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Stock of the Day
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Dow Chemical (DOW)
Dow Chemical Buys Rohm & Haas
The Dow Chemical Company (DOW: Charts, News, Offers) makes a big splash in the chemical industry today with its purchase of the Rohm & Haas Company (ROH: Charts, News, Offers). Dow Chemical announced this morning that it will buy Rohm & Haas for an estimated $15.3 billion in an all-cash deal. Stockholders of Rohm & Haas will receive $78 for each share they hold, resulting in a 74% mark up from the closing price yesterday. So, why has the biggest U.S. chemical producer decided to pay a premium price for Rohm & Haas?
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| Daily Chart |
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| Stock Analysis |
The Rohm & Haas acquisition is a direct reflection of Dow's new business strategy. The firm wants to make a push into the specialty chemicals market, which will help broaden its product offering. Dow Chemical believes that the transition into the specialty market will decrease its dependency on less profitable products and increase its sales of paint ingredients and adhesives, Rohm & Haas' forte. The firm also hopes that establishing itself in the specialty chemicals market will provide protection against the ebb and flow nature of basic chemical sales.
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Another reason behind the deal is Dow's recent commitment to increasing its cost saving effort. Dow Chemical has had to raise its chemical prices twice this year due to the high energy costs in natural gas and oil. In addition, like many firms today, Dow Chemical is dealing with a lethargic U.S. economy. Both these factors combined result in a formidable opponent for Dow. However, the Rohm & Haas purchase should result in major savings for Dow Chemical.
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The acquisition is expected to generate a pretax cost synergies of at least $800 million per year. Benefits of the synergies created between the firms include increased purchasing power for raw materials, supply chain improvements, and the elimination of redundant corporate services. Furthermore, Dow Chemical will attempt to streamline production capacity for several products on its side of the business. Dow believes that Rohm & Haas will facilitate a competitive advance into the specialty chemicals market and help cut overall costs for the firm.
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This seems like a superb deal for all parties involved. The acquisition even received approval and outside equity investments from Berkshire Hathaway and the Kuwait Investment Authority. However, only time will tell if this was the right move for Dow Chemical. Will the benefits of acquiring Rohm & Haas come to fruition like Dow predicted?
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