A Test of Leadership
As Andrew Liveris discovered, a chief executive embarking on a strategic bet should expect to face a series of harsh tests that might stretch over several years, severely straining the resolve and creativity of everyone closely involved. Those tests began for Dow Chemical on December 31, 2008, two days before the close of the deal with PIC, when the Kuwaiti government abruptly backed out, throwing all of Liveris’s plans into jeopardy. “We were shocked by this news, and this was completely unexpected, given the approvals already received and the behavior, actions, and words from our partners,” Liveris said at the time.
Once the financial foundation of the deal had been destroyed and the other critical building blocks were wobbling, most observers expected Dow Chemical to shut down the deal and retreat. But Liveris was in a corner. Retreat would be a defeat for him personally and could put Dow in a difficult legal situation. The contract with Rohm & Haas was airtight, and its leaders would not budge. It was also a cash deal, and a replacement for PIC’s promised investment was not easily found in early 2009. Even in normal times, investors are often fearful to commit money to a strategic bet, but at that moment, as the capital markets were coping with the worst economic crisis in 65 years, and the world financial system was teetering, their fear was compounded. Both the debt markets and equity firms were paralyzed, and the stock market was in free fall, down 60 percent. Meanwhile, Dow’s own stock, which had been at $30 per share when the Rohm & Haas deal was announced in the summer of 2008, plummeted to $7 by March 2009, and Andrew Liveris was facing the prospect of a serious debt downgrade to junk status by Standard & Poor’s and Moody’s.
Liveris had to keep the board committed to the deal, find new sources of financing, and convince the capital markets that Dow’s strategy had hit a bump, not a brick wall. Tackling these issues tested Liveris’s leadership abilities. He needed to summon his own mental toughness and perseverance, and to project continued conviction about the merits of the move he had championed. He had to persuade board members, institutional investors, Wall Street analysts, and rating agency analysts that the course he’d chosen was still correct and viable. He also had to be resourceful and creative in finding solutions, including alternative sources of funding.
In the end, Liveris succeeded. He kept the directors on board, convinced the rating agencies to maintain the company’s investment-grade rating, and lined up alternative financing from Warren Buffett and two members of the Rohm & Haas family. And the deal was in fact transformational; it set up the combined Dow–Rohm & Haas enterprise for better performance than either company might have expected alone. Today, specialty chemicals make up about two-thirds of Dow’s revenue, up from 50 percent before the merger, and Liveris says he’s aiming to tilt the mix toward 80 percent. The capital markets have warmed up accordingly. The deal closed in July 2009, and by January 2010 Dow’s stock was above $29. Matthew Norris, a portfolio manager and equity-research director at the investment management firm Waddell & Reed, told Barron’s in an interview that Dow’s transition “means a faster-growing business that deserves a higher multiple.” Liveris said at a New York City investor conference in December 2009 that Dow could return to record earnings levels of $4.50 per share by 2012.
As an example of strategic thinking, the Dow deal is of great significance. It represents the kind of challenge that more companies will find themselves facing in the future. Liveris and his board put their company on the line because they understood that the global environment affecting the chemicals industry was changing rapidly, and that they would be forced, sooner or later, to change too. They would be much better off if they could find a way to stay ahead of this inexorable change, even if it meant putting their entire enterprise at risk. It might not have taken a genius to see that commodity chemicals were going to become less profitable, given new entrants from emerging and resource-rich countries in the industry; the real genius was in moving quickly to a new business model and acquiring and deploying the necessary capabilities before competitors fully accepted or woke up to this reality.