Dow captures Rohm

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Chemical companies, a favourite target of private equity, are used to the sight of barbarians at the gate. Rohm & Haas, however, with 33 per cent of its stock controlled by the Haas family, was never for sale. So why has it now decided to succumb to larger rival Dow Chemical?

The short answer is: $78 in cash per share. Dow’s offer is a whopper: a 74 per cent premium to Wednesday’s closing price and a multiple of more than 11 times 2008 earnings before interest, tax, depreciation and amortisation. When negotiations began, the premium was apparently more like 45-50 per cent. Since then, however, Rohm’s shares have nosedived, as have Dow’s. The Haas family, perhaps with an eye on the difficulties faced recently by the Bancrofts, Fords and Busches of this world, are getting out while the getting is good.

Even as the Haas family diversifies its portfolio, Dow is doing the same. Rohm, with its slate of higher-value speciality chemical lines, will reduce Dow’s exposure to commodity chemicals. The latter are more cyclical and increasingly the preserve of low-cost Middle Eastern producers. BASF has pursued a similar strategy with acquisitions such as that of Engelhard in 2006. Indeed, Dow’s rich offer appears partly designed to head off any competing offer from its German rival. Tapping Berkshire Hathaway and the Kuwait Investment Authority in conjunction with the deal is also a smart move, shoring up the balance sheet and gaining Warren Buffett’s stamp of approval.

Long term, the acquisition will probably pay off. Even Mr Buffett is hedging his bets, though, taking convertible preferred rather than straight equity. This is a tough time in chemicals, with Dow pushing surcharges to cover commodities costs while idling capacity owing to weaker demand. Rohm, also struggling, is an opportunity born from adversity.

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