Dow's Bid for Rohm & Haas

Harvard Business School Case 211-020

HBS Courseware 9-211-704
This courseware was prepared by Professor Ben Esty solely as the basis for class discussion.
Cases are not intended to serve as endorsements, sources of primary data, or illustrations of
effective or ineffective management. Copyright 2010 President and Fellows of Harvard
College. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or
transmitted, without the permission of Harvard Business School.

or class discussion.
a, or illustrations of
Fellows of Harvard
produced, posted, or

Exhibit 1
Dow and Rohm, Income Statement Data, 2006-2008 H1 (as amended, in $ millions)

2006

Dow Chemical
2007

2008 H1

Revenues
Cost of Goods Sold
Depreciation & Amortization
Gross Profit

$49,124
39,407
2,074
7,643

$53,375
44,028
2,190
7,157

$31,140
26,346
1,143
3,651

SG&A Expense
Research & Development
Amortization Expense
Operating Income

1,663
1,164
50
4,766

1,861
1,305
72
3,919

1,012
666
47
1,926

Net Interest Expense

Income/(Loss) from Affiliates
Other Non-operating Income
Restruct. & Unusual Charges
Profit Before Tax

425
959
60
388
4,972

445
1,122
315
719
4,192

247
525
57
(10)
2,271

Income Tax Expense

Minority Interest & Other
Net Income

1,155
(93)
3,724

1,230
(75)
2,887

536
(32)
1,703

Avg. Basic # Shares (millions)

962.3
Num. of Acquisition Shares (as of 9/25/08)

953.1

936.0

$3.03
$1.64
13.4%
5.4%
29.3%
2.4%
$2,105

$1.82
$0.84
11.7%
5.5%
23.6%
2.1%
$1,019

Earnings per Share (basic)

Dividends Declared per Share
Gross Margin
Net Margin
Effective Tax Rate
R&D as % of Sales
Capital Expenditures

$3.87
$1.50
15.6%
7.6%
23.2%
2.4%
$1,983

Source: Adaped from Capital IQ, accessed 9/22/10.

in $ millions)

Rohm and Haas

2007
2008 H1
$8,897
5,963
469
2,465

$5,074
3,537
247
1,290

1,091
296
57
1,021

586
159
32
513

120
22
27
70
880

85
90
21
98
441

206
(13)
661

111
(11)
319

207.8

193.7
195.2

$3.18
$1.44
27.7%
7.4%
23.4%
3.3%
$417

$1.65
$0.78
25.4%
6.3%
25.2%
3.1%
$266

Exhibit 2
Dow and Rohm, Balance Sheet Data, 2006-2008 H1 (as amended, in $ millions)

2006
Assets
Cash & Investments
Receivables
Inventories
Other
Total Current Assets

Dow Chemical
2007

2008 H1

$2,910
8,048
6,058
193
17,209

$1,737
9,684
6,885
348
18,654

$2,113
11,356
7,690
172
21,331

Net PP&E
Goodwill
Deferred Tax Assets
Other Long-term Assets
Total Assets

13,722
3,242
4,006
7,402
45,581

14,388
3,572
2,126
10,061
48,801

14,624
3,617
2,283
10,298
52,153

Liabilities
Accounts Payable
Accrued Expenses
Short-term Debt
Current Long-term Debt
Other Current Liabilities
Total Current Liabilities

5,674
2,215
219
1,291
1,202
10,601

6,536
2,512
1,548
586
1,263
12,445

7,837
2,237
2,225
1,051
1,037
14,387

8,036
1,365
3,094
5,420
17,065
45,581

7,581
1,414
3,014
4,958
19,389
48,801

8,116
1,237
3,109
5,171
20,133
52,153

Long-term Debt
Minority Interest
Pension/Other Benefits
Other Liabilities
Total Equity
Total Liabilities & Equity
Total Debt
Debt-to-Total Capital
Current Ratio (CA / CL)

9,546
35.9%
1.62

Source: Adaped from Capital IQ, accessed 9/22/10.

9,715
33.4%
1.50

11,392
36.1%
1.48

Rohm and Haas

2007
2008 H1

$265
1,876
1,024
261
3,426

$204
2,141
1,091
307
3,743

2,871
1,668
83
2,059
10,107

2,923
1,737
0
2,084
10,487

806
613
150
8
192
1,769

908
770
108
0
101
1,887

3,139
215
760
1,078
3,146
10,107

3,168
239
754
1,087
3,352
10,487

3,297
51.2%
1.94

3,276
49.4%
1.98

Exhibit 3
Dow Chemical Company, Slected Financial and Operating Information, 1994-2007 (as amen

Size and Operations

Year
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994

Profitability

Sales

Assets

Employees
(000)

Gross
Margin

$53,375
$49,124
$46,307
$40,161
$32,632
$27,609
$28,075
$29,798
$26,131
$25,396
$27,814
$27,267
$27,140
$22,634

$48,801
$45,581
$45,934
$45,885
$41,891
$39,562
$35,515
$35,991
$33,456
$31,121
$31,004
$31,219
$29,838
$31,573

45.9
42.6
42.4
43.2
46.4
50.0
52.7
53.3
51.0
50.7
55.9
52.0
51.0
65.7

13.4%
15.6%
17.3%
14.7%
13.7%
13.9%
14.9%
17.4%
21.8%
23.0%
24.6%
26.7%
31.1%
24.7%

Return
Return on Equity
on Sales (ending)
5.4%
7.6%
9.8%
7.0%
5.3%
-1.2%
-1.4%
5.6%
6.2%
6.7%
8.8%
9.1%
11.0%
5.8%

14.9%
21.8%
29.5%
22.8%
18.9%
-4.4%
-3.9%
14.1%
14.8%
17.3%
24.6%
24.7%
31.7%
13.5%

Sources: Adapted from Dow Chemical Company form 10-K (Year end 2004 and 2007); Standard & Po

994-2007 (as amended, in $ millions)

Per Share Information

Earnings Dividends
Average
Per Share Paid Per Numb. of
(Basic)
Share
Shares
$3.03
$3.87
$4.69
$2.98
$1.88
($0.37)
($0.43)
$1.88
$1.85
$1.92
$2.71
$2.61
$2.91
$1.22

$1.59
$1.46
$1.34
$1.34
$1.34
$1.34
$1.25
$1.16
$1.16
$1.16
$1.08
$1.00
$0.93
$0.87

953.1
962.3
976.8
940.1
918.8
910.5
901.8
893.2
874.9
888.1
898.4
950.1
1,025.8
1,069.8

Debt-toTotal
Capital

Leverage
S&P
Debt
Rating

Debt
Issued

33.4%
35.9%
41.1%
50.7%
58.8%
63.1%
52.1%
44.4%
44.3%
45.1%
45.0%
41.2%
41.7%
43.6%

AAAAAA
A
A
A
A
A
A
A
A

$0
$0
$0
$614
$463
$1,992
$3,956
$300
$1,444
$0
$0
$0
$0
$0

007); Standard & Poor's Corporation, and Capital IQ, accessed10/4/10.

Exhibit 2
Merger-Related Compensation for Rohm Directors and Officers (Offer = $78 per share)

Person or Group

Total Value of
Stock &
Other
Options Compensation

Raj Gupta (CEO)

$72,409,850
Jacques Croisetiere (CFO)
$12,523,636
Alan Barton (a)
$2,405,676
Pierre Brondeau (COO)
$13,379,231
Roberty Lonergan (EVP)
$9,110,539
9 Other Executive Officers
$15,487,566
11 Non-employee Directors
$66,556,776
Total (25 persons) $191,873,273

$31,383,647
$9,245,321
$1,741,086
$9,551,890
$5,124,344
$18,499,902
$19,475,657
$95,021,847

Person or Group

Number of
Shares
Exercisable
Owned (b)
Options

Gupta
Croisetiere
Barton (a)
Brondeau
Lonergan
9 Other Executive Officers
11 Non-employee Directors
Total (25 persons)

275,512
82,532
30,842
97,793
36,906
180,127
853,292
1,557,004

1,301,742
169,844
0
167,120
173,802
41,076
0
1,853,584

Total
$103,793,497
$21,768,957
$4,146,762
$22,931,121
$14,234,883
$33,987,468
$86,032,433
$286,895,120

Value of
Shares
Owned
$21,489,936
$6,437,496
$2,405,676
$7,627,854
$2,878,668
$14,049,906
$66,556,776
$121,446,312

Person or Group

Value of Other Forms of Compensation

Short-Term
Severance
Employee
Incentive
& Pension
Transition
Bonuses
Benefits
Payments

Gupta
Croisetiere
Barton (a)
Brondeau
Lonergan
9 Other Executive Officers
11 Non-employee Directors
Total (25 persons)

$365,754
$126,795
$89,610
$136,548
$65,836
$402,293
0
$1,186,836

$9,956,217
$2,952,575
$0
$3,192,847
$1,815,512
$1,495,124
0
$19,412,275

$5,000,000
$1,000,000
$0
$1,000,000
$500,000
$2,500,750
0
$10,000,750

Sources: Casewrite estimates, Rohm & Haas Forms DEFM14A (9/29/08) and DEF14A (3/19/08)
Notes:
(a) Alan Barton (formerly EVP) left Rohm and Haas in August 2008.
(b) Includes shares owned directly and indirectly through a savings plan and an ESOP.
(c) Includes stock options, restricted stock, restricted share units, and performance share awards.

78 per share)

Value of
Exercisable
Options

Total Value
of Stock
& Options

$50,919,914
$72,409,850
$6,086,140
$12,523,636
$0
$2,405,676
$5,751,377
$13,379,231
$6,231,871
$9,110,539
$1,437,660
$15,487,566
0
$66,556,776
$70,426,961 $191,873,273

pensation
Total Value
Unvested
of Other
Shares (c) Compensation
$16,061,676
$5,165,951
$1,651,476
$5,222,495
$2,742,996
$14,101,735
$19,475,657
$64,421,986

$31,383,647
$9,245,321
$1,741,086
$9,551,890
$5,124,344
$18,499,902
$19,475,657
$95,021,847

14A (3/19/08)

e share awards.

Exhibit 7A
Rohm and Haas Stand-alone Cash Flow Forecasts, 2009-2010 (in millions)

Assumptions:
Tax Rate =
Growth Rate =

26%
2%

Effective tax rate (average rate)

For future cash flows and terminal value calculations

ORIGINAL Forecast at the Deal Anno

2009
2010
Revenue
Earnings bef. Interest, Taxes, and Depr. (EBITDA)
Depreciaton & Amortization
Earnings before Interest and Taxes (EBIT)
Earnings before Interest After Taxes (EBIAT)
+ Depreciation & Amortization
- Capital Expenditures
- Increases in New Working Capital (NWC)
Total Free Cash Flow

$10,286
$1,633
$503
$1,130
$836
$503
($555)
($280)
$504

$10,897
$1,793
$507
$1,286
$952
$507
($556)
($295)
$608

* REVISED * Forecast as of
2009
2010
Revenue
Earnings bef. Interest, Taxes, and Depr. (EBITDA)
Depreciaton & Amortization
Earnings before Interest and Taxes (EBIT)
Earnings before Interest After Taxes (EBIAT)
+ Depreciation & Amortization
- Capital Expenditures
- Increases in New Working Capital (NWC)
Total Free Cash Flow

$8,414
$1,016
$524
$492
$364
$524
($461)
($50)
$377

$8,867
$1,224
$509
$715
$529
$509
($479)
($100)
$459

Source: Casewriter estimates using forecasts from E.H. Yang and L. Amadeo, Oppenheimer Equity Re
and Haas Company, reports dated 7/10/08 and 2/9/09, via Thompson Rsearch/Investex, access

t at the Deal Announcement (7/10/08)

2011
2012
$11,517
$1,996
$512
$1,484
$1,098
$512
($553)
($310)
$747

$12,132
$2,223
$521
$1,702
$1,259
$521
($558)
($325)
$897

D * Forecast as of early February 2009

2011
2012
$9,340
$1,456
$501
$955
$707
$501
($448)
($200)
$560

$9,812
$1,583
$493
$1,090
$807
$493
($451)
($250)
$599

penheimer Equity Research on Rohm

rch/Investex, accessed 9/24/10.

2013
$10,280
$1,691
$488
$1,203
$890
$488
($473)
($250)
$655

Exhibit 7B
Discount Rate for Rohm and Haas Free Cash Flow Valuation

Weighted Average
Cost of Capital (WACC)
Risk-free Rate (Rf)
4.92%
Equity Beta (E)
1.06
Equity Risk Premium (ERP)
Cost of Equity (KE)
Tax Rate
Cost of Debt (KD)
Debt / Value Ratio (D/V)
Equity / Value Ratio (E/V)

5.07%
10.3%
35%
6.1%
28%
72%

WACC =
8.5%
WACC Range 7.5% - 9.5%

Goldman Sachs Assumptions and Sourc

Average 30-year Treasury Yield Over Past 7 Y
Barra's U.S. Equity Model (forward-looking es
Ibbotson's Arithmetic Mean (Market - Risk Fre
Calculated: KE = Rf + (E * ERP)

Long-term sustainable tax rate (marginal rat

Weighted average of rates on Rohm's existin
Unstated but implied by the resulting WACC
Unstated but implied by the resulting WACC

Calculated: WACC = [KD * (1 - Tax Rate) * (D

Source: Casewriter estimates using data in Rohm & Haas Co., Form DEFM14A, dated 9/29/08, p. 28.

mptions and Sources

ury Yield Over Past 7 Years; Current yield = 4.50%
del (forward-looking estimate)
Mean (Market - Risk Free Rates) from 1957-2007

tax rate (marginal rate)

ates on Rohm's existing debt as of 12/31/07
y the resulting WACC
y the resulting WACC

KD * (1 - Tax Rate) * (D/V)] + [KE * (E/V) ]

dated 9/29/08, p. 28.

Exhibit 8
Dow's Post-acquisition Financial Forecast, 2008-2010

Net Debt
Long-term Debt (LTD)
Current portion LTD
Notes Payable
Cash
Total Net Debt
Total Equity (b)
Total Capitalization
Net Debt / Total Capitalization (1)

Year-end
2008

2009 Quarterly Data

Q2 (a)

Q1

$8,042
$1,454
$2,360
($2,800)
$9,056

$8,042
$1,454
$2,360
($1,506)
$10,350

$22,830
$1,454
$2,460
($531)
$26,213

$13,511
$22,567

$13,097
$23,447

$12,928
$39,141

40.1%

44.1%

67.0%

1.30

1.83

5.16

$57,513
$6,959
12.1%
$4,333
$562

$55,034
$5,654
10.3%
$3,018
$586

$55,293
$5,080
9.2%
$2,365
$830

Interest Coverage Ratio

= EBIT / Interest Expense

7.71

5.15

2.85

Current Ratio (CA / CL)

1.23

1.19

1.26

Leverage Ratio (2)

= Net Debt / EBITDA (trailing)
Trailing 12 month figures:
Sales
EBITDA
EBITDA Margin
EBIT
Interest Expense

Source: Casewrite estimates using forecasts from J. Zekauskas et al., J.P. Morgan North America Equi
Dow Chemical Report 2/4/09 (Tables 6, 7, & 8), accessed via Thompson Research/Investex on 9
Notes:
a) Assumes the Rohm acquisition closes in the second quarter of 2009.
b) Total equity exludes preferred equity and reflects large hedging and pension losses in 2008.
It also reflects the payment of cash dividends and the repurchase of shares.
Covenants on the Dow Bridge Loan:
1) Net Debt-to-Total Capitalization < 65% (for this covenant, total equity excludes
2) Leverage Ratio < 4.25X

009 Quarterly Data

Q3

Q4

Year-end
2010

$22,330
$1,454
$2,460
($879)
$25,365

$21,830
$1,454
$2,460
($1,945)
$23,799

$19,830
$1,454
$2,460
($534)
$23,210

$12,750
$38,115

$12,708
$36,507

$11,790
$35,000

66.5%

65.2%

66.3%

5.33

4.10

3.64

$56,276
$4,760
8.5%
$1,978
$1,064

$59,659
$5,801
9.7%
$2,957
$1,247

$63,633
$6,372
10.0%
$3,404
$1,532

1.86

2.37

2.22

1.25

1.25

1.17

organ North America Equity Research,

on Research/Investex on 9/24/10.

d pension losses in 2008.

ty excludes preferred stock)