Will Buyout Brouhaha Put Dow Chemical In Play?

The irony of Thursday’s spectacle at Dow Chemical, which fired two senior executives for allegedly engaging in rogue negotiations to sell the company, is that it may have whetted investors’ and suitors’ appetite for a Dow takeover. “I find it interesting how private equity had penetrated the highest levels of the company,” HSBC Securities analyst Hassan Ahmed told Bloomberg News. The announcement “is telling us that there are parties interested in making that bid.” Shares of Dow rose 2 percent Thursday as some suggested that, while these talks appear to have been bungled, Dow could still make an attractive takeover target for Middle East investors or private equity firms. Breakingviews said this may be an example of “the wrong people doing the right thing.”
The Financial Times’s Lex column said the imbroglio highlights the “ever-present conflicts involved in management buyouts.”
There is a dispute, however, over whether the unauthorized talks really happened. One of the fired executives has already denied Dow’s accusations, telling TheStreet.com on Thursday that there may be “some kind of scapegoat going on.”
Dow Chemical, meanwhile, continues to reject the notion that it may be sold, a rumor that has been reported several times in British newspapers this year. A Dow spokesman told the Detroit Free Press that it is considering about 60 deals, ranging from joint-venture acquisitions to divestitures, but none involves the entire company.
Dow has a lot of cash, and many consider its shares to be undervalued — two factors that make for an appealing buyout candidate. But analysts also see plenty of reasons why a buyout is unlikely, including Dow’s size (its market capitalization is about $44 billion), its highly cyclical earnings and the difficulty of breaking the company up.
Details of the executives’ undercover negotiations began to emerge yesterday after Dow Chemical fired the two executives — J. Pedro Reinhard, a director and senior adviser to management, and Romeo Kreinberg, an executive vice president — saying they were “engaged in business activity that was highly inappropriate” involving “unauthorized discussions with third parties about the potential acquisition of the company.”
The New York Times reports that that both men engaged in talks with J.P. Morgan Chase about the prospect of a buyout and encouraged the bank to seek possible bidders, although the report notes that it is unclear whether the two executives had hoped simply to put Dow Chemical in play or had sought to be part of the management of an acquired company.
In any case, J.P. Morgan worked on the project for at least a month, running numbers on the business based on public filings and eventually reaching out to several private equity firms including Kohlberg Kravis Roberts & Company and the Blackstone Group, according to the Times. The firms apparently held meetings and briefly crunched some numbers, but their interest soon cooled.
J.P. Morgan was never formally retained by Dow Chemical to pursue a sale, and it is unclear whether Mr. Reinhard and Mr. Kreinberg represented themselves to the bank as authorized to engage in such preliminary discussions.
Yet the private talks soon became public on Feb 25, when The Sunday Express reported that three private equity firms — Kohlberg Kravis Roberts, Blackstone Group and the Carlyle Group — were ready to bid $54 billion for Dow.
The original report set off a firestorm at Dow Chemical’s headquarters in Midland, Mich.
Dow Chemical’s chief executive, Andrew Liveris called J.P. Morgan’s chief executive, James Dimon, to find out what was happening, according to The Times. When Mr. Dimon learned that Mr. Liveris was not interested in a buyout, it apparently stopped work on the project.
Furthermore, an executive from Blackstone reportedly called Mr. Liveris to tell him that the firm was not involved with a buyout proposal.
On Sunday, however, The Sunday Express ran another report of a possible buyout, this one specifying that Dow Chemical was about to be bought for $50 billion, with much of the money coming from the Middle East, in particular Oman.
“The fact that conversations had been held with potentially realistic buyers of the company suggests that those buyers aren’t going to go away,” William Batcheller, who helps oversee $85 million, including Dow shares, as director of investment management at Butler Wick, told Bloomberg.
On Monday, Dow, which usually does not comment publicly on deal speculation, issued a statement denying that it was in play. And on Tuesday, the chief executive, Mr. Liveris, appeared on CNBC to reiterate the denial.
Dow also decided that it was time it found out exactly why the talk persisted.
Christopher R. Huntley, a Dow spokesman, told The Times that high-level executives and directors started calling their contacts in the financial world, trying to trace the rumor to its source. One of them struck gold: “Someone in a position to know pointed at Romeo and Pedro,” Mr. Huntley said.
But now that the company has managed to rout the alleged secret deal makers, will it find itself — albeit unwittingly — in play?
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