The credit crunch is not going away, and as a result, there has been a sharp fall-off in leveraged buyouts (LBOs). Basically, only relatively small LBOs -- between $1 billion to $2 billion -- are getting done.
But there is a bright spot: strategic acquisitions. If anything, we are seeing a variety of mega deals in this category. A survey from Dealogic shows that – as of June 25 – there were $597 billion in strategic M&A transactions, only 2% down from last year's total.
Investment bankers are keeping busy with chemical companies lately. For example, yesterday The Dow Chemical Company (NYSE: DOW) announced a $15.4 billion buyout of Rohm & Haas (NYSE: ROH), which even included an investment from Warren Buffett.
Then today, we got another deal. That is, Ashland Inc. (NYSE: ASH), which is the #1 chemical distributor in the US, has agreed to pay $3.3 billion for Hercules Inc. (NYSE: HPC). The consideration is a mixture of cash and stock. Moreover, Bank of America Corporation (NYSE: BAC) and Scotia Capital will provide the bank financing on the transaction.
Hercules got its start in 1912, as a spin-off from E.I. du Pont de Nemours & Company (NYSE: DD). Now, the company is a major provider of water-treatment chemicals (with a focus on the pulp and paper industries). It's an attractive segment – especially because of the opportunities in emerging markets.
When it comes to a mega M&A deal that involves an old-line company and a founding family, Warren Buffett is on speed-dial. For example, his firm, Berkshire Hathaway (NYSE: BRK.A), provided $4.4 billion in financing for the Wrigley Co. (NYSE: WWY) buyout.
Now, Warren is plunking down some more cash on another big deal: Dow Chemical Co's (NYSE: DOW) $18.8 billion cash purchase of Rohm & Haas Co. (NYSE: ROH). In this case, the contribution comes to about $3 billion (in the form of a convertible preferred structure, which has a nice 8.5% coupon rate). As a result, Berkshire will become Dow's largest shareholder.
Yes, the US economy continues to be bleak and there is lots of fear. But, for long-term investors – such as Warren – this is an ideal time to pick up juicy opportunities.
In fact, this is evidence that the smart money sees lots of value from M&A deals – especially transformative ones. Then again, in order to compete on a global scale, there is a need for economies of scale.
For the most part, Dow focuses on petroleum-based chemicals. As for Rohm & Haas, it deals primarily with adhesives, personal care products, paints and so on. In other words, Dow is trying to find ways to diversify things.
Although, the deal for Rohm & Haas is no slam dunk. 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.
U.S. stock futures were lower Friday morning after General Electric (NYSE: GE) reported its flat quarterly profits and as concerns remain over the problems at government sponsored mortgage companies Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Some economic data is also on tap, but barring any breaking announcements, it seems stocks will drop at the start of trading, especially if oil continues its way up.
On Thursday, U.S. stocks managed to post gains. What might have given a big push to stocks, a large multi-billion takeover of Rohm and Haas by Dow Chemical, was offset somewhat by concerns over the solvency of Fannie Mae and Freddie Mac and another surge in oil prices. The Dow industrials ended 81 points higher, or 0.73%, the S&P 500 rose 8 points, or 0.7%, and the Nasdaq Composite added 22 points, or 1.03%.
Oil concerns may very well continue today as crude oil rose for a third day, to within $1 of a record, on supply concerns rising from a possible strike on Brazil oil platforms coupled with further unrest in the Middle East and Nigeria. Oil already soared $5.60 Thursday, or 4.1%, to settle at $141.65 a barrel. Today, crude oil for August delivery rose as much as $3.45, or 2.4%, to $145.10 a barrel on the New York Mercantile Exchange
On the economic front, May trade balance is due out at 8:30 a.m. EDT. At the same time, import and export prices in June will be released. The University of Michigan also is due to release at 10:00 a.m. a preliminary reading on consumer sentiment in July.
Oil at $200 and a Two-Year Recession The predictions of $200 oil have made it to the front page of The Wall S Journal. They have been hanging around in less prominent places, but now they gain some further legitimacy. The Journal predicts this would push gas prices to $6 a gallon. Oil at $200 would seize up the economy to the extent that virtually no industry would me immune. Fixing the problem could take a year, and, perhaps, much longer. 24/7 Wall St.: Oil At $200 And A Two-Year Recession
One Grandmother's Mortgage Nightmare The nation's housing meltdown is disrupting lives and devastating families. One New York grandmother is trying to put the pieces back together. Life after losing your home - CNNmoney
TheStreet.com's Jim Cramer says its stunning buy of Rohm & Haas will get people thinking about an energy top.
Just when you thought it was safe to short anything, particularly anything with any commodity exposure, Dow Chemical (NYSE: DOW) (Cramer's Take) comes along and inexplicably pays a gigantic amount of money, $78 in cash, for Rohm & Haas (NYSE: ROH) (Cramer's Take)? My first thought was that it must be a joke. That is inconceivable. A hoax. Something perpetrated by frustrated longs to spook the shorts.
I mean, a chemical company? Two chemical companies? Ground Zero for slowing economic activity and raw costs? People unsure if Dow could even pay its nearly 5% yield? I mean, even last night on my show, I made fun of the idea that people are confusing Becton Dickinson (NYSE: BDX) (Cramer's Take), a medical supply company, with a chemical company because it uses resin.
Stock futures were mixed early Thursday morning, ahead of retailers reporting their June sales and testimony from Federal Reserve Chairman Ben Bernanke. Although June retail sales may benefit from the government checks and the warmer weather, it may not be enough to give stocks the lift they need as investors all but anticipated a possibly good month for retailers. Update, following Dow Chemical announced deal, futures have turned much higher.
On Wednesday, stocks tanked, retreating further in to bear market territory as concerns over financials increased. Specifically, the solvency of mortgage companies Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Worries about techs and Cisco Systems (NASDAQ: CSCO) in particular also weighed on the market. The Dow industrials dropped 236 points, or 2.08%, the S&P 500 lost 29 points, or 2.28%, and the Nasdaq Composite fell 59 points, 2.60%.
On the economic front, weekly jobless claims data will be released at 8:30 a.m. EDT. No recovery is expected in the labor market yet and the data will likely show increased claims. Also, throughout the day, chain-stores will report June retail sales. Overall, June sales are expected to rise 2.4%, according to research firm Retail Metrics. That's a better rate than the 1.6% gain the companies registered for the first five months of this year, but lower than the average monthly gain of 2.6% last year and an average gain of 3.7% in 2006. A big chunk of this increase, though, is attributed to Wal-Mart Stores Inc. (NYSE: WMT).
Already warehouse club operator Costco Wholesale Corp. (NASDAQ: COST) said same-store sales, including gasoline sales, grew 9% in June. That beat estimates of an 8.5% increase.
Taleo Corporation (NASDAQ: TLEO) offers software that allows businesses to efficiently manage their staffing processes. Products help to automate recruitment, background screening, regulatory compliance, skills assessment and tracking of professional, hourly, and temporary employees. The firm's professional services division provides implementation and technical support. Customers range from small businesses to global enterprises. Hewlett-Packard (NYSE: HPQ), Dow Chemical (NYSE: DOW) and Freeport-McMoRan (NYSE: FCX) are among Taleo's large-cap clients.
Investors were pleased last month, when the company affirmed its Q2 EPS and revenue guidance figures. Management also said it expected this week's acquisition of talent management software maker Vurv Technology to add to its 2008 results, projecting EPS of 62 cents (60 cent consensus) and revenues of $175-$177 million ($162.8M consensus).
For deals of $2 billion or less, private equity firms are showing interest. However, the problem is: cheap valuations.
This is what the board at Chemtura (NYSE: CEM) found out the hard way. Late last year, the company retained Merrill Lynch (NYSE: MER) to explore "strategic alternatives." While some private equity firms showed interest – like Blackstone Group LP (NYSE: BX) and Apollo Management LP -- there wasn't much appetite to pay a premium. So, Chemtura has ended the process. Instead, the company will focus on restructuring (such as divestitures).
Chemtura has an interesting mix of businesses, such as plastic additives, pool and spa products and the lubricant components. For 2007, the company generated $3.7 billion in revenues.
However, with the energy crisis, the environment has been particularly tough for Chemtura. Just look at rival Dow Chemical (NYSE: DOW), which has increased prices two times during the past month.
This post is part of our Big Company, Small Town series, featuring large companies and the small towns in which they are headquartered.
The Dow Chemical (NYSE: DOW) is capitalized at about $40 billion dollars and produces a multitude of household and industrial products that probably touch most Americans lives in some way. It is the largest chemical company in the U.S. and number two worldwide (ahead of ExxonMobil and behind BASF), and it is also a leader in performance plastics.
On May 18, 1897, Dow Chemical incorporated, based on Herbert H. Dow's plan to manufacture and sell bleach on a commercial scale. A year later they were in full-scale commercial production. The Dow-in-diamond mark was created to help resolve product shipping problems. In 1900, the Midland Chemical Company merged into Dow Chemical.
The company was always evolving under the guidance of Mr. Dow, who in 1913 announced the company would exit the bleach business to refocus to the value of chlorine as a raw material, prompting Dow stock to rise dramatically.
Investors looking for good news today can take solace knowing that Friday the 13th is not especially unlucky.
Indeed, researchers in the Netherlands have determined that fewer accidents and reports of fire and theft occur on Friday the 13th than other Fridays. And stocks are actually trading up in early market action. Still, some people won't care. About $800 million to $900 million will be lost in business today because people will not do things they normally do.
Investors need to remember that there are many ludicrous theories about the stock market. There is the Super Bowl Indicator where people figure that if a team from the old American Football Conference (now the American Football Conference) wins, the market is headed down, while a win for the old NFL (now the National Football Conference) means good times are ahead. People believe that bad things happen in October and that May is the time to sell and go away.
Sometimes these theories "work." Other times they don't. None of them should serve as the sole basis for any investing decision. I understand their appeal because they seem to take the guesswork out of figuring out the gyrations of the market. Real life, though, does not always fit into theories.
The Dow Jones industrial average and the NASDAQ Composite Index are both down more than 8% this year. Gasoline prices have topped $4, sending many trucking companies to the brink of bankruptcy. Soaring commodity prices have squeezed profits of businesses ranging from Dow Chemical Co. (NYSE: DOW) to the local pizzeria.
If you want to invest, do your homework. Of course, people still need to avoid black cats crossing their path, stepping on sidewalk cracks and breaking mirrors.
Paul Krugman's New York Times op-ed tries to defend his Princeton colleague, Federal Reserve Chairman Ben Bernanke. Krugman suggests that inflation is not a problem because he can't find any long-term labor contracts with 11% annual pay increases as in 1981's United Mine Workers contract.
Krugman gets himself into a weak position and he does not disclose his fealty to Bernanke whom he evidently does not believe can defend himself. It seems absurd to pretend that inflation is not a problem. Food prices have tripled and oil prices have doubled as Bernanke cut the Fed funds rate from 5.25% to 2%. Last week Dow Chemical (NYSE: DOW) announced a 20% price increase as did Eastman Kodak (NYSE: EK) in response to rising oil and other commodity prices. Huntsman Chemical (NYSE: HUN) announced a 25% price increase. And consumers -- who account for 70% of GDP growth -- expect inflation to rise at a rate of 7.7%.
Politicians this week have come up with a brilliant plan. Oh, let's blame the recent oil price hike on speculators, why don't we? This way, we can continue not doing anything about energy prices and oil's scarcity and still keep our jobs. Let's just deflect attention from us and our inaction and blame it all on those commodity traders.
Okay, of course, anyone who manipulates oil prices, inflating them artificially and causing us to pay $4 a gallon at the pump as a result while making a nice juicy profit on our backs, should pay. No doubt. But here's a thought: what if these speculators are doing us a service?
I'll use a line from Syriana: "It's running out." We all know it. At some point there will be no more oil, or it will become so scarce that $4 a gallon will sound like a joke, like my grandma telling me about those five-cent movie tickets (I still think she was pulling my leg!). And barring any alternative energy found to heat our homes, fuel our cars and power our factories, it is not difficult to envision doomsday scenarios.
So perhaps, instead of reaching that crucial stage and having to start scrambling for solutions then, perhaps the recent oil price hikes have done us more good than harm. It put the problem of oil and energy in the forefront; it made the problem too big to be ignored, brushed aside. Indeed, there has never been this much news and these many resources diverted to alternative energy as there has been in the past year (at least it feels that way).
The high price of oil has repercussions throughout the economy; it trickles down to the smallest of items and we've only been experiencing the beginning. The effect on prices is lagging. Still, only Wednesday Dow Chemical (NYSE: DOW) announced a price increase of up to 20% to offset these higher costs. Dow's CEO blamed Washington for not listening to industrialists when they demanded action for years.
The credit crunch is not going away, and as a result, there has been a sharp fall-off in leveraged buyouts (LBOs). Basically, only relatively small LBOs -- between $1 billion to $2 billion -- are getting done.
Investment bankers are keeping busy with chemical companies lately. For example, yesterday 
When it comes to a mega M&A deal that involves an old-line company and a founding family, Warren Buffett is on speed-dial. For example, his firm, 
and 
. He also operates 
U.S. stock futures were lower Friday morning after General Electric (NYSE: 
Dow Chemical (NYSE: DOW) announced it will acquire Rohm and Haas (NYSE: ROH) for $78 per share. 
Stock futures were mixed early Thursday morning, ahead of retailers reporting their June sales and testimony from Federal Reserve Chairman Ben Bernanke. Although June retail sales may benefit from the government checks and the warmer weather, it may not be enough to give stocks the lift they need as investors all but anticipated a possibly good month for retailers. 
For deals of $2 billion or less, 
This post is part of our 
Investors looking for good news today can take solace knowing that Friday the 13th is not especially unlucky.
Paul Krugman's 
Politicians this week have come up with a brilliant plan. Oh, let's blame the recent oil price hike on speculators, why don't we? This way, we can continue not doing anything about energy prices and oil's scarcity and still keep our jobs. Let's just deflect attention from us and our inaction and blame it all on those commodity traders.
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