Dow's Bid for Rohm and Haas Essay

3957 WordsMar 2, 201516 Pages
Corporate Finance Dow’s bid for Rohm and Haas Introduction Question 1 Rohm and Haas will be a good acquisition for Dow because of the large synergies implied: strategic and operational ones. First of all, the new strategy of Dow implies transforming the company into an “asset-light producer of commodity chemicals” and “a high value added of specialty chemicals and advanced materials”. The acquisition of Rohm and Haas will contribute to this strategy by bringing in new growth opportunities such as expansion of the portfolio of products, new technology and a strong industry channel. Also, the acquisition will create possibilities to expand into emerging markets like China and gain new customers, thus enhancing Dow’s revenues. The large business portfolio with diversified products, together with growth opportunities makes Rohm&Haas a desired target. Not only that, but the company has a strong leadership team with experience based on costumer focus and innovation which can contribute to Dow’s transformation strategy. Valuation using the Original Forecast In order to do the discounted cash flow analysis, we needed to calculate first the weighted average cost of capital (WACC). We have used the following formula: WACC = [KD * (1 - Tax Rate) * (D/V)] + [KE * (E/V) ] (1) As can be observed in Table 1, the value obtained for WACC is 8,5% , which we consider to be appropriate. Weighted Average Cost Of Capital | | Risk-free Rate (Rf) | 4,92% | Equity Beta (bE) | 1,06 | Equity Risk Premium (ERP) | 5,07% | Cost of Equity (KE) | 10,3% | Tax Rate | 35% | Cost of Debt (KD) | 6,1% | Debt / Value Ratio (D/V) | 28% | Equity / Value Ratio (E/V) | 72% | WACC | 8,5% | Table 1. Weighted Average Cost Of Capital Using the Exhibit 7A, the value of WACC(8,5%) and a growth rate of 2%, we calculate a

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