Delving Into Dow Chemical's Strategy

Dow Chemical (DOW Quote) gave investors a peek at its corporate strategy Tuesday, announcing that it will seek compensation from a Kuwaiti company for backing away from a petrochemical joint venture.

Dow said in a press release that state-owned Petrochemical Industries is in breach of contract for dissolving the JV. Kuwait could be liable for as much as $2.5 billion.

Dow had expected to reap more than $7 billion from the deal, some of which could have been used in its its pending $15.3 billion acquisition of chemical producer Rohm & Haas(ROH Quote).

Dow's contract with Rohm stipulates that the deal close by this Saturday or the original purchase price will escalate at an annual rate of 8%.

The failure to mention Rohm & Haas in its press release suggests that Dow could still be negotiating a lower acquisition price. The original price of $78 a share already had a premium of more than $30 a share last July. An analyst at Credit Suisse reported last week that the fair value of Rohm & Haas is about $35 a share given the sour economic climate.

Many analysts have suggested that Dow should pay $50 a share for Rohm & Haas at most. Others have said that Dow Chemical should walk away from the deal.

However, the recent commodity bubble served to motive Dow Chemical to reduce its input costs and limit the amount of petroleum it must use as a feedstock. Dow's Kuwaiti joint venture would meet the first goal by constructing a chemical plant near an abundant and cheap source of hydrocarbons. Annexing Rohm & Haas meets the second goal by introducing new chemical products that aren't petroleum-based.