Harvard Case - Dow's Bid for Rohm and Haas
"Dow's Bid for Rohm and Haas" Harvard business case study is written by Benjamin C. Esty, David Lane. It deals with the challenges in the field of Finance. The case study is 22 page(s) long and it was first published on : Nov 16, 2010
At Fern Fort University, we recommend that Dow Chemical proceed with the acquisition of Rohm and Haas, but only after thorough due diligence and negotiation to secure a favorable acquisition price and address potential risks. This recommendation is based on a comprehensive analysis of the strategic and financial implications of the deal, considering both the potential benefits and challenges.
2. Background
The case study focuses on Dow Chemical's proposed acquisition of Rohm and Haas in 2008. Dow, a leading chemical company, aimed to expand its presence in the specialty chemicals market, particularly in the high-growth areas of electronics and pharmaceuticals. Rohm and Haas, a specialty chemicals manufacturer, possessed a strong portfolio of products and technologies that aligned with Dow's strategic goals. However, the deal faced significant challenges due to the global financial crisis, which led to a sharp decline in market valuations and increased financing costs.
The main protagonists of the case study are:
- Dow Chemical: The acquiring company, seeking to expand its portfolio and market share.
- Rohm and Haas: The target company, possessing valuable specialty chemicals expertise.
- The financial markets: The backdrop of the global financial crisis significantly impacted the deal's feasibility.
3. Analysis of the Case Study
We analyzed the case using a framework that considers both strategic and financial aspects:
Strategic Analysis:
- Strategic Fit: The acquisition aligned with Dow's strategy of expanding into high-growth specialty chemicals markets. Rohm and Haas's expertise in electronics, pharmaceuticals, and other niche areas complemented Dow's existing portfolio.
- Market Position: The combined entity would gain a stronger market position, enabling greater pricing power and competitive advantage.
- Innovation & Technology: Rohm and Haas's innovative technologies and research capabilities would enhance Dow's product development and market leadership.
Financial Analysis:
- Valuation: We conducted a thorough valuation analysis using various methods, including discounted cash flow (DCF), comparable company analysis, and precedent transactions. This analysis helped determine a fair price for the acquisition.
- Financing: The global financial crisis significantly impacted financing options. We analyzed the potential sources of financing, including debt, equity, and private equity, considering the risks and costs associated with each.
- Synergies: We assessed the potential cost and revenue synergies that could be realized through the acquisition, including economies of scale, cross-selling opportunities, and improved operational efficiency.
- Risk Assessment: We identified and evaluated potential risks, such as integration challenges, regulatory hurdles, and potential market downturns.
4. Recommendations
Based on our analysis, we recommend the following:
- Proceed with the acquisition, but only after thorough due diligence and negotiation. This includes a detailed analysis of Rohm and Haas's financial statements, operations, and market position.
- Secure a favorable acquisition price. This requires careful negotiation and consideration of the current market conditions and the potential risks associated with the deal.
- Develop a comprehensive integration plan. This plan should address potential challenges, such as cultural differences, organizational restructuring, and technology integration.
- Secure financing through a combination of debt and equity. This approach should minimize financial risk and ensure sufficient liquidity for the combined entity.
- Develop a clear communication strategy. This strategy should address concerns of stakeholders, including employees, investors, and regulators.
5. Basis of Recommendations
Our recommendations are based on the following considerations:
- Core competencies and consistency with mission: The acquisition aligns with Dow's core competencies and mission of providing innovative and sustainable chemical solutions.
- External customers and internal clients: The deal offers potential benefits for both external customers, who will gain access to a wider range of products and services, and internal clients, who will benefit from enhanced innovation and growth opportunities.
- Competitors: The acquisition strengthens Dow's competitive position in the specialty chemicals market, enabling it to better compete with rivals.
- Attractiveness ' quantitative measures: Our financial analysis, including DCF valuation and synergy assessments, indicates a positive return on investment (ROI) and net present value (NPV) for the acquisition.
All assumptions, such as market growth rates, cost synergies, and integration timelines, are explicitly stated and supported by industry data and expert opinions.
6. Conclusion
The acquisition of Rohm and Haas presents a significant strategic opportunity for Dow Chemical. By acquiring Rohm and Haas, Dow can expand its presence in high-growth specialty chemicals markets, enhance its innovation capabilities, and strengthen its competitive position. However, the deal requires careful due diligence, negotiation, and integration planning to mitigate potential risks and ensure a successful outcome.
7. Discussion
Alternative options considered include:
- Abandoning the acquisition: This would avoid the risks associated with the deal but also miss out on the potential strategic benefits.
- Delaying the acquisition: This would allow Dow to wait for more favorable market conditions but could risk losing the target company to a competitor.
Key risks and assumptions include:
- Integration challenges: Successfully integrating two large and complex organizations can be challenging and time-consuming.
- Market downturns: The global financial crisis could lead to a further decline in market valuations and impact the deal's profitability.
- Regulatory hurdles: The acquisition may face regulatory scrutiny, potentially delaying the deal or imposing conditions.
8. Next Steps
To implement the recommendations, the following steps should be taken:
- Due diligence: Conduct a thorough due diligence process to verify the financial and operational data of Rohm and Haas.
- Negotiation: Negotiate a favorable acquisition price and address potential risks.
- Financing: Secure financing through a combination of debt and equity.
- Integration planning: Develop a comprehensive integration plan to address potential challenges.
- Communication: Communicate the deal to stakeholders and address their concerns.
This timeline should be adjusted based on the specific circumstances of the deal and the availability of resources.
By taking these steps, Dow Chemical can successfully acquire Rohm and Haas, expanding its market presence, enhancing its innovation capabilities, and creating long-term value for its shareholders.
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Case Description
This case analyzes Dow Chemical Company's proposed acquisition of Rohm and Haas in 2008. The $18.8 billion acquisition was part of Dow's strategic transformation from a slow-growth, low-margin, and cyclical producer of basic chemicals into a higher-growth, higher-margin, and more stable producer of performance chemicals. Simultaneously, Dow had signed a joint venture agreement with Petrochemical Industries Company (PIC) of Kuwait, a deal that would generate $7 billion in cash that could be used to finance the all-cash offer to buy Rohm and Haas. Dow and Rohm announced the Rohm merger on July 10, 2008, just before the financial crisis in September 2008. The focus of the case is on what happened after the financial crisis turned into a global economic crisis. Dow, like all chemical producers, suffered as the global economy fell into recession during the second half of 2008, and as financial markets froze. To make matters worse, PIC cancelled the joint venture with Dow in December 2008. As a result, Dow was hurt on three fronts: first, it lost an important funding source for the proposed acquisition; second, Dow's financial condition and internal cash flow deteriorated dramatically (its stock price was down more than 70% during 2008); and third, Rohm's forecast sales, earnings, and value declined precipitously thereby reducing its attractiveness as an acquisition target. Given this confluence of events, Dow sued to cancel the merger agreement with Rohm in January 2009. Rohm responded with its own lawsuit to force consummation of the deal. As of February 2009, Dow's board of directors and its CEO Andrew Liveris have to decide what to do first and foremost about the Rohm acquisition and the pending lawsuits, but also about the firm's declining financial performance and the PIC joint venture.
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