Marking what The Dow Chemical Co said is a pivotal point in its transformation, the Michigan-based diversified chemical company said yesterday it will acquire the semiconductor materials supplier Rohm and Haas for $78 per share in cash of Rohm and Haas's outstanding common stock. The deal is worth $18.8 billion.

With this acquisition, Dow believes it will be the world's leading specialty chemicals and advanced materials company, by combining the two organizations' technologies, geographic reach and industry channels.

This transaction also comes as part of Dow's moves to become an earnings growth company with reduced cyclicality, kicked off by a joint venture deal last December with Petrochemical Industries Co of the State of Kuwait.

The collective impact of the two deals will represent 69% of Dow's total sales, on a 2007 pro forma basis, compared with 51% prior to these transactions, Dow noted.

Financing for the acquisition of Rohm and Haas includes an equity investment by Berkshire Hathaway and the Kuwait Investment Authority in the form of convertible preferred securities for $3 billion and $1 billion respectively.

"After an extensive analysis of acquisition opportunities in the marketplace, it became clear that Rohm and Haas is the ideal company to accelerate Dow's transformation. The addition of Rohm and Haas' portfolio is game-changing for Dow, enabling us to accelerate the growth of our performance business portfolio and affording us a strong position in the global specialty chemicals and advanced materials sectors. Rohm and Haas brings us access to new and exciting technologies and offers an extended reach into emerging geographies, all of which are highly complementary to Dow's existing platforms and value growth priorities," commented Andrew N. Liveris, Dow chairman and CEO, in a statement.

Dow believes Rohm and Haas provides it with an excellent position in a number of industry segments that are poised for significant growth given long-term market megatrends, most notably in the electronic materials and coatings segments.

In addition to its platforms in these segments, Dow said Rohm and Haas participates in a number of other areas such as water solutions, adhesives, personal care, biocides, and building and packaging materials, and the acquisition will unlock value from Dow's existing portfolio.

This will be done by delivering a range of new products and technologies to these high growth downstream sectors, while at the same time expanding the product offering for sale through Dow's own existing market channels.

Further, Dow expects the transaction to be meaningfully accretive to earnings in the second year following completion, with pre-tax annual cost synergies expected to be at least $800 million per year and key areas of cost savings including increased purchasing power for raw materials; manufacturing and supply chain work process improvements; and the elimination of redundant corporate overhead for shared services and governance.

Dow also expects the transaction to result in revenue synergies through the application of each company's technologies and as a consequence of the combined businesses' broader product portfolio in key industry segments with strong global growth rates.

In the electronics industry, Dow said its expertise in polymer science will enhance Rohm and Haas' development of display films and other electronic materials.

Dow plans to establish an advanced materials business unit at Rohm and Haas' current headquarters in Philadelphia and intends to contribute complementary Dow businesses to Rohm and Haas' existing portfolio, such as coatings, biocides and personal care with total revenue of this new unit approaching $13 billion.

The Rohm and Haas corporate name will be maintained for this advanced materials business unit in order to capitalize on the brand value.

To allow for the continued stewardship of Rohm and Haas' corporate culture and assets two Rohm and Haas directors will join the Dow board of directors, bringing the total size of Dow's board to 14.

The transaction has been unanimously approved by the boards of directors of both companies but remains subject to approval by Rohm and Haas shareholders, customary conditions and receipt of regulatory approvals. The companies believe the transaction will be completed by early next year.

By Ann Steffora Mutschler, Senior Editor - Electronic News