Dow Chemical (DOW) was supposed to buy Rohm & Haas (ROH). Now, it may be the other way around. Dow can’t close the deal and Rohm is suing to get it finished.

Dow has quickly gone from being viewed as one of the most aggressive multinationals in the world to a firm which is in very deep trouble. The Rohm deal was a bold play for combining two similar companies to create big potential cost savings and a broad product line for common customers.

According to the AP, "The suit, filed Monday in Delaware court, alleges Dow is intentionally breaching its obligation to complete the deal even though it has received all regulatory approvals and has the money available."

Dow just lost a deal for a large joint venture with Kuwait that cost the US company as much as $7 billion.  Rohm claims that Dow has access to other money from banks and Berkshire Hathaway (BRK). But, does Dow really have the ability to tap all of that cash?

Over the last eighteen months, banks have shown a willingness to walk away from M&A and LBO transitions that they think are not financially viable. The banks are willing to protect their capital at the risk of being sued. Bank balance sheets are that tight. The Dow lending facility may fall into the "too dangerous to fund file."

The Rohm claim that Dow has access to $17 billion of pledged capital may be true on paper, but that may be the only place that it is true.

The legal system will get the opportunity to see whether Dow is liable. If the suit plays out the way several similar ones have, one of three things will happen. Dow will buy Rohm & Haas at a discount because Rohm sees it as the best option for its shareholder even at a reduced price. Or, Rohm may collect several hundred million in damages from Dow for breaching the buyout contract. The last option may be the most likely. If Dow and Rohm can prove that banks who had made lending commitments to Dow are walking away, both of the chemical companies can sue those financial firms.

Then, the banks can use TARP money to cover the costs of breaking their word..

Douglas A. McIntyre

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