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Warren Buffett
Warren Buffett
As Lenders Struggle, Buffett Becomes M&A Financier
July 15, 2008 06:03 AM
by
Anne Szustek
The $18.8 billion purchase of Rohm & Haas is indicative of Dow Chemical—and Berkshire Hathaway’s—strategies to develop a competitive advantage.
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Dow Chemical agreed July 10 to take over the specialty chemical firm at a 74 percent premium over the previous day’s closing share price.
Pushing the transaction along was conglomerate Berkshire Hathaway, which is to become the chemical titan’s largest shareholder after putting $3 billion toward the Rohm & Haas buyout. In addition, sovereign wealth fund Kuwait Investment Authority put in $1 billion.
Dow CEO Andrew Liveris said on CNBC that as early as May, Berkshire chief Warren Buffett saw in Dow stock “more value there than what the current price indicated.”And BloggingStocks’ Tom Taulli writes that Buffett’s move “is evidence that the smart money sees lots of value from mergers and acquisition deals.”
Buffett’s backing of Dow is the latest deal to tap into the Berkshire Hathaway wellspring. In April, the conglomerate lent $4.4 billion in debt financing to Mars for its $23 billion purchase of Wm. Wrigley Jr. Co, as well as buying a $2.1 billion minority stake in the chewing gum giant.
“Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals,” writes Money Morning. The deal between Mars and Wrigley, both name-brand candy companies, “fits the bill”—and is roughly analogous to the chemical duo of Dow and Rohm & Haas.
The Wrigley takeover “also shows how the debt market has shifted to cause acquirers to back deals with more funds,” writes Mergers Unleashed. Dow Chemical certainly fits into this category as well.
Pushing the transaction along was conglomerate Berkshire Hathaway, which is to become the chemical titan’s largest shareholder after putting $3 billion toward the Rohm & Haas buyout. In addition, sovereign wealth fund Kuwait Investment Authority put in $1 billion.
Dow CEO Andrew Liveris said on CNBC that as early as May, Berkshire chief Warren Buffett saw in Dow stock “more value there than what the current price indicated.”And BloggingStocks’ Tom Taulli writes that Buffett’s move “is evidence that the smart money sees lots of value from mergers and acquisition deals.”
Buffett’s backing of Dow is the latest deal to tap into the Berkshire Hathaway wellspring. In April, the conglomerate lent $4.4 billion in debt financing to Mars for its $23 billion purchase of Wm. Wrigley Jr. Co, as well as buying a $2.1 billion minority stake in the chewing gum giant.
“Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals,” writes Money Morning. The deal between Mars and Wrigley, both name-brand candy companies, “fits the bill”—and is roughly analogous to the chemical duo of Dow and Rohm & Haas.
The Wrigley takeover “also shows how the debt market has shifted to cause acquirers to back deals with more funds,” writes Mergers Unleashed. Dow Chemical certainly fits into this category as well.
Headline Links: Dow Chemical takeover to add value to company brand
BB&T Capital Markets analyst Frank Mitsch was quoted as saying of the merger in The New York Times, “It’s going to be a challenging environment for Dow. It’s a heck of a premium, especially at a time when industry fundamentals are suffering.”
Source: The New York Times (free registration may be required)
Morningstar analyst Ben Johnson told BusinessWeek that Dow Chemical’s takeover of Rohm & Haas is a “solid strategic move.” The purchase should help Dow make further inroads in the specialty chemical segment.
Source: Business Week
Video: ‘Dow/Rohm & Haas Deal’
Dow Chemical CEO Andrew Liveris said on CNBC that in May Berkshire Hathaway had strong confidence in Dow Chemical stock, and that Buffett “noticed there was more value there than what the current price indicated.”
Source: CNBC
Background: Credit crunch devastates lenders, Berkshire Hathaway investment activity
Credit crisis hits lenders hard
Wachovia, America’s fourth-largest bank, forced CEO Kennedy Thompson into retirement in June after the bank suffered major losses. Such corporate changes have become commonplace in the wake of the country’s housing slump. Merrill Lynch’s longtime CEO Stan O’Neal resigned in October after unveiling the company’s worst-ever quarter, and Citigroup chief Charles Prince met the same fate in November.
Source: findingDulcinea
Earlier in 2008, U.S. regulators were scrambling for ways to rescue bond insurers—who help fund public projects—from the sub-prime crisis.
Source: findingDulcinea
Berkshire Hathaway’s recent investments
In May Warren Buffett told an audience of 31,000 that he still sees investment opportunities in U.S. stocks and bonds, during Berkshire Hathaway’s annual meeting for shareholders in Omaha, Neb.
Source: The Washington Post (free registration may be required)
On April 28, Warren Buffett said on CNBC of Berkshire Hathaway’s debt financing of the Mars/Wrigley deal, “There’s really nothing that can go wrong with something like the Wrigley and Mars brands.”
Source: Money Morning
During 2007 Berkshire Hathaway was buying up shares of Kraft Foods, holding 8.6 percent of the company by the end of the year. Berkshire also had sizable stakes in pharmaceuticals company GlaxoSmithKline, Procter & Gamble, Anheuser-Busch, U.S. Bancorp and The Coca-Cola Co. as of end-year 2007. MarketWatch compiled a list of Berkshire Hathaway’s end-2007 shareholdings.
Source: MarketWatch
Opinion & Analysis: Mergers and acquisitions help Berkshire navigate tough market
The Rohm & Hass buyout “is evidence that the smart money sees lots of value from M&A deals—especially transformative ones. … In order to compete on a global scale, there is a need for economies of scale,” writes Tom Taulli on BloggingStocks. But “it’s not easy to make such a transaction in a tough economic environment. Plus, Dow is paying a massive premium—thus setting a high bar for performance.”
Source: BloggingStocks
“While the $23 billion paid for Wrigley represents a significant premium over its market value, the structure of the deal … also shows how the debt market has shifted to cause acquirers to back deals with more funds,” writes Mergers Unleashed.
Source: Mergers Unleashed
BloggingStocks’ Tom Taulli writes that acquisitions are the hot investment ticket in the current market. A weak dollar has made U.S.-based stock an easy buy for European investors, as was the case in InBev’s purchase of Anheuser-Busch. Lower valuation and lesser market competition from private equity buyers are also playing into the trend.
Source: BloggingStocks
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