Dow Chemical strikes $15B deal to acquire Rohm and Haas

Dow Chemical dow, the venerable but stodgy chemical giant, scooped up some glitter Thursday, agreeing to buy Rohm and Haas roh for $15.3 billion to boost sales in more lucrative markets such as electronics and paints.

The deal is aimed at broadening Dow's product base to include more high-margin specialty chemicals so it can rely less on commodity offerings that are vulnerable to boom-and-bust cycles.

Dow CEO Andrew Liveris called the merger "game-changing," adding that Rohm and Haas "brings us access to new and exciting technologies."

The all-cash deal for $78 a share represents a 74% premium over Rohm's closing price Wednesday. Dow, the No. 1 U.S. chemical producer, also will assume $3.4 billion of Rohm's debt. Rohm stock soared 64% Thursday to close at $73.62. Dow shares closed down 4% at $32.52.

Warren Buffett's Berkshire Hathaway brka is investing $3 billion, and the Kuwait Investment Authority is adding $1 billion, both in convertible preferred securities. Citigroup c, Merrill Lynch mer and Morgan Stanley ms are supplying $11.4 billion in loans. The deal is expected to close by early 2009.

About 50% of Dow's sales comes from commodities such as polyethylene and polypropylene, which are used to make plastics. Every few years, a buildup of production capacity drives down prices and crimps profits. Last year, Dow earned $2.9 billion, down from $3.7 billion in 2006.

Its products also have been socked by runaway energy costs as they use oil and gasoline as feed stocks. Dow, in turn, has raised its prices 50% since May.

Rohm and Haas, by contrast, makes more specialized products that are less vulnerable to price swings and are closer to consumers, such as coatings for flat-panel TVs and materials for electronics and computer chips. It also produces chemicals used in adhesives, paints and cosmetic products. And it owns Morton Salt.

Dow says the deal will widen its share of advanced products from 51% to 69%. It also expects to save $800 million from greater buying power and reduced overhead. By the second year after the purchase, the deal will boost per-share earnings, Dow says.

But analyst Frank Mitsch of BB&T Capital Markets says Dow overpaid and didn't account for a weak market for acrylics and coatings due to the housing downturn. Also, prices for materials in Rohm's products have jumped. Long term, he says, the deal "should work out fine," though he expects "a fair amount of pain between now and then."