1

Strategic Planning Example

Divestiture Analysis

The Dow Chemical Company

​

December 14, 2004

Roger McCarty

2

Framework and Approach

Divestiture Alternative Example

Divestiture Valuation Framework

Dow Breakeven Value

NPV

($MM)

Current Strategy Value

Acquirer Synergies

Acquirer One-time Costs

Potential Purchase Value

Dow One-time Costs

Dow Synergies

Incremental Value to Dow

Current Strategy Value

Approach

• Acquirer Synergies were evaluated from the perspective of two types of potential acquirers:
• AAA - represents acquirers who would build upon their current position with our business
• BBB - represents someone entering our market or business through this acquisition
• Synergies were estimated relative to the current strategy (e.g., Additional revenue and reductions in Manufacturing cost and SARD)

​

• One-time Costs for Dow and the Acquirer include both transaction and separation costs

​

• The Potential Purchase Value is the ‘theoretical’ maximum that an acquirer would pay, assuming it could realize the synergies identified

• Incremental value is the potential purchase value above the Dow Breakeven value

​

• Dow Synergies consist of lost revenue in related products and residual SARD.

Divestiture should be considered if the Incremental Value to Dow is positive compared to the current and alternative strategies, and we expect the acquirer to pay above the ‘breakeven’ value

Value to Acquirer

Breakeven Divestiture Value

Value Creation

3

Divestiture Strategy Alternative

​

• What is it worth to an acquirer?

​

​

• What is our breakeven divestiture value?

​

​

• What might someone be willing to pay?

​

​

• Comparison and Recommendation

Agenda

Divestiture Alternative Example

4

What is it Worth to an Acquirer?

Comments

Product1 & Product2 Divestiture Potential Purchase Value

The acquisition of the Dow Business could be worth up to $239 MM due to significant positive synergies by the acquirer

* Risk adjusted for Product2

Potential Purchase Value

Divestiture Alternative Example

• AAA could realize $191 MM in acquirer synergies (without including additional complementary sales) due to the significant cost synergies and some additional revenues from leveraging Dow product where they have complementary sales

​

• BBB could only realize $85 in acquirer synergies because they could not shut down as many plants, or reduce SARD as extensively since they do not have a current Dow Product position to leverage

​

• The maximum price (i.e., potential purchase value) that AAA could pay is $239 MM . For BBB it is $141 MM. It is driven by cost reductions, lower LPP investments and revenue synergies

​

NPV

($MM)

Current Strategy Value*

Acquirer Synergies

Acquirer One-time Costs

BBB

AAA

(6)

(14)

191

62

85

141

BBB

AAA

239

0

50

100

150

200

250

300

+

-

=

5

Acquirer Synergies… AAA

Description

Revenue Synergies

• Expected to capture $2 MM incremental Product1 sales and $1.5 MM incremental Product2 sales at 2-4 plants where AAA has a presence
• Increased complementary revenue synergies excluded

​

Raw Material Synergies

• 2% cost reduction due to combining purchasing and reformulating with a new plasticizer.
• 3% cost increase in Product2

​

Manufacturing Cost Savings

• Lower conversion (25% in U.S. and 11% in Europe) due to plant consolidation in Product1
• Increased volume in Product2 contributes to slightly lower conversion cast

​

SARD Synergies

• Eliminate 66% of the direct Sales/Marketing resources and 60% of the direct R&D resources

​

Capital Investment Synergies

• Closure of Plant A, Plant B, Plant C, and European JV
• Spend half of Dow LPP capital in remaining sites

AAA could generate $191 MM in total synergies; $154 MM from Product1 and $37 MM from Product2 (risk adjusted)

AAA Synergy Drivers

(2004-2011)

NPV ($MM)

Enhanced Revenues

14

$

27

$

Conversion & Raw Materials

40

$

(1)

$

Other Costs

11

$

5

$

SARD

57

$

34

$

Capital Reductions

31

$

8

$

Total

154

$

73

$

Product1 Product2

Divestiture Alternative Example

Risk Adjusted $ 154 $ 37

6

Acquirer Synergies… BBB

Description

BBB could generate $85 MM in total synergies; $74 MM from Product1 and $11 MM from Product2 (risk adjusted)

BBB Synergy Drivers

(2004-2011)

Revenue Synergies

• Expected to meet the Dow Product1 & Product2 revenue projections

​

Raw Material Synergies

• 2% cost increase in Product1
• 5% cost increase in Product2

​

Manufacturing Cost Savings

• Lower conversion cost (25% in NA and 11% in EUR) due to lower labor rates and headcount

​

SARD Synergies

• Eliminate 25% of the direct resources (vs. 66% for AAA)
• Must add Plant Services headcount

​

Capital Investment Synergies

• Minimal plant consolidation opportunities as its sites are committed
• Capital expenditures will be necessary to improve sites, but would be half of the Dow LPP required investment

Source: Steve Henderson, Keith Marchiando, Steve Smid, and Francois Stouvenot

NPV ($MM)

Product1 Product2

Enhanced Revenues

-

-

Conversion & Raw Materials

12

$

(6)

$

Other Costs

11

$

5

$

SARD

33

$

22

$

Capital Reductions

17

$

6

$

Total

74

$

22

$

Divestiture Alternative Example

Risk Adjusted $ 74 $ 11

7

Acquirer One-Time Costs

Comments

AAA could incur one-time costs of $16 MM and BBB $7 MM due to the acquisition of the Product1 & Product2 business

One-Time Costs (2003-04)

​

($MM) AAA BBB

​

Relocation 0.8 0.0

Severance 9.8 4.4

Demolition 4.0 0.0

Equipment Sales (1.1) 0.0

Transaction 2.8 2.8

Total 16.3 7.2

​

NPV $13.8 $6.2

​

​

​

​

Relocation

• AAA relocation includes $0.5 MM for equipment relocation when closing Plant C

​

Severance

• The acquirer will handle all severance
• The severance includes SARD headcount reductions and manufacturing headcount reductions related to plant closures

​

Demolition & Equipment Sales

• AAA will handle all demolition costs and will obtain proceeds from equipment sales that occur when closing down Plant A, Plant B, Plant C, and European JV

​

Transaction

• Includes Investment Bank, Legal, and “out of pocket” expenses

​

​

​

​

Divestiture Alternative Example

8

Divestiture Strategy Alternative

​

• What is it worth to an acquirer?

​

​

• What is our breakeven divestiture value?

​

​

• What might someone be willing to pay?

​

​

• Comparison and Recommendation

Agenda

Divestiture Alternative Example

9

What is Dow’s Break Even Value?

Comments

Product1 & Product2 Divestiture

Dow Break Even Value

Dow should divest the Product1 & Product2 business if an acquirer would pay more than the breakeven value of $150 MM

Dow Breakeven Value

* Risk adjusted for Product2

NPV

($MM)

Dow One-time Costs

Dow Synergies

Current Strategy Value*

Divestiture Alternative Example

74

149

• Dow’s breakeven value of $150 MM is the sum of the current strategy value ($62 MM), the one time costs ($14 MM), and Dow’s negative synergies ($74 MM) in the Most Likely Case

​

• In the most likely case ($74 MM negative synergies) Dow must successfully moderate revenue losses and be able to reduce some residual SARD burden by actively consolidating leadership and services

​

• In the optimistic case ($34 MM negative synergies) Dow will modify its marketing approach to retain almost all revenues and aggressively consolidate leadership and services to reduce residual SARD burden

34

14

62

0

50

100

150

200

250

110

150

225

Optimistic Case

Most Likely Case

Pessimistic Case

+

+

=

10

Dow One-Time Costs

Comments

Dow could incur one-time costs of $17 MM due to the divestiture of the Product1 & Product2 business

Dow One-Time Costs (2003-04)

​

($MM)

​

Relocation 1.1

EH&S Remediation 10.8

Contract Penalty 1.1

Transaction 2.8

Total 16.8

​

NPV $14.2

​

​

​

​

Relocation

• This includes relocation expenses for employees that Dow plans to retain

​

EH&S Remediation

• Dow will handle all site remediation costs, specifically at Plant A, Plant B, Plant C, and European JV
• $10 MM in Plant A site remediation could potentially be reduced

​

Contract Penalty

• These are penalties related to the JV partnerships at Asia1, Europe, and Asia2

​

Transaction

• Includes Investment Bank, Legal, and “out of pocket” expenses

​

Divestiture Alternative Example

11

Dow Negative Synergies… Product1 & Product2

Comments

Lost Revenue

• Pessimistic case assumes that all of the business at DDD EUR, HHH, LLL, and KKK is at risk. Half of the MMM EUR business at risk. The total revenue at risk in 2004 is $29 MM.
• Most Likely case assumes that 40% of the business at DDD EUR, HHH, LLL, and KKK is at risk. This corresponds to $11 MM in 2004 revenue.
• Optimistic case assumes that 15% of the business at DDD EUR, HHH, LLL, and KKK is at risk. This corresponds to $4 MM in revenue in 2004.

​

Residual SARD

• Pessimistic Case: 70% of Mfg and Finance overhead, 40% of Sales, 25% of R&D, and 60% Admin/P&A burden will remain and need to be spread to other businesses
• Most Likely Case: 20% of Residual SARD is eliminated
• Optimistic Case: Reduce another 20%

Dow could experience negative synergies of $74 MM, in the most likely case, due to lost sales of bundled products, residual SARD and other expenses that continue beyond divestiture

Potential Dow Negative Synergies

(2004-11)

​

​

​

​

* Corporate Governance NPV impact of $3 MM included since they will go away from Dow but not Dow Chemical

Divestiture Alternative Example

12

Divestiture Strategy Alternative

​

• What is it worth to an acquirer?

​

​

• What is our breakeven divestiture value?

​

​

• What might someone be willing to pay?

​

​

• Comparison and Recommendation

Agenda

Divestiture Alternative Example

13

What Might Someone be Willing to Pay?

Comments

Historical Multiple Impact on Value to Dow

* Purchase value is the 2003 Forecast times high and low of multiple range

** The incremental value is the amount by which the acquisition price will exceed the breakeven value

Divestiture Alternative Example

​

Multiple

Historical

Multiple

Range

Mean

Multiple

Purchase

Value*

Incremental

Value to

Dow**

Revenue

0.6 - 1.9

1.1

$81 to

$257 MM

$(69) to

107 MM

EBIT

1.6 - 14.2

8.0

$8 to

$71 MM

$(142) to

(79) MM

EBITDA

0.5 - 11.3

6.3

$4 to

$90 MM

$(146) to

(60) MM

An acquirer may not be willing to pay a price, based on historical EBIT and EBITDA multiples, that yields incremental value to Dow above the break even value, however...

• For the potential acquirer to pay the breakeven value of $150 MM, the following multiples are required (in the most likely negative synergy case):
• Revenue: 1.1x
• EBIT: 30.0x
• EBITDA: 18.8x

​

• Due to the depressed profitability of the business, it appears unlikely that an acquirer would pay a multiple of EBIT or EBITDA that would yield incremental value to Dow in excess of the break even value

​

• However, based on historical trends, a potential acquirer may pay a Revenue multiple that would yield incremental value to Dow in excess of the breakeven value (>1.1x)

​

14

Comments

Product1 & Product2 Divestiture

​

NPV

($MM)

Divestiture Alternative Example

Revenue Multiple

​

​

… if an acquirer were to base its valuation on revenue multiples and the synergies it could generate, Dow might realize a value above its breakeven value in the Most Likely and Optimistic cases

What Might Someone be Willing to Pay?

81

257

Dow Breakeven Value

EBIT Multiple

Dow Synergies

EBITDA Multiple

Current Strategy Value

Dow One-time costs

AAA

BBB

Potential Purchase Value

​

239

0

50

100

150

200

250

300

62

141

149

74

34

225

150

110

71

8

90

4

14

• An acquirer like AAA would need to pay for 53% of its synergies to meet the most likely breakeven value and 93% to meet the most pessimistic breakeven value

​

• An acquirer like BBB would need to pay for 73% of its synergies to meet even the most optimistic breakeven value

​

• It appears that an acquirer like AAA is a “better bet” to pay above the breakeven value, creating positive incremental value, since it could realize more synergies

​

• Considering historical market multiples of EBIT and EBITDA, no acquirer would be willing to pay for even the most optimistic DA breakeven volume

​

• The net divestiture value must also be compared to the value of the Alternative strategy to determine if divestiture will create more value

​

Pessimistic Case

Most Likely Case

Optimistic Case

15

Divestiture Strategy Alternative

​

• What is it worth to an acquirer?

​

​

• What is our breakeven divestiture value?

​

​

• What might someone be willing to pay?

​

​

• Comparison and Recommendation

Agenda

Divestiture Alternative Example

16

Alternatives Outside of Dow

Divestiture Alternative Example

​

​

There are alternatives to a complete divestiture that need to be considered during the divestiture valuation and analysis

Alternative Strategies to Divestiture of Total Business

• Form a joint venture with a competitor to pool assets and market positions

​

• Form a joint venture where a competitor produces, but Dow sells the products and technologies

​

• Form a joint venture with a potential competitor seeking to expand horizontally into this complementary market

​

• License new technology and upgrade asset position to become cost competitive

​

• License the end use technology and application know how and patents into the end user market place.

​

• License competitors to use manufacturing and application technology

​

• Sell customer list and sign a “do not compete” clause with a current or potential competitor

​

Alternatives Inside of Dow

• Reduce SARD costs and run for cash on all commodity products and specialty products

​

• Leverage technologies to introduce new products and reinvent the business and market

​

• Buy intermediate products on open market and only make and sell specialty products at Dow

​

• Shut down Dow assets and leverage technical and market position by reselling contract manufactured products in the market place

​

• Contract manufacture products for a competitor who has a better market position

​

• Contract manufacture for a new competitor who seeks to expand horizontally in the market

​

• Turn over assets to Dow Contract manufacturing to make different products

​

• Shut down business and use for scrap equipment

17

The total value of the Alternative strategy is $165MM or 45% higher than the current strategy; the risk adjusted value of the Alternative strategy is $100MM

Valuation- NAA & EUR

** Value of new product business is risk adjusted downward by 50% to be conservation since most products are not yet commercialized

Value of Current Strategy

NAA &EUR

$0

$20

$40

$60

$80

$100

$120

$140

Product1

Product2

Total

Value

$7

$110

$117

NPV $MM

Value of Alternative Strategy

NAA & EUR

Product1 Profitability and Valuation

$0-

$20

$40

$60

$80

$100

$120

$140

$160

$180

Product1

Product2

Total

Value

$37

$128

$165

$62

Risk

Adjusted

Value**

$55

Risk

Adjusted

Value**

$100

$64

$160

$180

NPV $MM

18

Comparison of Values

Divestiture Summary and Recommendation

NPV

($MM)

Divestiture Example

Strategy Alternatives Evaluation

Value

to an

Acquirer

BBB

AAA

239

We recommend a breakeven divestiture value of $150MM, which is the risk adjusted value of the Alternative strategy plus the optimistic case negative synergies for Dow; $150MM is also the breakeven for the Current strategy with the most likely negative synergies

0

50

100

150

200

250

300

141

100

Current Strategy Breakeven

Alternative Strategy

Breakeven Value to Dow

150

Recommended Breakeven Value

What an Acquirer Might Pay

EBIT Multiple

EBITDA Multiple

Revenue Multiple

71

8

90

4

257

81

110

150

225

Optimistic Case

Most Likely Case

Pessimistic Case

149

14

74

34

Optimistic

Most Likely

Pessimistic

Dow One-time Costs

Dow Synergies

263

190

150

Risk Adjusted Value