Deal or No Deal
“The second thought is usually better than the first.” – Joe Cervantes
On July 10, 2008, The Dow Chemical Company agreed to buy specialty chemical maker Rohm and Haas for $15.4 billion in cash. Dow’s then-CEO Andrew Liveris – an executive better known for his love of the limelight than his talents as a negotiator – was roundly criticized in the media for cutting a deal that was extremely favorable for Rohm and Haas’ shareholders. Not only was the definitive merger agreement seemingly airtight, but Liveris also offered a staggering 74% premium to the prior day’s closing price. Liveris’ motivation to do the deal did make some strategic sense as the company was embarking on a shift away from volatile commodities and toward higher-margin specialty products. Nonetheless, the terms of the agreement left many in the industry shaking their heads, and Dow’s stock plummeted on the news.
In a separate transaction, Dow entered into an agreement to form a joint venture (JV) with Kuwait’s Petrochemical Industries Co (PIC), intending to create a new company with the rather unimaginative name K-Dow. In the Kuwaiti deal, Dow effectively agreed to sell half of its commodity plastics and chemicals businesses and was expecting a net payment of approximately $9 billion in return for the assets it would contribute to the JV. This deal would advance Dow’s transition away from base commodities and, quite critically, Liveris was counting on the receipt of those proceeds to help pay for Rohm and Haas.
For Dow shareholders, there were two problems. First, these transactions were announced the same week the price of oil reached its all-time peak of $147 a barrel and less than a month after the market topped. The global financial crisis was in its early innings, and as the stock market indices continued to collapse, the deal for Rohm and Haas looked worse by the day. Second, although the Rohm and Haas contract was indeed airtight, the K-Dow agreement was anything but. Despite cutting a new deal with PIC at a lower price in early December, by year-end, a nightmare scenario unfolded for Liveris (emphasis added throughout):
“Kuwait decided on Sunday to scrap a deal to form a $17.4 billion petrochemical joint venture with U.S. company Dow Chemical.
The cancellation of the deal, which had met opposition in Kuwait’s parliament, was acknowledged Sunday by Dow and is a blow to the largest U.S. chemicals company. Dow had planned to use the proceeds to repay a large part of $13 billion in debt it will have to shoulder once its acquisition of rival Rohm and Haas closes, which is expected to be in early 2009.”
Left at the altar by the Kuwaitis but still obligated to follow through with his marriage proposal to Rohm and Haas, Liveris was in a solvency jam of his own making. With Dow’s stock down 90% from its all-time high, rumors of a potential bankruptcy flying, and the deadline for closing the merger fast approaching, Liveris played his only remaining card: he contrived a reason not to close and simply refused to do so. Rohm and Haas quickly sued Dow for specific performance – a request for the court to order a buyer to close on a deal – in the Delaware Court of Chancery in early January 2009:
“Dow Chemical argued on Tuesday that its agreement to buy rival Rohm and Haas is not binding under current conditions, claiming a deal closing now would jeopardize both companies.
Rohm and Haas disagreed with Dow’s claims, saying that the deal should be closed as is. It suggested Dow should consider a number of strategic moves to be able to finance the deal, including cutting its dividend to 1 cent per share and putting assets up for sale.
Dow laid out its legal defense for delaying or walking away from the more than $15.3 billion deal in a response to Rohm and Haas’ lawsuit filed in Delaware Chancery Court on Tuesday.”
Rohm and Haas was granted an expedited trial schedule, and the two sides ultimately settled within weeks on terms deeply unfavorable to Dow. The original deal price was paid in full (plus penalties for the delayed closing), and Liveris had to rely on what amounted to expensive vendor financing from the Haas family – with an assist from hedge fund manager John Paulson, along with vulture financing from Warren Buffett – to consummate the transaction. Had the trial continued, legal experts agreed that Rohm and Haas would have almost certainly secured an order for specific performance (likely pushing Dow into bankruptcy), a view that is buttressed by the heavily one-sided nature of the settlement.
For as long as there have been negotiated deals, there have been dealmakers with buyer’s remorse. The Delaware Court of Chancery takes enforcement of contracts between well-advised and sophisticated investors seriously, and Delaware is a major hub of corporate formation in no small part because of the Court’s reputation. That reputation will soon be put to its most important test. As Elon Musk tries to wriggle his way out of his definitive agreement to acquire Twitter, the stage is set for an epic spectacle that will undoubtedly serve as a powerful precedent for years to come. What can we glean from cases like Dow/Rohm and Haas, and what can we expect as Twitter and Musk go to court? Let’s dig in.
Notice: No member of the Doomberg team has any position in Tesla or in Twitter, nor do we intend to open one in the coming weeks. Nothing you read here should be considered investment or legal advice.