Dow Chemicals' (DOW) acquisition of Rohm & Haas (ROH) in 2008: For this entire question use only the information given herein. Assume that the value of synergies is $5 billion. Disregard personal taxes. DOW has 936 million shares outstanding and ROH has 195.2 million shares outstanding. The pre-merger stock prices of DOW and ROH were $33.96 and $44.83 respectively.

A. If DOW pays cash $78 per share for each of the 195.2 million shares of ROH, what is the distribution of the synergy between the original stock holders of DOW and the stock holders of ROH?

Answer :

Total Benefit to the stock holders of ROH = Cash Payment to the stock holders of ROH - Pre merger Value of ROH

TotalBenefit to the stock holders of ROH =78*195.2-44.83*195.2

TotalBenefit to the stock holders of ROH =6474.78 Million

Since TotalBenefit to the stock holders of ROH is6474.78 Million which is greater than value of synergies, it means distribution of synergy is 100% transferred to stock holders of ROH and also provided additional money from their existing shareholders value .

Therefore,

Distribution of the synergy to the original stock holders of DOW = 0

Distribution of the synergy to stock holders of ROH = 5 Billion x 100% = 5 Billion

B. Assume that DOW announces the offer to purchase ROH for $78 cash per ROH share. The post-announcement stock price of DOW and ROH is $32.52 and $73.62 respectively. Assuming that the final outcome of the offer will be known in 1 year and the one-year interest rate is 3%. What would be the strategy of a merger 'arbitrager' who believes that the deal will eventually be completed successfully as proposed?

Answer:

If the merge is going to be completed successfully, then the share prices of DOW and ROH should converge eventually. Therefore, a strategy that a merger 'arbitrager' could do is to borrow money at the interest rate of 3%, to then short ROH stock and long DOW stock. This is because since they will converge, DOW stock is underpriced and will rise and ROH tock is overpriced and will fall.

C. Suppose that instead of cash, the offer is an all-stock offer with an exchange ratio is 2.50-for-1 and that the post-announcement market reaction is still the same as in (b) above. What would be the strategy of a merger 'arbitrager' who believes that the deal will eventually be completed successfully as proposed? (Stuck on this)