Investors holding out for a higher price in the

Engelhard

(EC) - Get Report

saga say they aren't discouraged by the failure of fellow chemical outfit

Huntsman

(HUN) - Get Report

to consummate a deal.

Sunday night, Salt Lake City-based Huntsman walked away from suitors that reportedly included Apollo Management, saying they weren't offering enough. Engelhard has likewise deemed a $37-a-share takeover offer from

BASF

( BF) to be too low, but is urging shareholders to be patient while it explores other alternatives. As of Monday, the vast majority of its shareholders have agreed to wait.

The hard lines adopted by Huntsman and Engelhard suggest chemical-industry targets aren't going to fork over their assets without a fight. Though it's difficult to speculate who, if anyone, might emerge as a second bidder for Engelhard, Huntsman's stubbornness strengthens Engelhard's hand, in the eyes of some backers.

Backstory

To review, BASF launched its $4.9 billion bid in January, sending Engelhard's stock price up 27% in one day to an all-time high. Three weeks later, Engelhard declared the offer insufficient, and said it hired Merrill Lynch to explore other options.

In defending its bid, BASF, which is based in Germany but has operations close to Engelhard in New Jersey, has said it expects to reap limited synergies from the proposed buyout, instead highlighting its potential to grow scale. For many involved in the drama, the disclosure signaled that BASF doesn't expect other chemical companies to bid for Engelhard. If competition does materialize, the logic goes, BASF expects it to come from so-called "financial bidders," like private equity companies.

"It's an arrogant bid, which is never a good thing in a hostile takeover," says one stock investor who bought Engelhard after BASF launched its bid. "They aren't looking at their competing suitors the right way."

Many private equity firms are more than financial buyers, this arbitrager notes, because they have significant stakes in other chemical businesses and have been active in the space over the past year. One particularly active financial buyer in chemicals was Apollo.

Representatives of Apollo and Huntsman were unavailable for comment. Huntsman's shares fell more than 8% on Monday.

Historically, in chemical deals, buyers can get a 4% to 20% synergy on an acquisition, says one person familiar with the industry. If a buyer's operations are physically close to the seller's, it can save more. That BASF, which operates a plant in New Jersey, said that it sees few synergies is suspect, this person says. "The synergy opportunity is far greater than what BASF said it was," he said.

Apollo, which bought chemical company Borden in August 2004, has recently been on a specialty-chemicals acquisition spree. In June 2005, Apollo rolled Borden into another specialty chemical maker, Hexion, which includes three other chemical businesses that Apollo owned. Since the formation of Hexion, Apollo has aggressively pursued and purchased other chemical companies. The company bought a coatings-and-adhesives business from the Rhodia Group; is in a definitive agreement to buy a wax compounds business from

Rohm & Haas

( ROH); and has offered a bid for an ink and adhesive resins business from Akzo Nobel.

Other private equity firms have a significant presence in the chemical sector as well. Kohlberg Kravis Roberts & Co., for example, has a majority stake in Rockwood Specialties Group, which makes specialty chemicals. It is also located in Princeton, N.J., not far from Engelhard's operations in Iselin.

Standing Pat

The market seems confident that Engelhard can strike a deal with another bidder -- and that such a bidder will be willing to offer significantly more than BASF. Engelhard's stock, which before this month never traded above $33, hit an all-time high of $40.92 on Jan. 27. Shares fell 3 cents to $40.33 on Monday.

Engelhard praised its shareholders Monday for refusing to sell into a hostile tender offer, saying it still believes a review of strategic alternatives can yield more value. "We believe that the response to BASF's unsolicited tender offer demonstrates that Engelhard stockholders recognize the offer is inadequate and that our exploration of strategic alternatives has the potential to create value greater than BASF's offer," Engelhard said.

Still, with the stock trading almost $4 a share above BASF's offer, could Engelhard investors be getting too greedy? To be sure, the suitors and seller were not able to reach an agreement in the Huntsman deal, and BASF's price at $37 is significantly higher than Engelhard had traded for years previous to the announcement. And with BASF bringing the auction public, private equity companies aren't going to bother dedicating resources to investigate a bid if they know they won't get it above $37.

Investors are quick to mention that dissipation of the Huntsman deal doesn't necessarily say anything about Engelhard's potential to attract suitors willing to pay more than BASF. All chemicals companies aren't the same, and Engelhard, which makes chemicals that help energy refineries, is poised for faster growth.

The company's fourth-quarter earnings last week show how attractive it is, they say. Engelhard's profit rose to $63.8 million, or 53 cents per share, from $58.1 million, or 47 cents per share, a year earlier, and beat analyst's expectations of 49 cents per share.

"Fourth-quarter earnings were solid and industry performance has only improved," says one bull. "The stock is not going back to $30."

Some investors also say that Huntsman's announcement may mean that Apollo is free to consider other options, including Engelhard. The dissolved Huntsman deal might even mean that there could be activity between Huntsman and Engelhard.

"There could be a situation in which Huntsman spins off certain assets into Engelhard, and then both companies become more attractive," said one investor close to the deal.

In Huntsman's release Monday, the company signaled that it may spin off some of its businesses to gain a boost in value that in the current stock price doesn't realize.

"We believe our historical stock prices have not reflected the full value of our differentiated businesses," said John Huntsman, founder and chairman of the company "Accordingly, we are continuing to evaluate the available alternatives for realizing this potential."

Another factor is Merrill Lynch, the investment bank advising both Engelhard and Huntsman on their possible sales. Although the advisory teams are different, and the bankers are governed by confidentiality agreements, Merrill presumably has insight into all the interested bidders and might be able to see a deal where others couldn't.

Bankers at Merrill Lynch were unavailable for comment.