Dow's Bid for Hohm and Haas

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Major risks

Risk of non-performance

To control for non-performance there are two termination fees and a specific performance provision. The terminations fees are stated in §7.2a&d. A specific performance is an order of a court which requires a party to perform a specific act, usually what is stated in a contract. It is an alternative to awarding damages, and is classed as an equitable remedy commonly used in the form of injunctive relief concerning confidential information or real property. It is stated in §8.5. Non-performance is addressed by this agreement exclusively in the Delaware Court of Chancery.

The provisions for non-performance mainly allocate the risk to Rohm but allow for damages to both parties in case of non-performance. Moreover, based on §5.6 both parties should use there reasonable best effort to complete the terms of the agreement mitigate this risk. The other provisions mainly favor Rohm but allow for damages to be granted to Rohm and Dow.

Risk of delay

In paragraph 1.2 the closing date provision is described, by stating a closing date in the contract the risk of delay is mitigated. Moreover, §2.1a is stated that if the merger does not close by 10 January 2009 there will be a ticking fee. This ticking fee of 8% simple interest, controls also for the risk of delay. The risk is allocated to Dow. In paragraph 5.6 is stated that each party shall use its reasonable best efforts to take all actions to do or assist for the merger. So this condition allocates these risks to both parties to complete the deal before the specified closing date. The part described in b &e favors Rohm and holds Dow responsible with respect to any intentional delays in finalizing the acquisition.

Risk that the transaction is valuated not properly

Valuation is a subjective matter, involving several assumptions. Integration of the pre-merger entities is a demanding task and has to be managed skillfully. In this case an incorrect valuation of Rohm’s financial position might have a negative influence on the shareholders of both companies. For this reason in §3.17

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there is a fairness opinion, Goldman, Sachs & Co gave an independent opinion about the effect that the consideration is fair to the Rohm shareholders from a financial point of view. This fairness opinion is in the interest of the share- and stakeholders of both companies.

Other risks

Risk of competitive bids evolving the others buyers

In paragraph 5.3 there is a “no talk” or “no shop” clause. This clause is in favor of Dow, it prevents that other additional parties (other buyers) might enter the bidding process. This might drive the price up, Rohm is responsible not to talk or shop to other parties.

Risks of material adverse change of the target

In §3.1 there is a Material Adverse Effect clause (MAE). This is a legal provision to refuse to complete the acquisition or merger or financing with the party being acquired if the target suffers such a change. The rationale for such a clause is a means to protect the acquirer from major changes that make the target less attractive as a purchase. In this case it favors Rohm and it holds Dow responsible to act in accordance with the clause.

Risks related to the closing conditions

Closing conditions generally provide that the obligations of each party to consummate the transactions contemplated by an acquisition agreement are subject to the satisfaction (or waiver) at the closing of an agreed upon set of condition. §6.1 and 6.2 describe some closing conditions of the merger. It listed five different conditions for example risk of non-approval by shareholders and the risk of non-compatibility of the deal with the interests of European capital and money markets and the risk of non-approval under antitrust law. According to the conditions Dow bears the risks after the merger. All the closing conditions protect the shareholders of Rohm and Dow, these shareholders bear the highest risk.

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QUESTION 3

As of early 2009, what should Andrew Liveris (Dow’s CEO) do and what should Raj Gupta (CEO Rohm and Haas) do?

Part 1: Wat should Andrew Liveris (Dow’s CEO) do?

The current economic climate created a vacuum of liquidity within the financial markets. The PIC deal of Dow put them in a position of not having enough cash to close the deal with Rohm and Haas. Three options are given within the case: 1. completing the deal at $78 per share either voluntary or forced through litigation, 2. terminate the deal through litigation or 3. renegotiate specific terms.

If Dow want to close the deal at $78 per share, they need to raise cash. But due to the PIC deal, there are few options to finance the deal for Dow. First option, financing at liquidity markets, is difficult given the state of the financing markets. Andrew Liveris will try to not cut the dividends, because since Dow has started, 97 years of consecutive dividends has been paid out. Then we have the option to sell assets. Dow will probably not consider to sell any of their assets since it is very probable that it will happen at sale prices.

Then Andrew Liveris has the option to do a public offering of shares. He will probably not consider a public offering since this will influence the stock price. Due to the selloff to the announcement of the deal with Rohm and Haas and the market conditions, it will influence the stock price in a negative way. Dow’s stock had dropped to $11 per share, and Dow’s market capitalization had fallen below the market capitalization of Rohm and Haas ($10.7 billion vs. $10.8 billion).

So the options are cutting dividends, asset sales and using a bridge loan with a one year repayment term to complete the deal at $78 per share. The bridge loan is quite risky, also because it could influence the credit rating by Moody’s. There are doubts in the capital markets if Dow could comply with the bridge loan’s covenants on cash flows and total leverage ratio.

Second option is terminating the deal through litigation. This is a very unlikely and difficult route to let a Judge rule in Dow’s favor and to terminate the deal with Rohm and Haas. Changes in the markets as general market conditions, affecting the specialty chemical industry or the financial markets are not covered in the Material Advers Clause. Dow is required to the Reasonable Best Efforts Clause that they must do everything that they can do in their power to complete