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Dear Mr. Berko:

Dear S.L.:

That merger is no longer “on again” or “off again.” It became a fait accompli on April Fools’ Day! That’s enough to make some investors a tad apprehensive. However, the best way for you to double your money in the next two years is to buy a printing press. Meanwhile, I wouldn’t tread within a parsec of Dow Chemical Co.

There’s big, big trouble in the chemical business today. The Dow Chemical Co. (DOW-$16.09) is expecting revenues and earnings to decline this year and next. Management will close 20 production facilities in the next 18 months and eliminate more than 5,000 jobs. E.I. DuPont de Nemours & Co. (DD-$27.71) has experienced a sharp decrease in demand plus a decline in revenues and earnings. So DuPont’s management is realigning the company, accelerating productivity programs and plans to cut 2,900 jobs. Meanwhile, Fitch Ratings lowered DD’s credit rating to “negative” from “stable.” Agrium Inc. (AGU-$43.79), down from a 12-month high of $113, and CF Industries Holdings Inc. (CF-$72.75), down from a 12-month high of $173, are both expecting lower revenues and earnings this year and next. The chemical sector is not expected to brighten for at least two more years.

Some think this $16.3 billion Rohm & Haas Co. acquisition could become a monkey on Dow’s back when it can least afford to carry the weight. There’s an excellent chance that Moody’s, the folks who gave Fannie Mae a triple-A rating a week before it went belly-up, will downgrade DOW’s debt. Standard & Poor’s gives Dow a BBB-minus rating, just a half-notch above junk.

Rohm & Haas is a specialty chemical company that produces emulsions for paints, coatings and adhesives. It also produces plastic additives, acrylic plastics, fungicides, herbicides, biocides and resins. Rohm & Haas also expects revenues and earnings to decline in 2009 and 2010. Now, DOW must pay Rohm & Haas shareholders $78 a share, and DOW had to raise $16.3 billion to make it happen. So, DOW raised $7 billion with a new preferred issue and negotiated a $10 billion bridge loan that must be repaid in two years.

Obtaining the cash for the Rohm & Haas purchase would have been a cakewalk in 2008. DOW had counted on selling a joint-venture stake in its Kuwait operations to the Kuwaitis for $9 billion. But the deal collapsed in December under pressure from the Kuwaiti government as the glum chemical sector soured due to the economic recession. So DOW had to strip itself to bare bones to honor the $78 per share promise to Rohm & Haas. Selling enough assets to help pay for this merger certainly won’t be a cakewalk in this difficult economic environment.

Because the $16.3 billion price tag is a cash deal and not a stock exchange, DOW’s interest costs (on a $10 billion loan plus $7 billion preferred) will exceed $1 billion a year. That $1 billion annual cost represents 35 percent of the combined net profits of these two companies. Holy mackerel, Rohm & Haas only expects to earn $600 million next year.

When the economy recovers, the revenues and earnings of this new company should experience substantially above average growth. If DOW can sell off enough of Rohm & Haas’ non-core assets — Morton Salt, a Dutch oil refinery, etc. — management might be able to maintain the company’s bank quality credit rating. Still, I would not care to own DOW just yet. There’s some concern that the fragile egos of territorial executives from both companies will clash. There is also concern about whose divisions will be redundant, who will be laid off and the severance packages to be paid.

Stay away from DOW for now. I don’t think there’s much danger of a decline in price, but I certainly doubt that there’s an opportunity for an increase in share value for a while.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2009 Creators Syndicate Inc.