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

Dow Chemical Rohm and Haas

2006 2007 2008 H1 2007 2008 H1

Revenues $49,124 $53,375 $31,140 $8,897 $5,074

Cost of Goods Sold 39,407 44,028 26,346 5,963 3,537
Depreciation & Amortization 2,074 2,190 1,143 469 247
Gross Profit 7,643 7,157 3,651 2,465 1,290

SG&A Expense 1,663 1,861 1,012 1,091 586

Research & Development 1,164 1,305 666 296 159
Amortization Expense 50 72 47 57 32
Operating Income 4,766 3,919 1,926 1,021 513

Net Interest Expense 425 445 247 120 85

Income/(Loss) from Affiliates 959 1,122 525 22 90
Other Non-operating Income 60 315 57 27 21
Restruct. & Unusual Charges 388 719 (10) 70 98
Profit Before Tax 4,972 4,192 2,271 880 441

Income Tax Expense 1,155 1,230 536 206 111

Minority Interest & Other (93) (75) (32) (13) (11)
Net Income 3,724 2,887 1,703 661 319

Avg. Basic # Shares (millions) 962.3 953.1 936.0 207.8 193.7

Num. of Acquisition Shares (as of 9/25/08) 195.2

Earnings per Share (basic) $3.87 $3.03 $1.82 $3.18 $1.65

Dividends Declared per Share $1.50 $1.64 $0.84 $1.44 $0.78
Gross Margin 15.6% 13.4% 11.7% 27.7% 25.4%
Net Margin 7.6% 5.4% 5.5% 7.4% 6.3%
Effective Tax Rate 23.2% 29.3% 23.6% 23.4% 25.2%
R&D as % of Sales 2.4% 2.4% 2.1% 3.3% 3.1%
Capital Expenditures $1,983 $2,105 $1,019 $417 $266

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

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

Dow Chemical Rohm and Haas

2006 2007 2008 H1 2007

Assets
Cash & Investments $2,910 $1,737 $2,113 $265
Receivables 8,048 9,684 11,356 1,876
Inventories 6,058 6,885 7,690 1,024
Other 193 348 172 261
Total Current Assets 17,209 18,654 21,331 3,426

Net PP&E 13,722 14,388 14,624 2,871

Goodwill 3,242 3,572 3,617 1,668
Deferred Tax Assets 4,006 2,126 2,283 83
Other Long-term Assets 7,402 10,061 10,298 2,059
Total Assets 45,581 48,801 52,153 10,107

Liabilities
Accounts Payable 5,674 6,536 7,837 806
Accrued Expenses 2,215 2,512 2,237 613
Short-term Debt 219 1,548 2,225 150
Current Long-term Debt 1,291 586 1,051 8
Other Current Liabilities 1,202 1,263 1,037 192
Total Current Liabilities 10,601 12,445 14,387 1,769

Long-term Debt 8,036 7,581 8,116 3,139

Minority Interest 1,365 1,414 1,237 215
Pension/Other Benefits 3,094 3,014 3,109 760
Other Liabilities 5,420 4,958 5,171 1,078
Total Equity 17,065 19,389 20,133 3,146
Total Liabilities & Equity 45,581 48,801 52,153 10,107

Total Debt 9,546 9,715 11,392 3,297

Debt-to-Total Capital 35.9% 33.4% 36.1% 51.2%
Current Ratio (CA / CL) 1.62 1.50 1.48 1.94

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

Rohm and Haas
2008 H1

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

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

908
770
108
0
101
1,887

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

3,276
49.4%
1.98
Exhibit 3
Dow Chemical Company, Slected Financial and Operating Information, 1994-2007 (as amended, in $ millions)

Size and Operations Profitability Per Share Information

Return Earnings
Employees Gross Return on Equity Per Share
Year Sales Assets (000) Margin on Sales (ending) (Basic)

2007 $53,375 $48,801 45.9 13.4% 5.4% 14.9% $3.03

2006 $49,124 $45,581 42.6 15.6% 7.6% 21.8% $3.87
2005 $46,307 $45,934 42.4 17.3% 9.8% 29.5% $4.69
2004 $40,161 $45,885 43.2 14.7% 7.0% 22.8% $2.98
2003 $32,632 $41,891 46.4 13.7% 5.3% 18.9% $1.88
2002 $27,609 $39,562 50.0 13.9% -1.2% -4.4% ($0.37)
2001 $28,075 $35,515 52.7 14.9% -1.4% -3.9% ($0.43)
2000 $29,798 $35,991 53.3 17.4% 5.6% 14.1% $1.88
1999 $26,131 $33,456 51.0 21.8% 6.2% 14.8% $1.85
1998 $25,396 $31,121 50.7 23.0% 6.7% 17.3% $1.92
1997 $27,814 $31,004 55.9 24.6% 8.8% 24.6% $2.71
1996 $27,267 $31,219 52.0 26.7% 9.1% 24.7% $2.61
1995 $27,140 $29,838 51.0 31.1% 11.0% 31.7% $2.91
1994 $22,634 $31,573 65.7 24.7% 5.8% 13.5% $1.22

Sources: Adapted from Dow Chemical Company form 10-K (Year end 2004 and 2007); Standard & Poor's Corporation, and Cap
in $ millions)

Per Share Information Leverage

Dividends Average Debt-to- S&P
Paid Per Numb. of Total Debt Debt
Share Shares Capital Rating Issued

$1.59 953.1 33.4% A- $0

$1.46 962.3 35.9% A- $0
$1.34 976.8 41.1% A- $0
$1.34 940.1 50.7% A- $614
$1.34 918.8 58.8% A- $463
$1.34 910.5 63.1% A $1,992
$1.25 901.8 52.1% A $3,956
$1.16 893.2 44.4% A $300
$1.16 874.9 44.3% A $1,444
$1.16 888.1 45.1% A $0
$1.08 898.4 45.0% A $0
$1.00 950.1 41.2% A $0
$0.93 1,025.8 41.7% A $0
$0.87 1,069.8 43.6% A $0

Poor's Corporation, and Capital IQ, accessed10/4/10.

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

Total Value of
Stock & Other
Person or Group Options Compensation Total

Raj Gupta (CEO) $72,409,850 $31,383,647 $103,793,497

Jacques Croisetiere (CFO) $12,523,636 $9,245,321 $21,768,957
Alan Barton (a) $2,405,676 $1,741,086 $4,146,762
Pierre Brondeau (COO) $13,379,231 $9,551,890 $22,931,121
Roberty Lonergan (EVP) $9,110,539 $5,124,344 $14,234,883
9 Other Executive Officers $15,487,566 $18,499,902 $33,987,468
11 Non-employee Directors $66,556,776 $19,475,657 $86,032,433
Total (25 persons) $191,873,273 $95,021,847 $286,895,120

Number of Value of
Shares Exercisable Shares Exercisable
Person or Group Owned (b) Options Owned Options

Gupta 275,512 1,301,742 $21,489,936 $50,919,914

Croisetiere 82,532 169,844 $6,437,496 $6,086,140
Barton (a) 30,842 0 $2,405,676 $0
Brondeau 97,793 167,120 $7,627,854 $5,751,377
Lonergan 36,906 173,802 $2,878,668 $6,231,871
9 Other Executive Officers 180,127 41,076 $14,049,906 $1,437,660
11 Non-employee Directors 853,292 0 $66,556,776 0
Total (25 persons) 1,557,004 1,853,584 $121,446,312 $70,426,961

Value of Other Forms of Compensation

Short-Term Severance Employee
Incentive & Pension Transition Unvested
Person or Group Bonuses Benefits Payments Shares (c)

Gupta $365,754 $9,956,217 $5,000,000 $16,061,676

Croisetiere $126,795 $2,952,575 $1,000,000 $5,165,951
Barton (a) $89,610 $0 $0 $1,651,476
Brondeau $136,548 $3,192,847 $1,000,000 $5,222,495
Lonergan $65,836 $1,815,512 $500,000 $2,742,996
9 Other Executive Officers $402,293 $1,495,124 $2,500,750 $14,101,735
11 Non-employee Directors 0 0 0 $19,475,657
Total (25 persons) $1,186,836 $19,412,275 $10,000,750 $64,421,986

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.
 Total Value
of Stock
& Options

$72,409,850
$12,523,636
$2,405,676
$13,379,231
$9,110,539
$15,487,566
$66,556,776
$191,873,273

Total Value
of Other
Compensation

$31,383,647
$9,245,321
$1,741,086
$9,551,890
$5,124,344
$18,499,902
$19,475,657
$95,021,847
Exhibit 7A
Rohm and Haas Stand-alone Cash Flow Forecasts, 2009-2010 (in millions)

Assumptions:
Tax Rate = 26% Effective tax rate (average rate)
Growth Rate = 2% For future cash flows and terminal value calculations

ORIGINAL Forecast at the Deal Announcement (7/10/08)

2009 2010 2011

Revenue $10,286 $10,897 $11,517

Earnings bef. Interest, Taxes, and Depr. (EBITDA) $1,633 $1,793 $1,996
Depreciaton & Amortization $503 $507 $512
Earnings before Interest and Taxes (EBIT) $1,130 $1,286 $1,484
Earnings before Interest After Taxes (EBIAT) $836 $952 $1,098
+ Depreciation & Amortization $503 $507 $512
- Capital Expenditures ($555) ($556) ($553)
- Increases in New Working Capital (NWC) ($280) ($295) ($310)
Total Free Cash Flow $504 $608 $747

* REVISED * Forecast as of early February 2009

2009 2010 2011

Revenue $8,414 $8,867 $9,340

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

Source: Casewriter estimates using forecasts from E.H. Yang and L. Amadeo, Oppenheimer Equity Research on Rohm
and Haas Company, reports dated 7/10/08 and 2/9/09, via Thompson Rsearch/Investex, accessed 9/24/10.
Announcement (7/10/08)
2012

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

st as of early February 2009

2012 2013

$9,812 $10,280
$1,583 $1,691
$493 $488
$1,090 $1,203
$807 $890
$493 $488
($451) ($473)
($250) ($250)
$599 $655

quity Research on Rohm

ex, accessed 9/24/10.
Exhibit 7B
Discount Rate for Rohm and Haas Free Cash Flow Valuation

Weighted Average
Cost of Capital (WACC) Goldman Sachs Assumptions and Sources
Risk-free Rate (Rf) 4.92% Average 30-year Treasury Yield Over Past 7 Years; Current yield = 4.50
Equity Beta (bE) 1.06 Barra's U.S. Equity Model (forward-looking estimate)
Equity Risk Premium (ERP) 5.07% Ibbotson's Arithmetic Mean (Market - Risk Free Rates) from 1957-200
Cost of Equity (KE) 10.3% Calculated: KE = Rf + (bE * ERP)
Tax Rate 35% Long-term sustainable tax rate (marginal rate)
Cost of Debt (KD) 6.1% Weighted average of rates on Rohm's existing debt as of 12/31/07
Debt / Value Ratio (D/V) 28% Unstated but implied by the resulting WACC
Equity / Value Ratio (E/V) 72% Unstated but implied by the resulting WACC

WACC = 8.5% Calculated: WACC = [KD * (1 - Tax Rate) * (D/V)] + [KE * (E/V) ]
WACC Range 7.5% - 9.5%

Source: Casewriter estimates using data in Rohm & Haas Co., Form DEFM14A, dated 9/29/08, p. 28.
7 Years; Current yield = 4.50%

Free Rates) from 1957-2007

ting debt as of 12/31/07

(D/V)] + [K E * (E/V) ]
Exhibit 8
Dow's Post-acquisition Financial Forecast, 2008-2010

Year-end 2009 Quarterly Data

2008 Q1 Q2 (a) Q3 Q4

Net Debt
Long-term Debt (LTD) $8,042 $8,042 $22,830 $22,330 $21,830
Current portion LTD $1,454 $1,454 $1,454 $1,454 $1,454
Notes Payable $2,360 $2,360 $2,460 $2,460 $2,460
Cash ($2,800) ($1,506) ($531) ($879) ($1,945)
Total Net Debt $9,056 $10,350 $26,213 $25,365 $23,799

Total Equity (b) $13,511 $13,097 $12,928 $12,750 $12,708

Total Capitalization $22,567 $23,447 $39,141 $38,115 $36,507

Net Debt / Total Capitalization (1) 40.1% 44.1% 67.0% 66.5% 65.2%

Leverage Ratio (2) 1.30 1.83 5.16 5.33 4.10

= Net Debt / EBITDA (trailing)

Trailing 12 month figures:

Sales $57,513 $55,034 $55,293 $56,276 $59,659
EBITDA $6,959 $5,654 $5,080 $4,760 $5,801
EBITDA Margin 12.1% 10.3% 9.2% 8.5% 9.7%
EBIT $4,333 $3,018 $2,365 $1,978 $2,957
Interest Expense $562 $586 $830 $1,064 $1,247

Interest Coverage Ratio 7.71 5.15 2.85 1.86 2.37

= EBIT / Interest Expense

Current Ratio (CA / CL) 1.23 1.19 1.26 1.25 1.25

Source: Casewrite estimates using forecasts from J. Zekauskas et al., J.P. Morgan North America Equity Research,
Dow Chemical Report 2/4/09 (Tables 6, 7, & 8), accessed via Thompson Research/Investex on 9/24/10.
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 preferred stock)
2) Leverage Ratio < 4.25X
 Year-end
2010

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

$11,790
$35,000

66.3%

3.64

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

2.22

1.17

uity Research,