Dows Bid for Rohm and Haas Mid Term Exam Kent Bowles EMBA 20

Topics: Dow Chemical Company, Stock market, Free cash flow Pages: 12 (2254 words) Published: February 4, 2015

EMBA 2015

Name Brandon Bowles
Darrell Kent
Assignment Dow’s Bid for Rohm and Haas Mid-Term Exam
Date January 23, 2015

This assignment exclusively represents my own work. I have not discussed this case or this assignment with anyone and have done no outside research unless specifically authorized to do so.


Table of Contents
1Financial Math – Pre Crisis1
Exhibit 1: Valuation Assumptions1
1.1Value of the Cost Synergies1
Exhibit 2: Cost Synergy Valuation2
1.2Value of the Revenue/Growth Synergies2
Exhibit 3: Revenue/Growth Synergy Valuation2
1.3Complete Synergy Value Analysis2
Exhibit 4: Complete Synergy Valuation Analysis3
1.4What is the Most Dow Should Pay for Rohm?3
Exhibit 5: Price Range for Purchase of Rohm3
1.5Synergy Plausibility and Obstacles to Realization3
1.6Change in Values w/ $1 Billion More in Revenues by Year 34 Exhibit 6: Synergy Value Change w/ $1Billion More Revenue in Year 34 Exhibit 7: Adjusted Price Range for Purchase of Rohm4
1.7The View from the Wall Street4
1.8Other Relevant Financial Facts5
2Deal Design5
2.1Key Issues Being Addressed and How5
Exhibit 8: Deal Design5
2.2Overall Impression of the Merger Agreement5
2.3Deal Design Signals & Dow’s Desire to Merge Now5
3Analyzing Dow’s Strategy6
4.1Good Decision for Dow?6
Exhibit 9: Pros and Cons of the Decision7
4.2What Should Liveris Do Now?7
4.3What Should Gupta Do Now?7

1 Financial Math – Pre Crisis
The case presents an American company Dow, producer of commodity chemicals, who is in the final stages of acquiring another company Rohm & Haas. Rohm & Haas is a perfect match for Dow in respect of the strategic and financial perspective. Dow is also pursuing another key deal with Kuwait’s Petrochemical Industries Company (PIC) that is supposed to generate $7 billion cash net of tax which could be used to finance acquisition of specialty chemical maker Rohm & Haas for $18.8 billion all cash deal. Exhibit 1 below includes the assumptions used for this analysis. Valuation Assumptions

Weighted Average Cost of Capital (WACC) or (Discount Rate)
Tax Rate
Growth Rate after 2008
Exhibit 1: Valuation Assumptions
1.1 Value of the Cost Synergies
To be able to recognize the cost synergies, Dow had to incur a one-time restructuring cost of $1.3 billion spread over two years. Dow also stated it would take 2 years for them to fully recognize cost synergies; estimated at approximately $800 million. Utilizing the synergy template provided in class, we found that these cost synergies ($800M) would be worth an additional $32.73 per Rohm & Haas Share as illustrated in exhibit 2 below. Cash Flows (assuming 1/10/2009 closing)

Figures in millions except per share values

Incremental EBIAT from:
Cost synergies

Less restructuring costs

Less Taxes at
Free Cash Flow

Terminal Value

Present Values

As of 1/10/2009:
Present Value FCF

Present Value TV


Value of synergies

No. of shares

Value per share
Exhibit 2: Cost Synergy Valuation
1.2 Value of the Revenue/Growth Synergies
Revenue/Growth Synergies are estimated to be between $2.0 billion and $2.6 billion. It is assumed that these Revenue/Growth Synergies would also take two years to completely recognize. The value of the revenue synergies per Rohm & Haas share ($53.04) is stated in exhibit 3 below based on the Earnings before Interest After Taxes (EBIAT) provided in...
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