First, I’m a fan of Mr. Matthews but too be honest he really over reached on this one and what gets me the most is it is a bit dishonest..
First here is his post…
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?
Well, maybe because it is not true in any aspect? I’ll not go into the arguments for or against the Rohm & Hass (ROH) deal but just deal with the erroneous claims above..
Here is the December 5th press release Mathews references. Note the date? December 5th. Kuwait pulled out of the JV on December 27th (that comes after the 5th) meaning the decision to lay off workers at money losing locations and sell other businesses has nothing to do with the Kuwait decision.
Further, Dow said in the release “The Company also expects to complete several divestitures within the next 2 years, which will result in a reduction of approximately 2,000 positions. As a result of the restructuring plan, the global workforce reduction and the divestitures, approximately 5,000 jobs will be eliminated across several functions, geographies and businesses.”
So 2,000 of the 5,000 are not even losing their jobs, as the businesses are for sale. They may even still end up working for a new JV Dow will be involved in, who knows? In short, they’ll be on someone else’s payroll, just not Dow’s.
Why the closings? Again, from the 8-k
– Due to the recent, severe economic downturn, a decision was made to shut down a number of facilities, including the following:
* Chlor-alkali manufacturing facility in Oyster Creek, Texas
* Styrene and styrene derivative manufacturing facilities in Freeport, Texas; Pittsburg, California; Terneuzen, The Netherlands; and Varennes, Quebec, Canada
* Facilities that manufacture NORDELTM hydrocarbon rubber in Seadrift, Texas, and TYRINTM chlorinated polyethylene in Plaquemine, Louisiana
With manufacturing firms the world over cutting back production, it would have been irresponsible for Dow to keep these facilities open as prices and demand plummet for the products they make and they become unprofitable.
“Why is Dow going forward with the deal” Matthews asks? Because ROH actually accepted a lower price from DOW in the auction for itself in return for a purchase agreement that gives Dow virtually no ability to cancel the sale save for regulatory objections. It is called a binding contract.
As for the “paying for the acquisition” claim. A cursory glance at the 8-K says “the Company will record a charge of $300 million to $400 million in the fourth quarter of 2008 for severance costs associated with the restructuring plan and the workforce reduction, and curtailment costs associated with Dow’s defined benefit plans.”……followed by this “Once fully implemented, these actions are expected to result in $700 million in annual operating cost savings by 2010.”
So, can anyone do the math for me? How does a charge of $400 million now, followed by saving maybe $700 million by the end of next year finance a $15.4 billion deal by the end of this week?
Anyone?
Bueller? Bueller?
Disclosure (“none” means no position):Long DOW, Sold ROH Jan. $50 puts this morning
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