Delving Into Dow Chemical's Strategy

Credit Suisse analyst John McNulty said in a Dec. 29 research note that "the DOW/ROH merger agreement leaves little room for DOW to walk away from the deal." The contract mandates that Dow pay Rohm $750 million even if the merger is canceled by government regulators. Were Dow to walk for any other reason, it would face worse penalties and a Rohm & Haas lawsuit.

The awkward irony of being on both sides of a breach of contract lawsuit was surely understood by Dow Chemical's executives when they released Tuesday's statement. This suggests that the Rohm & Haas schedule will proceed.

Dow's threat to sue Kuwait could also be a strategic attempt to bring Kuwait back to the negotiating table so that the petrochemical plant gets built, according to a research note released Tuesday by Credit Suisse analyst Mark Connelly. "K-Dow remains a strong possibility," Connelly said, as do alternative JV deals.

If Dow does acquire Rohm for the original $78 a share, it will be saddled with a $13 billion, 12-month bridge loan, which it has lined up. Any reduction in the $78-a-share price Dow were to pry from Rohm would directly reduce its debt. Any monetary reward Dow receives by way of its Kuwait lawsuit would also help it pay down debt and boost its credit rating.

"Remaining investment grade is the top priortiy, even ahead of these deals," Connelly wrote. "If Dow's borrowing costs rise to much, no amount of trransformation will take Dow to its goals. So Dow is likely to pursue a range of options, including divestitures of other highly valuable assets from its broad porfolio."