As of early February 2009, what should Andrew Liveris (Dow’s CEO) and what should Raj

Gupta (Rohm and Haas’ CEO) do?

Suggested Course of Action for Andrew Liveris

The options that Andrew was evaluating were: (1) close the deal at $78 per share (valuing Rohm and
Haas at $15.23 billion) (2) terminate the deal through litigation (3) renegotiate specific terms and
buy more time. The success rate is almost nil for the acquirer while going through the litigation route
in the history of Delaware court and in the best-case scenario, Dow will still have to pay $750 million
in breakup fees in addition to the out-of-pocket expenses incurred by Rohm. Rohm is not willing to
renegotiate the specific terms of the deal as it believes the agreement to be air-tight and feels that it
deserves to receive $78 per share in order to honour its duty towards its shareholders.

Hence, the only option available to Andrew is closing the deal at $78 per share for which raising cash
poses a problem. The financing options that the company looked are:

 Raising long term debt; difficult to obtain in tight liquidity situation prevailing in the market
 Cutting dividend; the CEO did not want to end its 97-year streak
 Raising cash through asset sale too was not feasible as the sale will take place at fire-sale
prices
 Dow share prices had fell to $11 hence, issuing equity will not be a wise decision
 Use existing 1-year bridge loan, which will lead to Moody’s downgrading the credit rating in
the event of breaching debt covenants

Unexplored financing options which the company can pursue are as follows:

 Renegotiate deal with PIC for going ahead with the joint venture and in the event of no
agreement Dow can sue PIC in order to obtain the $2.5 billion breakup fees which it can
either use to finance the acquisition of Rohm or use it as a leverage against PIC in order to
secure the K-Dow joint venture deal
 Raise equity through private placement with big institutional investors and large
shareholders selling them the robustness of the business strategy, going ahead with this
option will allow Dow to maintain its investment grade credit rating while at the same time
its share price will not dilute as well

The main question that Andrew is facing is whether it still makes sense to pay $78 per share under
the revised circumstances. Hence, it becomes imperative to do valuation of Rohm and Haans with
the revised numbers.

2009 2010 2011 2012 2013

Revenue $8,414 $8,867 $9,340 $9,812 $10,280

Earnings bef. Interest, Taxes, and Depr. (EBITDA) $1,016 $1,224 $1,456 $1,583 $1,691
Depreciaton & Amortization $524 $509 $501 $493 $488
Earnings before Interest and Taxes (EBIT) $492 $715 $955 $1,090 $1,203
Earnings before Interest After Taxes (EBIAT) $364 $529 $707 $807 $890
+ Depreciation & Amortization $524 $509 $501 $493 $488
- Capital Expenditures ($461) ($479) ($448) ($451) ($473)
- Increases in New Working Capital (NWC) ($50) ($100) ($200) ($250) ($250)
 Total Free Cash
Flow $377 $459 $560 $599 $655

Using the revised forecast, we calculate an Enterprise Value of $8,881. Subtracting the Net Debt
calculations from table 3, Rohm and Haas has an Equity Value of $5,570 or $28.54 per share.

Based on the Revised Forecast and using $2B growth synergies and $800M per year with a onetime
cost of $1.3B we calculate the value of Rohm and Haas to be $70.85.

Suggested Course of Action for Raj Gupta

Raj Gupta has a fiduciary duty to act in the best interest of the shareholders and completing the deal
at $78 per share is the best option for the shareholders. In the event of the deal falling out, the
shareholders will suffer as the share price will fall even below the post-agreement level. Therefore,
the best course of action for Gupta is to pursue litigation and force Dow to stick to the original deal.
There is high probability of Rohm winning the case in the court as there is no precedent case in
Delaware court wherein the buyer in an acquisition deal was favoured. The watertight nature of the
agreement is also in favour of Rohm.

Hence, Raj will be doing the right thing by suing Dow and bringing to light the fact that Dow is not
making Reasonable Best Effort by not pursuing many avenues available for raising necessary funding.