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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