Tuesday, January 06, 2009

Headline of the Day: “We’re Firing 5,000 Workers So We Can Make a Stupid Acquisition”


Tuesday, January 6, 2008: Dow Chemical admitted today that roughly 5,000 workers are being laid off in order to help pay the cost of acquiring Rohm & Haas at a price that makes no economic sense…


Actually, we made that up. Dow Chemical admits no such thing.

The company, which in July agreed to buy specialty chemical maker Rohm & Haas at a pre-Credit Crisis valuation of $15.4 billion—more than Dow’s current $14 billion market value—recently received a shock when Kuwait exercised economic prudence by backing out of a $9 billion joint venture that no longer made sense, thus depriving Dow of money to pay for Rohm & Haas.

So today, Dow released a whopper of a rationalization for not excercising its own economic prudence, in the form of a press release that begins as follows:

The Dow Chemical Company (NYSE:DOW) today announced a wide range of legal, operational and financial actions that will keep the Company on track to fulfill the transformational corporate strategy Dow has pursued since 2005.

Dow's strategy will continue to involve aggressive steps to establish Dow as a high-performance, earnings growth company organized around a strong portfolio of joint ventures and market-facing performance business divisions. Central to Dow's strategy is its commitment to retain a strong investment grade rating and to maximize shareholder return.

If that last sentence is suppposed to bear any semblance to reality, how is it possible that Dow continues to pursue the acquisition of a chemical company at a pre-Credit Crisis price which even Wall Street’s Finest consider to be as much as, oh, a third too rich?

Well, one way is layoffs, as today’s press release trumpets:

Since the onset of the global financial crisis in September 2008, Dow has taken aggressive actions to reduce capital spending, working capital and operating expenses. With further weakening in the global economy, Dow announced a restructuring in December which will reduce the Company's workforce by approximately 11 percent, close facilities in high-cost locations and divest several non-strategic businesses. "We undertake actions like these with a very clear outcome in mind -- to preserve our financial flexibility and improve our financial performance.

In the final paragraph of the release, labeled “About Dow,” the company claims 46,000 employees worldwide.

So the real headline should be more like, “We’re Firing 5,000 Workers So We Can Make a Stupid Acquisition.”

Why can't they just say it?



Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.

8 comments:

John Sweda said...

This may not be fresh news, and circumstances may have changed, but
Dow had planned to hire 3,000 employees in India (from http://economictimes.indiatimes.com):

Job slump? Dow Chemicals to hire over 3,000 in India
25 Dec 2008, 1115 hrs IST, Piyush Pandey, ET Bureau

MUMBAI: DOW Chemicals is planning to increase its head count in India to over 3,000 employees, at a time when the company had when the company had announced the
firing of 5,000 employees globally.

Early this month, the company announced that it would cut 5,000 jobs, shut 20 facilities, temporarily idle 180 plants and reduce the company’s contractor work force by about 6,000 due to global meltdown.

In contrast, Dow is not only hiring
in India, it is also evaluating options to set up a performance chemicals park in the country.

north fork investor said...

How about the rule of law you moron. DOW and ROH have a contract. If DOW doesn't close at $78 within two business days of getting their regulatory approvals, DOW will have breached its contract. DOW can terminate it under certain very limited circumstances none of which are available to it at least not yet. The rule of law and the sanctity of contracts are why we all love the good ol US of A and don't live in Stalinist Russia or Communist China. Kabbish?

dearieme said...

It's been obvious for some time that the US car industry is failing in much the same way as the British one did. Now Dow seems to be emulating our former chemical company ICI. Predicting the future is easier when it's all been done before. Thus ends the most interesting civilisation since the Greeks and Romans. Though perhaps a Byzantium may linger on.

Anonymous said...

It's disappointing because minus this ridiculous price, Dow is a pretty stellar company.

tech98 said...

The rule of law and the sanctity of contracts are why we all love the good ol US of A and don't live in Stalinist Russia or Communist China. Kabbish?

I think we need an economic version of Godwin's Law that triggers any time someone compares an economic action to "Communist China" or the "Soviet Union". There are one or two other countries in the world.

RichL said...

The ROH deal is an example of why it's smart to split the role of CEO and Chairman. A check on one man decision making would have been helpful, because the money-to-be was burning a hole in his pocket.

The company culture doesn't seem to encourage discussion and debate. IMHO, why would the extraordinary situation of Reinhart and Kreinberg trying to solicit bids for Dow have occurred, other than it was impossible for them to have a discussion with Liveris about selling the company??

kg79 said...

I think north fork has it above....
unfortunately word is that Rohm & Haas actually reduced the price slightly during initial negotiations to get an airtight contract... overpaying is bad, but paying a bunch of lawyers a ton of money, getting in a nasty fight, and then overpaying is worse.

I sure wish they could get out of it though...

Kieran said...

This is a tune that's been replayed across multiple sectors. Those who levered up to make big acquisitions at 2007/early 2008 prices have been in a very difficult position in late 08/09. Rio Tinto comes to mind. Its stock fell 90% in 2008 when its purchase of Alcan turned into out to be overpriced to the tune of about $20 billion.

On a side note, I just finished your book. It was a wonderful read. Along with Lowenstein's book, it was the most insightful and even-handed Buffett commentary I've read. Great work!