M&A escape hatches

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All of a sudden, breaking up really is hard to do. A virtual epidemic of jilted brides made investors wonder whether merger agreements were worth the paper on which they were printed. That is why more recent deals carry the equivalent of prenuptial agreements to keep suitors more tightly shackled to the altar, in sickness or in health.

Dow Chemical now fears the “till death do us part” clause of its marriage vows with speciality chemical maker Rohm and Haas. It agreed last summer to buy Rohm for $15.3bn, just before valuations collapsed, but saw a $9.5bn cash infusion from Kuwait for a planned joint venture vanish. It faces a downgrade deep into junk status if it buys Rohm, while the merger agreement does not allow it to plead poverty. In any case, it already has a bridge loan in place, making it possible to do the deal today if it wanted. Rohm alleges that Dow tried to sabotage the final closing condition – by seeking unsuccessfully to have the Federal Trade Commission delay approval. It now wants the full cash consideration, which is rising because of the missed deadline.

Dow’s deal-making, and attempted deal-breaking, have been astoundingly inept, leaving it legally cornered. But Rohm’s shareholders face uncertainty too, as shown by the 40 per cent buy-out premium being shunned by arbitrageurs, who smell a renegotiated deal. Dow still has one unpalatable ace up its sleeve – threatening financial ruin. That was the strategy used by Hexion and parent Apollo Management to wriggle out of an aborted $6.5bn deal for Huntsman, with similarly tight terms.

But Dow will have trouble making the case after it obstinately committed to maintaining its 389-quarter streak of steady or rising dividends at $1.6bn a year. Its best option is to conserve cash and convince Rohm shareholders to soften terms, perhaps by accepting a lower price or partial payment in shares. Nobody said marriage was easy.

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