Dow Chemical buys 'jewel' Rohm & Haas

The news that shook corporate Philadelphia yesterday was delivered at an impromptu meeting called by the Haas family in November, and it "came out of the blue," said Rohm & Haas CEO Raj Gupta.

The family, owners of one-third of the Philadelphia chemical giant, wanted out. Gupta said that about 45 members of the extended Haas family had been told by financial advisers to diversify their assets.

Gupta thought he could keep Rohm & Haas - which employs thousands in the region and has been one of the most stable corporate fixtures in the city for decades - from being sold, like so many other Philadelphia companies, to an outside conglomerate.

He proposed buying the Haas family stakes over several years. This would have cost Rohm & Haas billions of dollars, yet an arrangement with the family was reached in early June.

The plan didn't hold. Several major chemical companies heard Rohm & Haas was in play, so instead, Gupta had to privately auction the company.

In rapid-fire fashion, Dow Chemical Co. won against Germany's BASF, another chemical giant. Dow's huge 74 percent premium shocked Wall Street and stunned Rohm & Haas employees who arrived for work yesterday without a clue. Boards of both companies have approved the $78-a-share cash deal that values Rohm & Haas at $18.8 billion, with debt. The transaction is expected to close in January 2009.

Financing comes from several sources. Among them: Warren Buffett's Berkshire Hathaway Inc., and the Kuwait Investment Authority, the country's $250 billion investment fund. Experts say Buffett and the Kuwait fund were most likely brought into the deal because they had cash and were willing to take the risk, unlike an investment bank under pressure from the credit crisis.

Dow has agreed to pay $750 million as a termination fee to Rohm & Haas if it scuttles the deal. Rohm & Haas will pay Dow $600 million if it backs out, according to a regulatory filing yesterday. Rohm & Haas gets to nominate two directors to Dow's board.

An exuberant Dow Chemical chief executive Andrew N. Liveris said he paid a "full price" for Rohm & Haas because he considered it "beachfront property" and a "jewel" and because he couldn't pass on the opportunity.

"It didn't happen because Rohm & Haas was distressed," Liveris said, although he noted the economy was weakening quickly.

Liveris said that he intended to preserve the Rohm & Haas culture and operations in Philadelphia, but that some backroom-office functions could be consolidated with Dow's.

Gupta and No. 2 executive Pierre Brondeau said that they did not see major employee cutbacks in Philadelphia and that the Rohm & Haas brand would remain viable inside Dow. They said Rohm & Haas would operate as Dow's $13 billion specialty-chemicals business. The company now employs 3,100 in the region and 15,700 around the world.

Being part of Dow will give Rohm & Haas access to raw materials it would have to buy on the open market and will give it economies of scale in other purchases, they said.

"It's a good thing for Philadelphia and a good thing for Rohm & Haas at the end of the day," said Gupta, 62, who has been chief executive since 1999.

Rohm & Haas manufactures thousands of products and is a major paint-additive supplier to paint companies like Sherwin-Williams and Behr.

Privately, Rohm & Haas employees were expressing reservations. The company has been family-controlled, and there are plans for a big celebration of its 100th anniversary in 2009. In the lobby of the company's Philadelphia headquarters yesterday, one employee greeted a visitor with a wry, "Welcome to Dow."

The weak economy and soaring raw-materials prices played no role in the sale of the company, Gupta said, noting that the Haas family has ridden out other economic cycles.

Last month, Gupta had reported record declines in paint volumes over a three-year period. Homeowners were delaying painting jobs. Rohm & Haas has announced a 925-employee job cutback, mostly in North America, because of the weak paint market. It is closing paint-related chemical plants in Kentucky and California, and Brondeau said those plans wouldn't change.

Last fall, Gupta anticipated $85-a-barrel oil in 2008, but in April he revised that to $120-a-barrel oil. Rohm & Haas has developed a raw-materials price index that would allow the company to raise, or lower, prices each month. Some customers balked at the index, but many accepted it, Rohm & Haas executives have said.

Gupta has a plan in place to boost profit, called Vision 2010, by expanding rapidly overseas in developing markets, such as China, and innovating in its electronic-chemicals division. The company also faces cost cuts in slow-growing North America. Gupta's plan projects profit of $5.50 to $6 a share by 2010, compared with the $3.12 a share in 2007.

With Gupta's anticipated level of profit, Rohm & Haas stock price would trade between $71.50 to $78 a share in 2010, based on price-to-earnings multiples - or roughly the price Dow Chemical agreed to.

Wall Street analysts questioned whether Dow's $78 share price was too high. "Some have asked, 'Why don't you wait a year until this thing really tanks?' " admitted Liveris. He said he didn't want Rohm & Haas to slip away. "We're banking on the future."

Other experts marveled that a deal of this size could take place in this uncertain economic climate.

"It's a big deal, and credit markets are still not recovered and are probably still deteriorating," said Pavel Savor, who specializes in mergers and acquisitions as assistant professor of finance at the University of Pennsylvania's Wharton School. "The fact that they were able to raise this money, to me, is very surprising." He said Dow got creative with its financing, referring to Buffett and the Kuwait fund.

"It's good news - yippee - we own this stock for our clients," said Theodore Aronson, founder of Aronson+Johnson+Ortiz L.P., a Center City investment firm that owns 92,000 shares of Rohm & Haas, according to Securities and Exchange Commission filings compiled by Bloomberg L.P.

But Aronson says Rohm & Haas' pension fund is also a client of his, and he's concerned that Dow will replace his firm with its own managers. Plus, "chauvinistically, I am also worried about one of the [few] major corporate citizens in Philadelphia leaving," he added.

"Rohm & Haas was under cyclical pressure this year" as demand declined from its U.S. housing-products customers, said Tom Neale, who manages the Dividend Growth Strategy portfolio at Wilmington Trust Co., which holds 24,000 Rohm & Haas shares.

The transfer of a family business between generations is a treacherous process.

And in many ways, the Haas family's desire to diversify its holdings out of the chemical giant is similar to the Bancroft family's actions with Dow Jones & Co., publisher of the Wall Street Journal. Distant Bancroft family members grew concerned about the health of the newspaper business, leading to the sale to Rupert Murdoch at a huge stock premium.

Two Haas family members sit on the Rohm & Haas board, and the patriarch, 90-year-old John Haas, has an office in the company headquarters on Independence Mall.

The two family members on the Rohm & Haas board - David W. Haas and Thomas W. Haas - did not return messages left through a spokesman at the William Penn Foundation, where both men are actively involved in leadership roles in the philanthropic nonprofit established and underwritten largely by their family's chemical fortune.

"The next generation, as is typical in these cases, are artists, and they have musical interests; they're absolutely not scientific, technical people by education," said Arnold Thackray, who said he had known John Haas for 25 years and spoke with him as recently as "a couple of weeks ago."

Thackray, 68, is founding president and chancellor of the Chemical Heritage Foundation, a Philadelphia nonprofit established with financial support from the Haas family and located a few blocks from the company headquarters.

Gupta developed a plan to purchase the Haas family's shares at market rates over three years. Those plans changed when other chemical companies entered the picture.

Offers were submitted by BASF and Dow Chemical at the auction deadline at 1 p.m. Wednesday. Neither BASF nor Rohm & Haas revealed the BASF offer price.

On Wednesday evening, the Rohm & Haas board approved the $78-a-share offer from Dow. Gupta flew to Dow's Michigan headquarters on a Dow corporate jet at 4:30 in the morning for a contract signing. Later in the morning, he disclosed the deal to Rohm & Haas managers, whom Gupta described as "shocked." Only three or four executives inside Rohm & Haas were aware of the dealings.

The Haas family's stake had been worth about $3.45 billion, based on the stock's average closing price over the last three months. After yesterday's deal, it's worth about $5 billion.

Major Rohm & Haas Co. shareholders and the value of their holdings at $78 per share.

John C., John O., William D. and Thomas W. Haas, two income trusts, and four charitable trusts:

Shares: 64.5 million.

Value: $5.03 billion.

Dodge & Cox Funds:

Shares: 14.0 million.

Value: $1.09 billion.

Rohm & Haas Co. employee stock ownership plan:

Shares: 12.4 million.

Value: $966.5 million.

Capital World Investors:

Shares: 12.8 million.

Value: $999.2 million.

SOURCE: Rohm & Haas Co. proxyEndText

Go to http://go.philly.com/Rohm&Haas for more on Rohm & Haas.

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