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Dow acquires Rohm and Haas, continues shift toward specialties

July 21, 2008

3 Min Read
Dow acquires Rohm and Haas, continues shift toward specialties

Dow Chemical (Midland, MI) recently occupied headlines with two sweeping double-digit price increases and the addition of surcharges to deal with rising energy and feedstock costs, but last week it made big news with a new tact to deal cost inflation—an acceleration of its shift into the specialty market with the acquisition of Rohm and Haas (Philadelphia). Paying $78/share, which represents a 47.9% premium on Rohm and Haas’s 60-day average share price, Dow will finance the deal with $3 billion in equity from Warren Buffet’s Berkshire Hathaway and $1 billion from its partner, the Kuwait Investment Authority, with which it formed a joint venture for its basic materials business.

In a presentation to investors, Dow chairman and CEO Andrew N. Liveris said the acquisition will shift 2007 revenues from a 51:49 split between performance and basics to 69:31, favoring specialty products. In terms of 2007 EBITDA, the ratio will expand from 52:48 to 67:33 advantage for performance over basics. Going forward, Dow said Rohm and Haas’s business is growing at a better than 8% clip, with key growth opportunities in electronic materials, coatings, specialty chemicals, and specialty packaging. In terms of synergies, the companies say Rohm and Haas’s display films can be paired with Dow polymers, for example, or its printed circuit board materials joined with Dow’s epoxy resin. Dow says the move also expands its geographic reach, with 11% of Dow’s sales coming in Asia Pacific, but 22% generated there for Rohm and Haas. Liveris said the combined business will create “the largest R&D capability in China.”

In late 2006, Rohm and Haas opened a $60-million Asia-Pacific Manufacturing and Technical Center in Taiwan to serve the semiconductor industry. The same year it opened a $30-million China Research and Development Center in Shanghai as part of its 2010 Strategic Plan that aimed, among other things, to double electronic material sales to $2.6 billion in three years.

The deal is expected to close by early 2009, pending approval from regulators and Rohm and Haas’s shareholders. Both companies’ boards of directors unanimously approved the agreement. Although the price tag seems hefty, Dow said that if “cost synergies” are accounted for, it actually paid a smaller multiple (7.7) for Rohm and Haas than BASF did for Engelhard (9.6), for example.

Dow believes that by joining with Rohm and Haas, it will greatly expand leverage, estimating pre-tax annual cost synergies to be at least $800 million, with savings generated by increased raw-material purchasing power; manufacturing and supply chain process improvements; and staff reductions through shared services and governance.

The Advanced Materials business unit will remain headquartered in Philadelphia, with the Rohm and Haas name retained for that segment. Two Rohm and Haas directors will join the Dow’s board, bringing the total size to 14. The company, which was founded in 1909, generated 2007 sales of $8.9 billion, with plants in 27 countries and 15,700 employees, and was called by Liveris “a highly sought after and previously unobtainable enterprise.” Dow has $54 billion in annual sales and 46,000 employees.

This spring, Rohm and Haas expanded its Display Technologies business with a $40-million deal to gain a controlling interest Korea’s Gracel Display Inc. (Seoul). The company acquired thin-film transistor (TFT) photoresists and related materials from the purchase of Eastman Kodak’s Light Management Films business in June 2007. Including the Gracel deal, Rohm and Haas said it invested $270 million in its Display Technologies unit in 12-month span.—[email protected]

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