Rohm & Haas Arbitrage Opportunity

Another arbitrage opporunity similar to the Anheuser Busch deal is worth noting.

Last year Dow Chemical announced that it had agreed to purchase Rohm & Haas in an all cash deal at $78/share. Dow had already secured short term financing and even an investment from Warren Buffet when it annouced the deal. Orginally the deal was expected to close in January 2009.

Rohm & Haas stock price has been all over the places on worries that this deal won't go through. Investors are a obviously rattled with the unprecendent turmoil in the markets/economy and what now appears to be an extremely expensive price to pay for Rohm & Haas.

However the current return on this deal for an average investor are 25+% in as little as a few days to up to 10 months (Dow has the ability in the terms to delay the closing of the deal until October) that it would take to close this deal.

I personally think this deal will ultimately go through:

Financing is in place for this deal. While Dow will be highly leverage and not in an attractive financial position for awhile, it has the ability to close this deal.
Management wants to own Rohm & Haas. While the financial side is a negative right now, the Dow management wants to own ROH - they will find a way to make this work and prevent another company from buying Rohm & Haas.
A management team doesn't like to admit when they were wrong or overpaid so they have a tendancy to go through with a deal once they have made a decision.
Are we in a severe recession or entering a depression? I believe this is a severe recession and I believe DOW management will recognize that its better not walk away from this deal and hurt its ability to enter into future deals with other businesses. The Dow name would be tarnished in future negoiations. If you believe we are entering something worse than a recession you probably want to stay away from this - if times are going to be that rough, then the management team might have no choice but to walk away from the deal to prevent the company from going under.

There are lots of reasons why this deal might not go through. The econmy is in a state of turmoil and there is little visibility to the near term state of the economy. A large joint venture that was to give DOW several billion in capital recently fell apart making this aquisition for Dow more difficult. However I don't think any of these issues remove the desire for the Dow management to aquire Rohm & Haas, I think they will find a way to make this deal work.

I recently picked up 10 shares of Rohm & Haas @ $62 to toy with this opportunity. I am not confident enough to put a large amount of money up on this investment, but it will be interesting to see how this plays out.

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Comments (7)

sounds like an opportunity. Thanks for pointing it out.

Posted by thomas | January 9, 2009 6:39 PM

While I agree that the BUD takeover was a good opportunity, I would have to say that this one is much riskier. DOW was counting upon a deal they had with the government of Kuwait to help with financing this deal. Unfortunately, Kuwait pulled out last month, leaving DOW with a $9 Billion hole in their financing.

With the economy hurting and the manufacturing sector taking big hits, DOW's major customers are scaling back their purchases. This is hurting DOW's cash flow and leaving them increasingly vulnerable as the recession drags on. Like many other companies have done recently, I think there is a very strong probability that DOW will decide to pull back and preserve their capital.

Posted by Robert | January 10, 2009 6:35 AM

I thought about ROH but decided to stay out of it for now.

Are you playing PSD? It's a little late now, but hasn't closed yet and there is still a bit of upside.

Posted by Jonathan | January 11, 2009 4:39 PM

Hi 2mill,

I want to ask you for some guidance. I want to start buying stocks and mutual funds using a brokerage account, but I wasnt able to find a broker that is good for doing both. Surfing through your blog, I saw that you trade using Sharebuilder. Also, I found that Zecco, which you had used sometime back is rally good only for stock trading.

So does it make sense, if I open 2 accounts, one with Zecco for stock trading and the other with sharebuilder for multual funds trading?

Thanks for your advice
SM

Posted by Summerboy | January 29, 2009 12:45 PM

good call! http://finance.yahoo.com/news/Trading-halted-on-Dow-apf-14584992.html

Posted by thomas | March 9, 2009 11:49 PM

Thank You for the information on this stock arbritage. I bought 1000 shares after reading your comments and doing my own research and did very well...sure was a roller coaster ride though =)

Posted by Laurie | April 14, 2009 9:30 PM

Laurie - congrats! I only purchased 30 shares, but I am happy with the outcome. With 1000 shares you had the potential to do very well :-)

Posted by 2million | April 20, 2009 12:30 PM