Investing

Dow Chemical (DOW) Gambles Inflation Will Stay With Rolm and Hass (ROH) Buy-Out

Dow Chemical (DOW) recently raised prices on a number of its products by 20%. It said that the price of the core commodities it used in manufacturing was simply up too much. Wall St. was not willing to buy in to the theory that Dow could keep the volume of its sales up while passing significant price increases on to its customers. Consequently, DOW sits near its 52-week low, trading at $33.96 down from a period high of $47.96.

But DOW has decided to double down on inflation in a manner which seems almost reckless. It will takeover  Rohm and Haas, paying $78 per share in cash. Berkshire Hathaway will put up $3 billion toward the $18.8 billion purchase price, but that does not make the move any safer.

ROH is also trading near its 52-week low, changing hands at $48.33. The premium DOW is paying for its shares is spectacular, especially in a tight credit market and a slowing economy.

DOW has only one rational reason for the move. It still believes that its customers and the ROH customers are willing to weather and pay higher prices for DOW’s chemicals and the building and construction, electronics, and packaging produces that ROH makes.

Commodities prices are unlikely to fail within the foreseeable future. That means that DOW does not have the "out" of a drop-off in its cost of goods sold.

That leaves one window and one window only. The world is heading into an inflation cycle and DOW can make money on that. Its customers need it too much.

Maybe.

Douglas A. McIntyre

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