The Dow Chemical Company (DOW)

The Rohm and Haas purchase was a complete debacle. Andrew Liveris should have been fired over the mismanagement of that M&A decision. The dividend was reduced from ~$0.37 to $.05. The crisis in this company was at one point so strong, there was a small possibility that they may have been forced into bankruptcy (as evidenced by the $5+ stock price in March). But not anymore.

The Rohm and Haas purchase has been completed. Since the shotgun wedding of these two goliaths, DOW has had to take out a bridge loan of $9.2BB and issue additional stock in order to pay for the $15BB purchase price of ROH. DOW has correctly recognized they now have a large debt problem (duh!). DOW has begun breaking off non-core businesses, such as Morton and its interest in a refinery in the Netherlands, and putting them up for sale. DOW is using the money from these sales to pay down debt from the bridge loan. It will take some time, but DOW will successfully pay back the bridge loan and once again be prepared to grow its business.

The face of DOW’s commodity business is changing dramatically. The purchase of ROH will be the catalyst for DOW to shift its business model from a commoditized chemicals company, to a more specialized chemicals firm that will enable it to generate higher operating margins and more cash. It will also help the company to avoid the earnings troughs that come about every 5 years and drive its stock price into the tank. It will still be in the basic chemicals business, but those units will not dominate the largest portion of the overall company earnings. Its exposure to peaks and troughs will have been greatly mitigated.

The purchase of ROH has enabled the company to become a growth company once more. They can leverage their existing customer base and have an expanded product line / offering beyond the commoditized chemicals. The margins captured on the newer lines are going to generate much higher profits / cash with much less volatility. This may not play out for a few years, but I do believe this will be a multi-bagger over time. $15 a share is a steal considering future growth and cash generation.