Corporate Finance case 2
Dow’s Bid for Rohm and Haas
Dow started as a manufacturer of commercial bleach in 1897, and was founded by Herbert Dow. He merged his company in 1900 with Midland Chemical, which lead to diversification of his portfolio to agricultural and food products. In 1912, Dow started to pay dividends every quarter without any reductions or interruptions. By doing so, they were the only Fortune 200 firm that established these figures. Dow became a major player in the M&a field, since they acquired between 1983 and 2007 95 business, took stakes in 58 firms and divested 166 businesses. In 2006, Dow’s CEO Andrew Liveris announced the ‘Dow of Tomorrow’ strategy, which consisted of two pillars. One was pursuing an asset light approach to its commodity business. In order to do so, he signed a JV agreement with a subsidiary of the Kuwait Petroleum Company, named Petroleum Industries Company. Dow and PIC signed a Memorandum of Understanding, which generated Dow a $7.2 billion after tax revenues. Second, Mr. Liveris wanted to build a high-growth and high-value added performance business. In order to achieve this objective, Dow agreed to purchase Rohm and Haas. This acquisition had the purpose for Dow to become a producer of high-value chemicals and advanced materials.
Why does Dow want to buy Rohm and Haas?
As mentioned in the introduction, CEO Andrew Liveris announced the ‘Dow of Tomorrow’ strategy. This included becoming a high growth and high-value added producer of specialty chemicals, with less cyclicality. Rohm and Haas fitted the picture perfectly, since they were an advanced material and specialty chemicals company, operating in 27 countries. Besides the interesting company profile description, there were several other reasons why Dow was interested in the Rohm and Haas company. Most important reason was that the acquisition would make Dow reduce its cyclicality and increase its growth prospects. Expanded product portfolios, increased geographic market, improved market channels and innovative technologies will obtain the expected growth and cost synergies. Forecasts predict additional growth synergies values between $2.0 and $2.6 billion and $0.8 billion costs synergies, including shared services and governance, manufacturing, supply chain and work process improvements. Besides the above-mentioned advantages, Dow and Rohm could be a global leader in specialty chemicals and advanced materials if they combined forces. Also by combining their R&D, the development of new products and innovations could be stimulated. So overall, Rohm and Haas fitted the picture projected by Andrew Liveris perfectly. Rohm and Haas supported Dow’s commitment to maintain their highest standards in pursuing and selecting growth opportunities to satisfy their long-term shareholder values.
Was $78 per share a reasonable bid?
In order to draw a conclusion of the reasonability of the bid, we need to valuate Rohm and Haas as a firm with and without the synergies created by the acquisition. If this total value exceeds the $78 share price, Dow will pay the price, since it will be beneficial for them. The benefits of the synergies can be calculated by dividing it between the two firms on a multiple or 50/50 basis.
The excel file attached to the assignment contained a WACC of 8,5% based on a tax rate of 35%. In our analysis, we also calculated a WACC with a tax rate of 26%, since this was the average tax rate. This leads to a WACC of 8,7%. As a basis, we took 2% growth.
Rohm and Haas had at time of the acquisition 195,200,000 shares outstanding. From the balance sheet of Rohm and Haas 2008H1, we took the values of cash and debt (long and short term debt). Both inputs were needed in order to calculate the share price. Below, you can find how we calculated the share price...
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