a is used. The method used is DCF-model.
Now the equity value is calculated:
Lastly, a sensitivity analysis is performed.
The fair share price is $47,51, this is below $78 bid price. As can be seen in the sensitivity analysis a share price of $78 is not reached after changing the assumptions of WACC and the growth rate. In our calculation, the premium per share would be $30.49. This would reflect the synergies gains after the acquisition. So, the question now is, if this is reasonable. It is difficult to predict the true synergy gains for a company. First, it should be noted that Dow could have overvalued the bid price in order to win the auction. Furthermore, in order to value the synergy gains, you should look at the value of the cost synergies and the value of the growth synergies. The cost synergies can be calculated by looking at how costs can be saved after the acquisition. Growth synergies can be identified by looking at the growth prospect of Dow after the acquisition. In the introduction both synergies are mentioned. The acquisition of Rohm and Haas would have a functional integration, a reduction...
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