Midland, Dow fates entwined

MIDLAND, Mich. - This area near the thumb of Michigan is a place of small towns, farmhouses, and one giant corporate citizen in great distress.

Dow Chemical Co., the region's biggest employer and civic booster, faces narrowing options in its disastrously timed decision to buy Philadelphia's Rohm & Haas Co. for $15.3 billion in cash.

Dow has all but said that the deal would ruin the nation's largest chemical company.

Dow slashed its dividend last month, something it didn't do in the Great Depression, and local residents fear the company could be sold off limb by limb.

Indeed, the Dow executives have said they're considering 12 asset-sale scenarios to raise cash for the stalled merger. "Everything's on the table," said one Dow official.

From luncheonettes to the union hall and philanthropic offices, Dow's predicament is the talk of Midland, a town of bowling alleys, roller rinks, parks, and one-way streets.

Many consider it Rockwellian for its quaint downtown, low unemployment, low crime, and cultural amenities, typically funded in part by Dow or foundations connected with former Dow executives.

Midland, population 41,000, has one of the highest per-capita concentrations of doctorates in the United States. Dow's headquarters is the reason.

On one side of town is the Dow Diamond baseball stadium, home to the minor-league Great Lakes Loons, an affiliate of the Dodgers organization. On the other side are the Dow library and Dow Gardens. The H is a renovated boutique hotel in the downtown area that is partially owned by the company.

"If Dow's on the ropes, Midland's on the ropes," bemoaned Judge John H. Hart, a fourth-generation Midlander who drives around town in a green pickup truck with 196,000 miles on the odometer. His remarks came over a "hamburger Monday" lunch at Sid's neighborhood restaurant and market.

The staggering $15.3 billion price for Rohm & Haas, agreed upon last July, is going up $3 million a day because of penalties. Dow is fighting a desperate legal battle in Delaware's Court of Chancery to stave off a final closing of the merger.

New York hedge fund operators, and many legal experts, say they believe Dow will lose in court. A trial is scheduled for March 9 before Judge William Chandler 3d. Chandler is expected to balance the binding contract with Dow's doomsday scenario if the merger happens.

Dow is accelerating a program to close about 20 plants globally and streamline its operations with fewer employees, company officials say.

Investment bankers are shopping some of Dow's prized assets, such as its 50 percent stake in Dow Corning Corp., a major local employer, and a highly profitable agricultural division with operations in Midland.

Finger-pointing takes place in private. Publicly, the community is rallying behind the beleaguered giant.

Hart, the district judge, has launched a grassroots support-Dow drive with lapel pins. The pins are emblazoned with M-Dow, which stands for a joint venture between Midland and Dow Chemical.

The letters are a play on K-Dow, the failed joint venture that got Dow into this mess. Dow and the Kuwait government planned a joint venture with Dow's commodity chemical and plastics businesses, naming it K-Dow.

The venture would have brought Dow $7 billion to $9 billion in cash for the Rohm & Haas acquisition. Kuwait canceled the joint venture in late December.

Without the Kuwait cash, Dow has to rely mostly on a one-year bank loan for funds to close on Rohm & Haas.

"Here's a limited-edition one," Hart said taking an M-Dow pin out of his coat pocket for a cashier at Sid's.

At City Hall, council members are asking what would happen if the company that pays 17 percent of the town's property taxes gets into deep trouble.

Dow has to get through this because "the alternative for us is rather hard to digest," said city manager Jon J. Lynch.

In a recent unannounced appearance, Dow Chemical chief executive officer Andrew Liveris spoke at a weekly Rotary Club luncheon of about 150 movers and shakers. Liveris has other meetings planned, officials say, and will hold a town hall-style meeting for employees, said Dow vice president Patti Temple Rocks.

"In a small town like this, rumors run rampant, so it's nice to work with facts," said Ann Fillmore, executive director of the United Way. "The social conditions in Midland County would be very different without their support," she said. Midland County had an average unemployment rate in 2008 of 6.4 percent, while the state average was 10.4 percent.

In a U.S. Steelworkers union hall on James Savage Road, Kent Holsing senses the powerful forces swirling around - and inside - the company. Dow and the union, which represents about 950 Dow hourly workers, had ironed out a lot of their differences in recent years, and Dow had invested in the local plants.

One recent weekend, people kept asking Holsing at a local hockey rink, "What's up with Dow? What's up with Dow?" Holsing didn't have answers, but he's not optimistic. "The turkey has come home to roost in Midland," Holsing said. "How did we get into this?"

The economic crisis has claimed some big victims in Michigan. Flint and Saginaw look like rusted-out hulks.

Many expected Dow Chemical to get through a bad economy fairly well. The company employs 6,000 in the state and has almost 16,000 stockholders in Michigan. Dow's balance sheet was strong, and the company has a long history of resiliency to business cycles.

But the chemical industry collapsed in December like it hadn't in recent memory, and Dow bled a river of red ink.

The company did not tie the merger to K-Dow or the broad chemical-industry conditions when it agreed to pay $78 a share for Rohm & Haas, for the total of $15.3 billion. Dow also is assuming about $3 billion in Rohm & Haas debt.

The Philadelphia company, founded in 1909, was considered a gem because of its marketing and intellectual property in specialty chemicals and an electronic-materials division. The company employs about 15,500, including 3,000 in the Philadelphia area.

Rohm & Haas was expected to wean Dow from the boom-and-bust commodity businesses. "I'm a big fan of Rohm & Haas," said Hart, the local judge. "What's not to like. A little cyclical with a little calm kind of thing. Everybody is looking for more stability."

At this point, though, the agreed-upon $15.3 billion price for Rohm & Haas is more than double Dow's own stock market capitalization of $6.6 billion. It also is more than the $8.8 billion stock market capitalization of Dow's lead bank in the transaction, Citigroup Inc. A deal announced Friday by Citigroup and the Treasury Department represents the third rescue attempt for Citigroup in the last five months and would convert government bailout funds in Citigroup into an ownership stake.

Rohm & Haas, in court filings and in interviews, says it has a strong merger contract and expects to conclude the deal. It sued in late January in the Court of Chancery to make that happen.

The Michigan company has the financial resources and assets to close the merger, Rohm & Haas contends. Dow secured $13 billion in short-term loans from a consortium of banks in 2008 and has $4 billion from Warren Buffett and a Kuwait authority.

Howard Ungerleider, Dow's vice president of investor relations, said the Dow-Rohm & Haas corporate entity would likely violate the loan convenants within months of closing the merger. Dow, he said, is trying to renegotiate the loan terms.

Now is the time for Liveris to make tough choices, said Raj Gupta, Rohm & Haas' chief executive.

"All the logic of why these companies came together is the same now as it was six months ago," Gupta said at a meeting with Inquirer editors Feb. 10. "There is absolutely no reason for this enterprise to fail," he said of a post-merger company.

The stalled merger has harmed Rohm & Haas, Gupta said. One unexpected consequence of the merger's long gestation waiting for government approvals is that speculators and hedge funds bought millions of shares in Rohm & Haas, altering the once-stable texture of the company's shareholder base. Gupta said he would like a "reasonable proposal" from Dow for a path to the finish line.

Timothy G. Nash, a vice president at Northwood University in Midland, said he believed that a way of life was in the balance for the city and Dow. The city would not be what it is without the civic-minded company, he said.

"From a purely self-interested perspective, maybe they are not as heartless as other companies might be," said Nash at breakfast in a downtown restaurant.

If Dow has to close the merger at the $78 a share, Nash said, he believes the company "would have to gut Philadelphia and sell businesses that it doesn't want to. It's a difficult economy, and it's a precarious position that Dow is in, to say the least."