NEW YORK - Dow Chemical Co (DOW.N) faces an uphill battle in trying to convince a Delaware court that it should disregard its agreement to buy rival Rohm and Haas Co (ROH.N) on the basis that the deal could jeopardize both companies.
After Dow laid out its legal defense for delaying or walking away from the more than $15.3 billion deal on Tuesday, lawyers said Rohm appears to have the stronger argument in the case.
Dow argued in a 62-page filing with the Delaware Chancery Court that it cannot responsibly go through with the takeover due to "a confluence of dramatic and unforeseeable shocks" that have hit the company, the chemical industry and the economy.
It painted a picture of credit downgrades, loan defaults and difficulty with suppliers that Dow said would keep the company from doing business effectively.
"I don't think that's a winning argument," said Howard Berkower, a partner at law firm McCarter & English.
Berkower said Dow is essentially throwing itself at the mercy of the court and hoping the judge might think twice about forcing them to complete the deal.
"Their best case scenario is that somehow the court gets cold feet," he said.
But Chancellor William Chandler, who is hearing the case, also faces a difficult decision if he were to invalidate the merger deal.
"Does he want to be the judge that basically says. 'Who knows whether a merger agreement can hold up?'" said Adam Cohen, a lawyer and corporate bond covenant analyst at Covenant Review. "To me, that kind of uncertainty in the law would be disastrous.
DIRE DEAL FOR DOW?
Dow agreed to buy Rohm and Haas last July for $78 a share -- a 74 percent premium -- to broaden its product offerings in higher-margin markets such as paints, coatings and electronic materials.
The companies signed a very tight merger agreement, which basically allowed Dow to walk away from the deal only if both companies agreed or if the takeover did not receive antitrust approval.
Although Dow has a $13 billion bridge loan as well as $4 billion in equity financing for the deal, the company balked at closing after a key joint venture with Kuwait fell apart. Dow had intended to use proceeds from that transaction -- a $17.4 billion plastics joint venture -- to help fund the Rohm deal.
While the company said it would almost certainly default on the bridge loan if the deal were consummated, proving that the situation is dire will be difficult. Some analysts have already said the combined company should not be a bankruptcy risk.
"Dow will need flexibility with regard to their (loan) covenants," said HSBC analyst Hassan Ahmed. "But, at the end of the day, they will be free cash flow positive."
Nonetheless, both companies have more than 55,000 employees, and the prospect of grounding a company like Dow could give Chancellor Chandler pause.
Vinson & Elkins partner David Harvin, who represented Huntsman Corp (HUN.N) in a similar case, said Dow is basically staking everything on the proposition that they can convince the Chancery Court not to issue an order of specific performance, which would force it to complete the deal.
"They offer some pretty darn persuasive reasons about why you shouldn't: massive credit defaults, looming bankruptcy, employee layoffs, injury to local economies, and so on. I think the view is if they can avoid specific performance, than they just have a damage claim to deal with," Harvin said.
And the uncertainty created by the lawsuit may be enough to do what Dow has been unsuccessful in accomplishing so far: coaxing Rohm back to the table to renegotiate.
That route has an ally in Chancellor Chandler, who has already said he hopes for a settlement in the case.
"There is a fundamental business problem here," Chandler said in a conference call with lawyers last week, "and it is always my view that business problems are better resolved by business people."
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