The Dow Chemical Company Merger Analysis

1
The Dow Chemical Company Merger Analysis

• Robert Swarts
• Maxim Karnaoukhov
• Madhu Kutty
• Rebecca Graham

2
Introduction

• On August 4, 1999, Dow Chemical Company and
  Union Carbide Corporation announced a definitive
  merger agreement for a tax-free, stock for stock
  transaction.

3
Recommendation

• After an evaluation of
• Industry Analysis
• Trends in Mergers and Acquisitions
• Dow Chemical and Union Carbide Synergies
• Financial Issues

Our recommendation to Pension Fund Management is
to HOLD.
4
Industry Analysis

• The chemical industry produces 2 percent of
  the total U.S. GDP and 12 percent of the value of
  all U.S. manufacturing.

5
Chemical Industry Growth

• The chemical industry is a mature market with an
  overall five-year growth rate of .91 versus the
  Standards and Poors 500 rate of 17.33.
• Segmentation of Growth within the industry
• Fine chemicals
• Photographic chemicals, polymers, and textile
  additives
• Polyethylene

6
Dow Chemicals Two-Part Strategy

• 1. Improve the portfolio and become the low cost
  producer with a more consistent earnings stream
  and financial flexibility.

• 2. Growth through economies of scale, broadening
  of the product mix, and an expansion of the
  specialty business.

7
Synergies

• The Dow Chemical and Union Carbide merger.
• Creates the worlds second largest chemical
  company.
• Dow will control 20 percent of the worlds
  polyethylene market.
• Dow will control 40 percent of the U.S.
  polyethylene market.

8
Product Line

• The product mix shifts Dows line towards
  performance chemicals and specialties and away
  from commodity chemicals.
• Consolidates the fragmented ethylene chain.
• Supports the goal of becoming the low cost, mass
  producer.

9
Cost and Revenue

• Cost Synergies
• Cost savings of 500 million per year
• Revenue Projections
• Combined revenues of company will be 24 billion
• Operating income will be more than 3 billion
• Assets will be more than 30 billion

10
Geography

• Combined company will operate in 168 countries.
• Carbide has consolidated operations in U.S. and
  Dow is the largest chemical company in Europe.
• Low cost access to Asia due to Carbide operations
  in Kuwait and Malaysia.

11
Geographic Impact
12
Management

• CEOs of Dow and Union Carbide have known each
  other for more than 20 years. The merger allows
  both leaders to remain in executive positions.

13
Success of Merger - premium paid.
14
Significant Aspects of this Merger

• Cash savings of 500 million in the first two
  years due to synergies compensates for the cash
  outflow.
• No expected shut downs due to excess capacity.
• Considering the price earnings ratio, the price
  Dow paid for Union Carbide is justified.

15
Price Earning Ratio
16
Projected EPS Year Growth Rate

• Projected Earnings per share growth rate for
  the next five years indicates that Dow s EPS
  growth rate is better than that of the industry
  and the market.

17
Conclusion

• The new Dow Chemical Company appears to be a
  solid investment.
• Synergies including product line, geography, and
  leadership are positive.
• Financial forecast indicates that the risk of the
  merger is outweighed by the reward.
• Increase in market share, blending of the
  cultures, and economies of scale will lead Dow
  Chemical to future success.