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Deals in times of a crisis and new financiers
posted by
Vivek Sharma
16 Jul 2008, 08:04
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labels: companies, mergers/acquisitions, chemicals
Dow Chemical’s $18.8 billion acquisition of its domestic rival Rohm & Haas, announced last week, is significant in many ways. It has surprised many that such big ticket deals are indeed happening when the world is supposedly facing the second worst financial crisis in history. The hallmark of a crisis is a dramatic decline in capital availability, as investors decide to wait out the storm. That is not happening now; money is available if the deal makes sense.
What has changed? Definitely, the profile of the financiers. Dow is raising $3 billion from Warren Buffett’s Berkshire Hathaway and another $1 billion from the sovereign wealth fund of Kuwait. These investors, unlike commercial banks and other traditional financiers, can take a longer term view and are not swayed by the crisis.
Early this year, most commentators were saying the glory days of private equity are over. But, private equity funds continue to be very active and deals continue to happen. There is enough money for those who want it, provided the deals proposed are attractive.
That brings us back to the Dow – Rohm deal. Dow has offered a huge 74 per cent premium to the pre-announcement share price of Rohm & Haas. When the economy, both in the US and globally, is weak and the outlook is uncertain, why would anyone pay such a huge premium? And that too for a chemicals business, whose fortunes are almost directly tied to overall economic growth?
Dow says the deal will help increase the share of high-margin products in total sales from 50 per cent to nearly 70 per cent. That is impressive and yes, Dow is trying to get out of bulk chemicals and it transferred its basic commodity business to a joint venture with Kuwait Petrochemicals recently.
But the so called high margin products will remain ‘high-margin’ only if the seller has pricing power, which is usually not the case when the economy turns weak. Then why is Dow so confident? Why would Warren Buffett agree to invest in a chemicals business, something he has not done for many years, when everyone believes that product prices can only decline from here as global demand wanes?
Is the possibility of a global recession real? Or is it just a passing phase, as the confidence of the financial backers to large corporate deals seems to suggest?
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