dows bid for rohm and haas

Topics: Stock, Dow Chemical Company, Stock market Pages: 17 (4941 words) Published: February 16, 2015


1) Introduction
The case presents an American company Dow, producer of commodity chemicals, who is in the final stages of acquiring another company Rohm and Haas. Dow’s CEO has been working for four years to transform Dow from a producer of low-value, highly cyclical commodity chemicals to a producer of high-value, specialty chemicals and advanced materials. Rohm 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 was 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. However, by late 2008, a sever financial crisis gripped the US markets, causing a substantial decline in asset values. This financial crisis stretched across the entire globe, and the Kuwait based PIC terminated the joint venture with Dow in December 2008. To make matters worse, Dow reported a fourth quarter loss of $1.6 billion. Due to deteriorating market conditions and the credit market freezing up, Dow attempted to back out of its acquisition of Rohm & Haas. In response, Rohm & Haas approached the court to force Dow to complete the the terms of their deal. 2) Why does Dow want to acquire Rohm and Haas?

Rohm and Haas would be a strong operational and strategic fit for Dow. This acquisition would bring synergies as well as benefits in products and technologies, broad geographic reach, and strong industry channels. Andrew Liveris described the deal as a “jewel… that matched Dow‘s strategy perectly.” Rohm & Haas’ presence in the global market will provide Dow with an expanded network into emerging markets, producing important sources of revenues, while the synergies would create an outstanding business portfolio with diversified products and significant growth opportunities. Rohm & Haas is also backed by a strong and experienced leadership team with a culture of customer focus and innovation. In light of Dow trying to transform their production line beyond the low-value, highly cyclical commodity chemicals, Rohm & Haas’s portfolio of specialty chemicals and advanced materials made it a tempting acquisition. 3) Valuation using the Original Forecast:

Weighted Average Cost of Capital (WACC)
For the purpose of discounting cash flows to determine the present value of cash flows, we have calculated WACC. Using the long-term sustainable tax rates (35%) and debt level (D/V=28%), the WACC is 8.5% as shown in Exhibit 7b. Using short-term tax rates (26%) and debt level (D/V=49%), the WACC would be 7.44% as shown below. Weighted Average Cost of Capital (WACC)

Using Short-term Metrics

Calculation As per data

Risk-free Rate (Rf)
4.92%
Exhibit 7b
Equity Beta (bE)
1.06
Exhibit 7b
Equity Risk Premium (ERP)
5.07%
Exhibit 7b
Cost of Equity (KE)
10.29%
Exhibit 7b
Tax Rate
26%
Exhibit 7a
Cost of Debt (KD)
6.10%
Exhibit 7b
Debt / Value Ratio (D/V)
49%
Exhibit 2
Equity / Value Ratio (E/V)
51%
Exhibit 2
WACC =
7.44%

Table 1: WACC Calculations based on Short Term Metrics
We believe the WACC based on the long-term sustainable ratios (8.5%) is a more realistic discount rate. All figures are in millions except for price per share figures. Rohm & Haas Stand-Alone Valuation (Original FCF forecast)

Exhibit 7a provides the projected cash flows for the years 2009-2012, as shown in the table below

Table 2: Project Free Cash Flows (Original Forecast)
Using the given WACC of 8.5 and a growth rate of 2% we calculated an Enterprise value of $12,370. The value of equity is the Enterprise Value (EV) less the value of the Net Debt. Net Debt is defined as follows:

Table 3: Net debt Calculations

We found that the equity value of Rohm & Haas to be $9,059 and dividing this value by the Rohm and Haas shares outstanding yields a value of $46.41 per Rohm and Haas share. This...
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