Dow’s Bid for Rohm and Haas
1.Why does Dow want to buy Rohm and Haas?
Dow, a producer of low-valued cyclical commodity chemicals, had future aspirations of being
not only the largest but as well the highest valued chemical company in the United States. Its
strategy was simple: to be an asset-light company with extremely high growth potential fuelled
through advanced technology, geographical reach, strong industry channels and an overall switch in
to the advanced specialty chemical and materials market. As a result when the option to purchase
Rohm and Haas was put to market Dow jumped immediately on the opportunity. Rohm and Haas
brought with it mass amounts of experience ...view middle of the document...
As stated in the case, Dow will experience a cost synergy of $800 million annually (to be
realized in two years), an additional $2-2.6 billion in additional present value (assumed to be realized
in two years) all at the one time price of $1.3 billion. When valuing the benefits as a result of these
synergies we found it to be an additional $38.2 per share (Appendix B). This led us to arrive at a total
estimated bid price of $84.6 (Appendix C). Although this bid price is $6.60 higher than the actual bid
price, our assumptions pertaining to a revenue synergy of $2.3 billion along with very optimistic cost
synergy assumptions of $800 million annually make the $78 dollar bid reasonable for the total
operations of Rohm and Haas.
2.What are the major deal risks inherent in this merger transaction? How and to whom does the
merger agreement allocate these key risks? Hint: analyze the various provisions in case Exhibit 4.
What risk does each provision address and which party ultimately bears the risk?
Risks of delay and termination
Contractual Terms included: Closing Date §1.2, Ticking Fee §2.1a, Reasonable Best Efforts §5.6,
“Hell or High Water” Provision §5.6b, Termination Fees §7.2a, Enforcement and Jurisdiction §8.5.
The risks are made explicit and clear by listing the closing date, ticking fee, termination fees and the
responsibility to enforce the terms and provisions. Both parties are required to take all actions to
complete the acquisition. Most of the terms are made to protect the benefits of Rohm and allocate the
risks to Dow. But Termination Fees §7.2a protects both parties from breaching the contract by the
Risk of Solicitation
Contractual Terms included: §5.3 No solicitation, §8.10 Third-Party Beneficiaries
As a attractive acquisition target, there are other buyers who are interested in Rohm. Therefore, Dow
faces the risk of other bidders who make better offers. §5.3 No solicitation limits Rohm not to solicit
other parties to competitive bid, therefore reduces Dow’s risk. Also, §8.10 protects both parties by
prohibiting any other person benefit from the merger.
Risk from Financial Side
Contractual Term included: § 3.17 Fairness Opinion
The fairness of the valuation of Rohm is important to both Rohm’s and Dow’s shareholders. The
financial evaluation is provided by Goldman Sachs & Co, so Goldman Sachs & Co will be responsible
for any mispricing effect.
Risks of unpredictable circumstances
Contractual Term Included: § 3.1 Material Adverse Effect (MAE clause)
The MAE clause protects buyer’s interests by allowing the buyer to terminate the deal under special
circumstances and changes that had a material adverse effect on the target company’s business.
However, it is extremely hard to define whether an event is under MAE or not. So in real world, MAE
clause does not necessarily protect buyer’s benefits. In this case, the MAE actually favors Rohm since