Dow's Bid for Rohm and Haas

Corporate Finance

Dr. Jens Martin

Dow’s Bid for Rohm and Haas

Case Analysis

Group 6

Brenna Byerlotzer

Ben Kirkwood

Jacques van der Merwe

Oren Shabtay

Q1: Why does Dow want to buy Rohm and Haas? Was the 78 USD a share bid reasonable? In your calculation do as well a sensitivity analysis to see how different assumption in growth rate / WACC would affect the valuation.

        The prospect acquisition of Rohm and Haas (“Rohm”) was part of Andrew Liveris’s (CEO) plans for the “Dow of Tomorrow” and was designed to allow Dow to become a high-value-added producer of specialty chemicals and advanced materials with a broad reach and strong industry channels to create an outstanding business portfolio with significant growth opportunities. The Rohm acquisition would add expertise to the firm as well as change Dow’s earnings profile by increasing growth rate, reducing the cyclicality by diversification, thereby recasting Dow as an “earnings growth company”.

To determine whether $78 a share is a reasonable bid, we’ll first use the information provided in exhibits 7a and 7b to assess Rohm’s enterprise value by applying the discounted cashflow method.

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Given the above FCF forecast and using a WACC of 8.5% and a growth rate of 2%, we calculate Rohm’s enterprise value to be $11,542M. Since E = V – D, we need to subtract the debt from the enterprise value to arrive at Rohm’s estimated equity value. Based on exhibit 2, we can calculate Rohm’s net debt:

Total debt                                                                                                $3,276

(Cash)                                                                                                   ($204)

Net Debt                                                                                          $3,072

Therefore, we estimate Rohm’s equity value to be $11,524 - $3,072 = $8,452.

By dividing the above equity value by the number of acquisition shares of 195.2M (specified in exhibit 1), we can calculate Rohm’s share price to be $43.3, which is slightly lower than its share price just before the acquisition announcement ($44.83) and reflects a premium of 80%. To illustrate how different assumptions of WACC and growth rate affect the share price estimate, we’ll perform a sensitivity analysis:

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