Dow-Rohm merger standoff takes heated turn

For the descendants of company founder Otto Haas, it is a matter of $5 billion.

For Raj Gupta, the chief executive officer of Rohm & Haas, it means parting the company with more than $100 million.

For Paulson & Co. Inc., a New York hedge fund operator and the second-largest holder of Rohm & Haas stock, the value would be $1.5 billion.

These are the stakeholders with the most in play in the desperate standoff over whether Dow Chemical Co. will be made to complete an agreed-upon acquisition of Philadelphia specialty-chemical firm Rohm & Haas Co.

Dow's leadership says it cannot complete the deal, which was made in an economic climate vastly different from the one that exists now.

Since July, the markets have fallen dramatically, and many banks are in crisis, Dow's share price has decreased more than 60 percent, and cash it intended to use to finance part of the Rohm & Haas purchase was lost when a venture with Kuwait fell apart.

Rohm & Haas argues that a deal is a deal and that Dow is legally bound to do it. The case resides in Delaware Chancery Court.

The tension rose palpably today when David Bernick, an attorney for Dow, said the Haas family and other shareholders cared only about the huge payout, even more than the future of the company and its employees.

"The Haas family apparently has no interest in the health of Rohm & Haas," he said in a phone call from Chicago.

Bernick noted in court papers this week that Dow Chemical would pay Rohm & Haas executives and managers $375 million for stock options if the deal closes, which gives them an incentive to not worry about the heavily indebted company that would be left in the merger's wake.

The disclosure came amid the urgency created by an approaching court date and new uncertainty over Dow Chemical's financial health. The Midland, Mich., company reported $1.6 billion in fourth-quarter losses on Tuesday.

Dow Chemical's share price has fallen so far that its stock market capitalization of $10 billion is below the $15.3 billion in cash it agreed to spend for Rohm & Haas. Dow agreed to pay $78 a share, a 74 percent premium over the $44.83 Rohm & Haas was trading at at the time. Rohm & Haas stock was at $54.77 a share at the end of trading today.

The merged company created by the agreement signed last summer would have 60,000 employees and about $60 billion a year in revenue.

Dow would like to renegotiate terms of the contract. Rohm & Haas has refused, and legal experts say the Philadelphia company has an agreement that would likely hold up in court.

In a statement, Rohm & Haas said today: "We believe that Dow should fulfill its commitment to close the deal. We believe they have the means to finance it, to close it responsibly and integrate our two companies."

Rohm & Haas says the $375 million in stock options - which includes unvested options accelerated by the deal - are held by more than 500 managers who were paid options as part of their compensation.

Gupta, the CEO at Rohm & Haas, would realize $102.4 million through stock holdings, options and merger-related compensation if the deal closes, according to regulatory filings and an analysis by research manager Alexander Cwirko-Godycki at Equilar Inc.

Gupta's holdings are broken down this way: He directly owns 259,243 company shares, which would be worth $20.2 million at $78 a share.

He owns 1.3 million exercisable stock options, according to the company's merger filing, which Equilar says are worth $50.8 million.

Compensation related to the merger amounts to $31.4 million, company documents say. Gupta has said he would retire when the deal closes.

Separately, a Rohm & Haas stock-ownership plan, also a major stockholder in the Philadelphia chemical company, would have assets of $957 million after the merger. The money is used for 401(k) retirement plans.

Employee retirements and compensation are just one part of the billions of dollars riding on the deal.

Philadelphia's Haas family is the company's largest shareholder and its stock holdings are $5 billion under the terms of the deal. The Haas family owns 64.4 million shares through various family trusts, according to a regulatory filing.

John Haas, 90, the family patriarch, has an office in the company's headquarters on Independence Mall. The extended Haas family of about 40 members triggered the sale of the company when it informed Gupta that it would like to diversify its financial assets in late 2007.

John Haas was out of town today and could not be reached for comment. Haas has said previously that he is proud of the company.

David Haas, who sits on the company's board of directors, did not return a phone call.

The second-largest shareholder in Rohm & Haas is hedge fund operator Paulson & Co., of New York, which is led by John Paulson, who anticipated the subprime-mortgage meltdown. He bought a large stake in Rohm & Haas in 2008, believing the deal would close as the merger contract stipulated.

If it closes, Paulson's stockholdings would be $1.5 billion. But the holdings would fall substantially in value - maybe by half - if the deal collapses.

Paulson released a letter today saying the Michigan company should close the deal "or risk further damage to your shareholders by unnecessarily delaying the closing."

Paulson suggested that Dow cut its dividend to a penny a share. Rohm & Haas told Dow the same thing Tuesday. Rohm & Haas filed a lawsuit in Delaware state court last week to force Dow Chemical to honor terms of the merger contract.

Delaware Judge William Chandler 3d today denied a request by Dow Chemical to delay the trial, which is scheduled for March 9.

Dow Chemical's purchase price goes up each day because of a "ticking fee" in the merger agreement. The fee adds about $3 million a day, or $100 million a month, to Rohm & Haas. The fee began Jan. 10.

In December, a big part of Dow's financing for the merger disappeared when the Kuwait government walked away from a joint venture. The venture would have provided Dow Chemical $7 billion to $9 billion in cash for the Rohm & Haas purchase.

Bernick said the typical resolution for this dispute would be for Dow to pay damages.