Monday, December 29, 2008

MANDA Update: Rohm & Haas (ROH) falls sharply on bad news

First is was the failed merger of BlueGreen Corporation (BXG) and now it's chemical company Rohm & Haas (ROH) that is putting new pressure on the MANDA portfolio. The stock dropped over 20% today on news that take-over company Dow Chemical (DOW) lost a $17.4 billion joint venture with the government of Kuwait. Although the lost venture takes away important financing, the acquisition is not contingent on it. The transaction is fully financed by a one-year syndicated bridge loan and convertible preferred investments by Warren Buffett and the Kuwait Investment Authority.

However, that doesn't mean that the terms of the deal couldn't be lowered. If that's the case, I'll most likely end up losing money on the trade. But I'm not going to sell the stock now because I believe that I've already lost as much as I think can be lost and there's no where for the stock to go but up. I've been wrong before and I'm sure I will be wrong again but the mid-$50 range is a strong support level for the stock. (It's been trading at or above $50 from the end of 2006 until just a month prior to the take-over announcement where it sunk to $45.) Also, Rohm & Haas management is committed to getting the deal done and most Wall Street pundits think it will go through.

On the negative side, take-over company Dow Chemical was downgraded earlier this morning from overweight to equal weight at Barclay's. The combined bad news sunk the stock to $15 representing a low not experienced since 1991. Ouch! Adding salt to the wound, open interest in Dow put options has increased which is typically a bearish sign. So, if any of you out there are considering taking a bullish position in either company, I strongly suggest to tread lightly and not commit an excess amount of capital to the trade. Note that if the merger does go through at the original price of $78/share, you will realize a whopping 45-55% return on your investment had you purchased Rohm & Haas stock today. In this case, the potential return just might be worth the initial risk.

What is ironic is that of all of these mergers, I thought that this one would be less risky because of the large capitalizations and reputations of the entities involved, but if we've learned anything from the Bernie Madoff scandal, size and reputation don't mean much anymore. Let's keep our fingers crossed this deal goes off!

4 comments:

Mikesheridan said...

I just wanted to check with you about which option month you were discussing in DOW when you said "Open Interest was increasing". It seems like you are correct about it being Jan puts, but I am not sure I view this a bearish just because they are so short term. It will be interesting to see if people do some calendar spreads to lengthen out their downside exposure, but most of today's activity seems to be in the longer dated call options. I would take that as somewhat bullish depending on when the trade happened.

Good analysis and good luck on the trade. I enjoy your blog.

stockMarkie said...

and notice the Vol is lower also?!?!?

stockMarkie said...

Notice the lower price on lower volume?!?!?

Dr. Kris said...

Mike,

I read somewhere in passing that open interest was increasing in the near-month contracts. Looking at the table of Dow options today (Jan. 2) showed high volume as well as high open interest in the Jan and Feb 15 and 17.5 call and put options, so you could well be correct in viewing it as a bullish sign. The activity might be synthetic longs (selling puts and buying calls) or bull-put credit spreads. I'm sorry that I can't locate the source of the news that I used--it might have been something I read on the CNBC website. (I use a lot of sources.)

Thanks for the kind words about my blog. Prof. Pat and I are working on some very exciting analysis concerning market timing strategies versus buy & hold that has all sorts of interesting implications. There's going to be a lot going on here in 2009 so stay tuned!