Michael Klein’s Freelance Deal Making

Some chemicals combine easily; others require strong catalysts. So it seems to be with certain chemicals companies.

Dow Chemical Co.’s $15 billion acquisition of specialty-chemicals maker Rohm & Haas had to be completed virtually on the steps of the Delaware Chancery Court — on the very day that a trial was due to begin over Dow’s allegedly reneging on the deal.

The transaction began promisingly enough. Dow and Rohm seemed a good fit. The former wanted to expand into high-margin specialty chemicals, and they were the latter’s stock-in-trade. What’s more, the financing seemed secure. Citi vice chairman Michael Klein and Dow’s other leading advisers had helped the company obtain a $13 billion bridge loan from its three adviser banks, Merrill Lynch, Citi and Morgan Stanley. Dow was also counting on massive cash flow from a joint venture with Kuwait’s Petrochemical Industries Co. Moreover, Klein had helped to secure commitments for an additional $3 billion from Warren Buffett and $1 billion from the Kuwait Investment Authority. (They’d pledged to buy Dow preferred stock once the deal closed.) That extra fundraising on Klein’s part embellished Citi’s fees. Most participants expected the merger to close by January.

Yet complications began almost the moment the deal was announced on July 9, 2008. Less than two weeks later, Klein, 46, parted company with Citi amid a tumultuous changing of the guard. Dow, however, asked Klein to continue advising it on the merger as an “internal consultant.” Citi promptly designated Paul Smith, 42, of its chemicals M&A unit, to step in on the deal.

Meanwhile, the recession was growing worse and chemicals companies’ revenues were starting to dissolve. Even more ominous for the deal, Dow saw its 50-50 partnership with Kuwait’s state petrochemicals company collapse, blowing a $9 billion hole in the financing. The corporate debt market was temporarily out of commission. Dow insisted that the deal be postponed. Rohm, fearing that the merger would never occur, filed a breach-of-contract lawsuit against Dow in January. At this point, Dow brought in yet another adviser, Robert Greenhill of Greenhill & Co., because it felt that it ought to have an independent counselor — one whose bank was not financing the deal.

As the briefs piled up, the markets began to thaw. Working closely with Dow’s other advisers — Purna Saggurti, now with Bank of America Merrill Lynch, and Morgan Stanley’s Carl Contiguglia — Citi’s Smith negotiated a one-year extension of the bridge loan in early March, along with a $500 million reduction in the principal. That gave Dow vital maneuvering room.

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But it didn’t plug the gaping hole left by the absence of cash flow from the Kuwait petrochemicals venture. On March 9, even as lawyers for Dow and for Rohm & Haas were gathering at the Delaware Chancery Court, a few bankers, including Klein and Greenhill, and still more lawyers were holed up at Wachtell Lipton Rosen & Katz in Manhattan seeking to persuade the Haas Family Trust and hedge fund manager John Paulson to put up additional funds.

After much haggling the trust and Paulson came through, with $1.5 billion and $1 billion, respectively, in a complicated arrangement involving perpetual preferred stock. That funding, along with the $4 billion from Buffett and the KIA plus $9 billion drawn from the bridge loan, was enough to conclude the merger (fittingly enough) on April Fool’s Day. Five months later, Dow issued $9.4 billion of debt and equity to retire the bridge loan.

Klein says it’s time to do something different, though he might well surface in a top role at a major bank. Smith, now co-head of the chemicals unit, will surely do many more deals, but few with so many twists.