Plea to Dow Chemical Shows Paulson's Still An Arb At Heart
February 05 2009 - 4:40PM
Dow Jones News
John Paulson is best known as the hedge fund manager who called
the subprime mortgage crisis spectacularly right, but his plea to
Dow Chemical Co. (DOW) to complete its $15.3 billion acquisition of
Rohm & Haas Co. (ROH) shows Paulson remains fully committed to
his main strategy: merger arbitrage.
Paulson, who runs $36 billion Paulson & Co., now owns more
than 9% of Rohm & Haas stock after buying more than three
million shares during the fourth quarter, according to a filing
made with the Securities and Exchange Commission. Paulson, not
normally an activist investor, is taking unusual steps to turn
around what until now has been a money-losing investment.
Paulson said in a letter Wednesday to Dow Chemical Chief
Executive Andrew Liveris that Dow should cut its dividend to a
penny and sell common stock and bonds to pay off the $13 billion in
bridge financing needed to complete the deal.
Merger arbitrage had been Paulson's main focus ever since he
started his hedge fund in 1994, after working as a managing
director in mergers and acquisitions at Bear Stearns. But in 2007,
Paulson put on a perfectly timed bet against subprime mortgages,
earning millions for his investors and more than $3 billion for
himself. He continues to invest in financial services, but he has
never stopped with the merger arbitrage, holding large stakes in
Rohm & Haas and other buyout targets, like Genentech Inc. (DNA)
and Merrill Lynch & Co.
Dow agreed to buy Rohm & Haas back in July for $78 a share,
a 74% premium to the prior day's closing price. Since then, Dow has
been stung by a weakening chemicals market, which contributed to a
$1.55 billion fourth-quarter loss, and a decision by the Kuwait
Investment Authority to back out of a joint venture that Dow was
counting on to help finance the acquisition. Earlier this week, Dow
said a completed buyout would trigger debt defaults. The company is
fighting the deal in court, saying it is bad for both sides.
Rohm & Haas shares were up 1.9% at $54.75 in recent trading,
but have given up about a quarter of their value since the deal
with Dow was announced.
Paulson's hedge funds have all been faring well, with most
posting double-digit gains in 2008, according to investors. That
said, considering Paulson bought his original 14.9 million shares
in the third quarter when the deal was announced and Rohm &
Haas shares traded in the $70s, the investment hasn't worked out so
well.
The original investment, if Paulson isn't hedged, has resulted
in losses of well over $200 million, considering the depreciation
of Rohm & Haas' stock price. The more than three million shares
bought in the fourth quarter have also lost Paulson money.
A spokesman for Paulson declined to comment for this story.
Other merger arbitrage and event-driven hedge fund companies
also own Rohm & Haas shares, including York Capital Management
and Mason Capital Management. One anonymous hedge-fund manager, who
already owned more than a million Rohm & Haas shares, said he
is buying more now in anticipation of Dow losing in court.
Paulson's letter to Dow is a bit out of character, considering
that he has rarely played an activist role in his investments. It
is also rare in that it is a letter to Dow, a company whose stock
Paulson doesn't even own.
Technically speaking, Paulson's not even being an activist here.
The firm filed with the SEC a Schedule 13G - the form reserved for
passive investors - rather than a Schedule 13D, which is used by
investors who may plan on talking to management.
But since it is Dow management - and not Rohm & Haas's -
that Paulson is trying to push, declaring itself an activist isn't
necessary.
Dow shares were up 14 cents to $10.91 in late trading Thursday.
The shares have lost about two-thirds of their value since the
company announced the acquisition plans.
-By Joseph Checkler, Dow Jones Newswires; 201-938-4297;
joseph.checkler@dowjones.com
(Thomas Gryta and Kerry Grace contributed to this article.)