Dow's Bid for Rohm and Haas Custom Case Solution & Analysis

Evidence Brief

Financial Metrics

Operational Facts

• Dow Portfolio: Primarily basic chemicals, plastics, and agricultural products. Highly cyclical and sensitive to raw material costs.
• Rohm and Haas Portfolio: Specialty chemicals including electronic materials, coatings, and performance materials. Higher margins and lower capital intensity.
• Geographic Reach: Rohm and Haas provides Dow with significant expansion in electronics markets in Asia and architectural coatings in North America.
• The K-Dow Transaction: A planned joint venture with Kuwait Petroleum Corporation intended to house Dows basic chemicals business.

Stakeholder Positions

• Andrew Liveris, Dow CEO: Positioned the deal as the centerpiece of a transformation strategy to reduce cyclicality.
• Raj Gupta, Rohm and Haas CEO: Committed to delivering the 78 dollar per share value to shareholders.
• Kuwaiti Government: Cancelled the K-Dow joint venture in December 2008 citing the global economic downturn and domestic political pressure.
• Warren Buffett: Provided 3 billion dollars in preferred equity with an 8 percent annual dividend, contingent on the deal closing.
• The Haas Family Trusts: Major shareholders of Rohm and Haas who demanded the merger proceed according to the original contract.

Information Gaps

• Specific projections for Rohm and Haas performance during the 2009 recessionary troughs.
• The exact language of the material adverse change clauses in the merger agreement.
• Internal Dow assessments regarding the probability of the Kuwaiti JV failure prior to December 2008.

Strategic Analysis

Core Strategic Question

Dow must determine how to fulfill its legally binding acquisition of Rohm and Haas while facing a 7 billion dollar funding shortfall and a global credit freeze that threatens the solvency of the combined entity.

Structural Analysis

• Industry Transformation: The commodity chemical sector faces intense rivalry and low differentiation. Moving into specialty chemicals shifts Dow from a cost-leadership battle to a differentiation-based model with higher switching costs for customers in electronics and coatings.
• Value Chain Integration: Rohm and Haas consumes many of the feedstocks Dow produces. Capturing the full margin from basic building blocks to finished specialty chemicals improves overall profitability.
• Financial Constraints: The collapse of the K-Dow JV removes the primary source of cash for debt retirement. The bridge loan becomes a terminal risk if not refinanced or repaid through asset sales.

Strategic Options

• Option 1: Attempt to Terminate the Merger. This involves litigation to argue that a Material Adverse Change has occurred.
  • Rationale: Preserves Dows balance sheet and prevents a credit rating downgrade to junk status.
  • Trade-offs: High probability of legal failure due to the unconditional nature of the contract; significant damage to corporate reputation.
• Option 2: Close at Original Terms. Proceed with the 78 dollar per share cash payment using the bridge loan and available equity.
  • Rationale: Avoids protracted litigation and secures the specialty chemical assets immediately.
  • Trade-offs: Risks bankruptcy if the bridge loan cannot be refinanced; likely requires a total dividend suspension.
• Option 3: Renegotiate and Restructure the Deal. Settle the lawsuit by modifying the payment structure to include more equity or deferred payments.
  • Rationale: Reduces immediate cash outflow while fulfilling the legal obligation to Rohm and Haas shareholders.
  • Trade-offs: Dilutes existing Dow shareholders; requires the Haas family to accept Dow credit risk.

Preliminary Recommendation

Dow should pursue a negotiated settlement that maintains the 78 dollar per share valuation but replaces a portion of the cash payment with preferred equity issued to the Haas family and the Rohm and Haas board. This preserves cash while satisfying the legal requirement to close the deal.

Implementation Roadmap

Critical Path

• Phase 1: Liquidity Preservation (Days 1-30). Suspend the common stock dividend immediately to save 1.6 billion dollars annually. Identify non-core assets for rapid divestiture, specifically the salt business and portions of the plastics portfolio.
• Phase 2: Settlement Negotiation (Days 1-45). Open a direct channel with the Haas family trusts. Offer a combination of cash and perpetual preferred stock to bridge the 7 billion dollar gap left by the Kuwaiti exit.
• Phase 3: Debt Restructuring (Days 45-90). Negotiate with the bridge loan lenders to extend maturities. Use the proceeds from the Berkshire Hathaway and KIA equity injections to pay down the most expensive tranches of debt.

Key Constraints

• Credit Rating: Standard and Poors and Moodys will likely downgrade Dow if the debt-to-EBITDA ratio exceeds 4.0x. Maintaining an investment-grade rating is essential for future refinancing.
• Legal Deadlines: The Delaware Chancery Court operates on an expedited schedule. A settlement must be reached before a court-ordered close is mandated.

Risk-Adjusted Implementation Strategy

The strategy assumes the Haas family prefers a negotiated settlement over the risk of a bankrupt Dow. If negotiations fail, the contingency is to close using the bridge loan and immediately file for a massive secondary equity offering, regardless of share price, to retire the debt. This is a survival-first approach.

Executive Review and BLUF

BLUF

Dow must close the Rohm and Haas acquisition. The strategic shift to specialty chemicals is essential for long-term survival, but the current financing structure is unsustainable. The priority is to settle the litigation by converting 2.5 billion to 3 billion dollars of the cash consideration into preferred equity held by the sellers. This move, combined with the first dividend cut in company history and a 4 billion dollar asset disposal program, will prevent insolvency. The 78 dollar price is excessive in the current market, but the legal obligation is unconditional. Execution must focus on cash preservation and debt reduction rather than rapid integration.

Dangerous Assumption

The most dangerous assumption is that the specialty chemical markets will remain resilient during a deep global recession. If Rohm and Haas cash flows decline by more than 20 percent in 2009, the combined entity will struggle to service even the restructured debt, regardless of the settlement terms.

Unaddressed Risks

• Rating Agency Reaction: There is a high probability that even a successful settlement results in a downgrade to speculative grade. This would increase interest expenses by hundreds of millions of dollars annually, neutralizing the benefits of the dividend cut.
• Integration Friction: The necessity of aggressive asset sales and cost-cutting to survive the debt load will likely alienate the Rohm and Haas talent pool, destroying the very expertise Dow is paying a premium to acquire.

Unconsidered Alternative

The team did not fully explore a pre-packaged bankruptcy filing. While extreme, using a Chapter 11 process to reject the merger contract could have been used as a credible threat to force a much lower acquisition price, potentially saving 5 billion dollars or more in capital.

Verdict

APPROVED FOR LEADERSHIP REVIEW