Thursday, February 5, 2009 2 comments ++[ CLICK TO COMMENT ]++

What's good for an M&A arbitrageur is not always good for the buying firm

Once in a while we get situations where an arbitrageur betting on an M&A deal would want something to happen, but it would be disastrous for one of the firm's involved. This seems to be the case with the Rohm & Haas buyout by Dow Chemical.

In a story picked up by Bloomberg, John Paulson of the Paulson & Co hedge fund, who is the second biggest owner of Rohm & Haas, is telling Dow that it has the financial ability to close the deal.

Paulson & Co., the hedge fund run by billionaire John Paulson, urged Dow Chemical Co. to slash its dividend, sell new stock and issue bonds to pay for the stalled takeover of Rohm & Haas Co.

Dow should tap a previously committed $13 billion bridge loan and $4 billion of equity financing to close the $15.4 billion deal, Paulson said today in a statement. Dow could then repay the bridge financing with $4 billion of new equity and $5 billion of new bonds, Paulson said. Paulson, which manages $29 billion, is Rohm & Haas’s second-largest shareholder.


Paulson suggested that Dow follow the lead of InBev NV, which drew down bank financing to close its $54 billion acquisition of Anheuser-Busch Cos. in November. Anheuser-Busch InBev then raised $9.8 billion in an equity offering to pay off the bridge loan, and in January sold $7.5 billion of debt.

What Paulson is recommending is disastrous for Dow shareholders but benefitial to Rohm & Haas. In any case, Dow seems to have signed a tight contract and doesn't have much wiggle room. Dow's market cap is around $10 billion right now and it seems that, under the Paulson plan, Dow would have to issue $8 billion in shares (dilution of $4 billion from committed equity plus another $4 billion.) I don't follow either of these companies and haven't looked into the details so I'm speculating on the cost of financing. It's not clear to me if the committed $4 billion in equity, some of it from Warren Buffett's Berkshire Hathaway, is at a higher price. If Buffett's funding is priced around $35 per share (Dow share price back in July 2008) rather than the current price around $10, it won't be that bad for Dow.

Unlike several other deals where companies ended up buying shoddy assets (for example mortgage lenders or financial firms with dubious assets,) Rohm & Haas seems to be a valuable asset. So the concern of Dow shareholders likely isn't the asset per se (although the price is not attractive given the collapse of asset prices everywhere.) Rather, the really serious problem is the possibility of issuing shares at really low prices. This is one of the greatest risks to shareholders right now (and I'm not just talking about M&A deals either; we see investors in commodity businesses suffering massive losses due to dilution after the share prices have collapsed.) Paulson cites the InBev actions but that isn't a cyclical business and its share prices didn't collapse as much from what I recall.

Having said all that, it is possible that some of the negative scenario is already priced into Dow's share price. Even if the at-worst 50% dilution occurs, shares may not fall much. I remember when Ambac shares were diluted around 66% but the shares didn't fall that much because most of it was priced in.


2 Response to What's good for an M&A arbitrageur is not always good for the buying firm

M. Thomas - Houston
February 5, 2009 at 12:58 PM

It appears to some of us that Paulson cares only for his vested interest in "the deal," and is clueless about the concerns for the element Hu (yes, some of us actually buy into the crap companies espouse in their ads), the people who have made DOW what it is. In the end, greed, pride, and our me-first society have contributed to the current colossal crisis. By the way, it's also only going to get resolved by that same Hu element that is currently being so grossly ignored and disregarded by Congress and the "bailout!" It's time some of these Companies' Boards of Directors were purged and replaced with people who can hold management accountable for its actions. Why should the President of the United States have to be the one to say it's not right to pay billion dollar bonuses and multi-million dollar salaries to failing management? Where I grew up you were fired for a failing performance...Now, you get a bonus?! What's wrong with our financial environment today is NOT rocket science friends and neighbors.

February 5, 2009 at 2:20 PM

Nothing wrong with what Paulson's funds are saying or doing. They are, as you point out, acting in their own interests. Just like each of us would do with property that we own.

I agree with your comment regarding the misaligned compensation for those who were at the center of the financial crisis that is dragging down the rest of the world. There isn't an obvious answer though. Shareholders are the ones that are paying the executives and very few have complained publicly so far.

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