Dow’s bid case study
Executive summary
This case study focuses on Dow Chemical Company, founded by Herbert Dow in 1897. The company started as a commercial bleach manufacturer. The company later merged with Midland Chemical for diversification of its portfolio to food and agricultural products. CEO Andrew Liveries joined Dow Chemical Company and wanted to change the company into a highly advanced and specialized chemicals manufacturer. Dow company is in the course of the last phase to get into business with Rohm and Haas in 2008. According to Dow, Rohm is their ideal match regarding financial and strategic perspectives. Dow engaged into a shared project with PIC (Kuwait Petrochemical Industry) required to generate 7 billion of cash which can be used to invest in Rohm’s 18.8 billion of the cash deal. The emphasis of this case, the legal issues involved after the fiscal crisis hit during the 2008 fall. Dow got hit when the global economy fell into recession leading to the freezing of capital markets, resulting in a severe economic and monetary crisis in Dow and Rohm. As a result of the world financial crisis, the joint PIC and Dow project was terminated. As time passed, the crisis critically affected the Dow company, and it reported a loss of 1.6 billion in the fourth quarter, directly affecting the company’s cash flows. Due to critical market conditions, Dow sued to withdraw from its merger agreement with Rohm and Haas. Rohm responded to the withdrawal with a lawsuit to force Dow in consummating the deal.
Discussion
Facts of the case
The CEO of Dow seemed to be searching a more comprehensive range, long-term aspects, and benefits in product technologies and categories I the attempt to acquire Hohm and Haas. The project was considered very healthy and perfectly matching to the Dow’s strategy. Andrew Liveries is of the view that the acquisition or project with Rohm ad Haas will aid the company to provide ways to expand networks in new ad emerging markets and yield sources of revenue.
Dow’s CEO announced that the company’s strategy of tomorrow in 2006 includes;
- The low margin asset approach but the cash-rich industry
- The high growth and high value-added performance businesses
- The most significant reason why Dow was interested in the acquisition of Rohn and Haas was that the purchase would reduce Dow’s cyclicality while increasing its growth prospects.
Rohm and Haas were a prime target for Dow and settled in selling their 32% of shares and offer a strong strategic and operational fit. Also, the Rohm and Haas team members were innovative, strong, and experienced with highly customer-focused leadership. Besides the aforementioned advantages, Dow wanted to acquire Rohm and Haas since Rohm and Dow could serve as a global leader in advanced materials and speciality chemicals with a combined workforce.
Legal issue
In the enforcement and jurisdiction, the parties agreed that the irreversible damage would happen if any of the Agreement’s provisions were not undertaken by their specific terms or got breached. It is agreed that the parties would be entitled to an injunction or injunctions to inhibit breaches or threaten breaches of the Agreement and also to enforce particularly, the provisions and terms of this Agreement entirely in the Delaware Court of Chancery. If Rohm and Haas terminate the Agreement after the acceptance of a superior merger proposal, then they are bound to pay Dow company 600 million in cash as the termination fee. If the merger fails to occur by October 10, 2009 except when there is an existence of an injunction barring the consummation of the merger due to antitrust issues, then Dow company shall pay Rohm and Haas 750 million as reverse termination fee.
The risk that results in the delay is reduced by clearly expressing the closing date in the agreement ad identification of a ticking fee for any delays after the specified date. The injunctions approved by the Delaware Court will be settled in the case of breach of the Agreement. Although the provisions considerably favor Rohm, both parties are subject to financial penalties in case of nonperformance and inadequacy. The governing law of the Agreement is the state of Delaware. It provides a clear declaration of the appropriate legal and financial policies affecting the deal, allowing both parties to compute and lower any material changes or costs, thus providing safety and assigning uniform liability on both entities. Although there are macroeconomic aspects or market forces that are uncontrollable and may impact Rohm’s performance causing Dow to terminate the deal, the factors apply to the entire industry. They may not be used as a basis to terminate the Agreement. The Material Adverse Effect, MAE clause, provision holds Dow responsible in case of violating the terms of the Agreement.
The proper evaluation of the transactions provision in the fairness opinion states that any misleading evaluation of in Rohm’s Financial perspective will adversely affect all stakeholders. The importance of this provision is the protection of the two entities and their stakeholders. Moreover, there is a ‘No Solicitation’ clause where Rohm agrees not to initiate, solicit, or perceptively encourage any offer or proposal that institutes an alternative proposal. This provision protects Dow by preventing other parties from partaking in the bidding process. Since the conditions of the merger are irreversible, even under unfavorable situations, Dow is bound bear the risk. These provisions are in place to ease the impacts of various conditions surrounding the dealings of the two entities and defend the stakeholders. Considering the facts of this case, the judge of Delaware Court of Chancery will enforce the merger contract between both entities although it may not be in the good of both companies and the community at large. Regarding the material adverse change clause as settled by both parties fails to apply in this case and according to the specific performance clause, the merger will get effected as prearranged. If the Agreement is not executed according to the agreed time, Dow will have to pay the ticking fee which had been agreed upon, along with all the other contractual stated requirements.
Alternative solution
To give a clear perspective of the options that both CEO had, analysis of the details is imperative. After the announcement of the deal, the economic and fiscal crisis began causing a recession in the entire chemical industry, directly affecting Dow company. As a result of the crisis, a quarterly 23% decrease in sales, 50% drop of shares price occurred, leading to a loss of 1.6 billion dollars and an operating decline of 44% in 2008, forcing Dow company to shut down several facilities and lay off employees. After the closing of the joint project deal with PIC, the overall recession and drop in oil price led to PIC terminating their contract with Dow. These conditions created a financial gap in the merger for Dow, reducing and degrading their stock rating and prices. Dow is now engrossed in a deal that it cannot pursue wholeheartedly. Three options can act as alternatives in this situation;
Move ahead with the deal at $78 per share either forced or voluntarily
Terminate the deal
Delaying and Renegotiating the deal
Evaluation of the consequences of each alternative
Closing the deal with $ 78 per share in cash
This option will require enormous amounts of cash which are challenging in the prevailing market situation. The economic crisis affecting the market has impacted all capital markets, causing some major firms such as Lehmann Brothers to declare bankruptcy. Raising money to finance the acquisition will considerably strain Dow’s economic stability. The only available options are the use of the existing bridge loans, cutting dividend payments, issuing of equity shares in the secondary market, or selling some of their assets. The existing bridge loan’s option requires one repayment term along with other covenants associated with total leverage and cash flows. It is uncertain Dow will manage to comply to the covenants. The post-acquisition forecast a significant upsurge in debts, thus reducing the company’s equity, hence deterioration of the leverage ratio. Thus, without a specific strategy on refinancing the bridge loan and compliance risks of the covenants, this option will make the situation worse.
Termination of the deal
Keeping in mind the larger interest of both parties and the drastic change in the primary situation, this alternative is considerable. The survivability and viability of the merged entity should be used for the interest of the larger community (customers, suppliers, and associated communities). Nevertheless, the termination through the court appears unlikely since Dow’s legal position is weak, thus it is challenging to terminate the deal through litigation.
Delaying and Renegotiating the deal
This is the best alternative. The delay will provide an option for renegotiating a consideration ad the acquisition’s closing date offering Dow with an opportunity to arrange their finance. Dow might manage to renegotiate its bridge loan or joint venture or even arrange a long-term source of finance. Also, the economic conditions may improve, enabling Dow to access other sources of finance. However, the cost associated with cash in both situations will be high. DOW has a plan to sue the Kuwaiti entities for the breakup fees which can be used to finance the Rohm’s acquisition or serve as leverage to renegotiate the original deal with Dow hopefully raising more capital (than the breakup fee) for the acquisition deal.
Conclusion
The acquisition of Rohm is a defining step in the transformational strategies of a high value, diversified materials and chemical company. Thus the long-term benefits should be considered in this case. Renegotiation of the price and insisting on a merger is a better alternative as the blend of both companies’ strength may significantly help in their transformation. Dow should have been more careful in creating the contract due to the economic demise probability.