Dow Chemical is set to buy Rohm & Haas, a Philadelphia based, specialty chemical maker for $18.8 billion in cash. The deal is for $15.29 billion excluding Rohm & Haas’ outstanding debt and will be financed by Berkshire Hathaway and the Kuwait Investment Authority. The successful closure of the deal will make Berkshire Hathaway the largest shareholder in Dow Chemical while the company created after the deal will be the largest specialty chemicals and advanced materials company in the world.  This merger is expected to close by early 2009, and comes at a time when the industry is not doing so well and commodity prices are soaring giving rise to worries that Dow may have miscalculated.

“It’s going to be a challenging environment for Dow. It’s a heck of a premium, especially at a time when industry fundamentals are suffering," says Frank Mitsch, an analyst at BB&T Capital Markets.

The deal, which has approval of both the companies’ boards, awaits regulatory approvals as well as support from the Rohm & Haas shareholders

“Given the macro environment, they could have bided their time, but they must think it’s going to work,” said Edward Yang, an analyst for Oppenheimer & Company.  

A company press release says Dow plans to set up an advanced materials business division at Rohm & Hass’ current headquarters and retain its corporate name. They aim at producing coatings, biocides and personal care, with the estimated revenue of this division at $13 billion.

“I have relentlessly talked to our employees, customers and stockholders about the imperative to seek opportunities for transformative change. In its 100-year history, Rohm & Haas has constantly reinvented itself, and this agreement offers outstanding potential to do the same yet again," says Raj L. Gupta, the chairman and chief executive of Rohm & Haas.