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Buffett Puts $10 Billion Into Dow Chemical Takeover

Buffett Puts $10 Billion Into Dow Chemical Takeover
By Simon Maierhofer
July 11, 2008

SAN DIEGO - (ETFguide.com) - “The addition of Rohm & Haas is game-changing for Dow” said Andrew Liveris, CEO and Chairman of Dow Chemical Co. (DOW).

In a deal worth more than $15 billion, Dow agreed to buy rival Rohm & Hass Co. (ROH). With the new addition, Dow hopes to propel its growth in the higher-margin specialty chemicals market, which may provide a buffer against ups and downs in basic chemical sales.

Dow has annual sales of $54 billion and 46,000 employees worldwide. ROH has annual sales of $9 billion and 15,000 workers employees worldwide. Liveris said that before the deal Dow had expected earnings per share of $3.50 around 2010 and 2011, when it forecasts the next industry "trough." With Rohm & Haas, he said that should increase by $1 to about $4.50 per share. In 2015, when Dow next forecasts an industry "peak," Liveris says EPS should exceed $10 per share.

The deal values Rohm & Haas (ROH) at $78 shares. $78 is 25% above ROHs all time high. CFO Geoffery Merszei said the quality and reputation of Rohm & Haas’ business brands, products and technologies – as well as its work force – make the premium worth paying.

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And we know any deal that is blessed with Warren Buffett’s involvement can’t be bad. The $78 per-share deal includes money from a Kuwaiti sovereign wealth fund ($1 billion) and Warren Buffett’s Berkshire Hathaway ($3 billion).

Mergers are often tricky to capitalize on. Usually one company’s stock price takes off while the other corrects. ROH shot up 65% on the news while DOW consolidated 4.2%.

 

ETFs provide effective exposure to industry sectors and individual stocks.

Below is a list of ETFs that include DOW and ROH:
 

Name

Ticker

Exp.

Weighting

PowerShares Dynamic Basic Material

PYZ

0.60%

DOW – 2.54%
ROH – 2.38%

PowerShares FTSE RAFI Basic Material

PRFM

0.60%

DOW – 13.44%

Materials Select Sector SPDRs

XLB

0.23%

DOW – 8.7%

iShares Dow Jones US Basic Materials

IYM

0.48%

DOW – 6.13%

Vanguard Materials ETF

VAW

0.22%

DOW – 5.96%

With a weight of only 3.12%, the materials sector is the smallest industry sector of the S&P 500. There are 28 Materials stocks in the S&P 500, 13 have a market cap of $10 billion+, 15 have a market cap of $1.75B - $9.9B.  YTD the materials sector is up 2.64%. The S&P 500 (Ticker: SPY) is down 14.71%.

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