America's largest chemicals manufacturer Dow Chemical Co. said today it is acquiring rival Rohm & Haas Co. in an $18.8-billion deal that it called a "decisive move" to strengthen the chemical giant's profit and help buffer itself from cyclical downturns. The purchase exceeds the $12 billion Dow paid to acquire Union Carbide Corp. in 1999.

Michigan-based Dow will pay Philadelphia-based Rohm & Haas investors $78 per share of the company, at a steep 74 per cent premium over the latter's closing price of $44.83 yesterday. Expectedly, Rohm & Haas shares soared more than 65 per cent to $74.25 in pre-market trading. Dow shares slipped 2 per cent to $33.24.

Although the price is considered high, Dow aims to reduce dependence on less profitable products and increase sales of paint ingredients and adhesives. It seems to have found support for its strategy in one of the keenest minds in business – Warren Buffet. The latter's Berkshire Hathaway is funding $3 billion of the deal through equity placement, and the Kuwait Investment Authority is chipping in with $1 billion.

"The addition of Rohm & Haas' portfolio is game-changing for Dow, enabling us to accelerate the growth of our performance business portfolio and affording us a strong position in the global specialty chemicals and advanced materials sectors," said Dow CEO Andrew Liveris in a statement.

"Rohm & Haas brings us access to new and exciting technologies and offers an extended reach into emerging geographies, all of which are highly complementary to Dow's existing platforms and value growth priorities," he said.

Further, the combined company, which is expected to be less vulnerable to business cycles than in the past, should deliver more consistent earnings, Dow said. The acquisition is part of an effort by Dow to move into the specialty chemicals market, to provide the buffer it needs against the ups and downs of basic chemical sales.

Dow said the transaction would be "meaningfully accretive" to earnings in the second year following the deal's closure, with annual cost savings of about $800 million. The emerging company expects to have increased purchasing power for raw materials, an improved supply chain, and a streamlined corporate overhead.

Rohm & Haas, based in Philadelphia, is the world's largest producer of acrylic paint ingredients and also makes chemicals used in adhesives, packaging materials and personal-care products. Dow said the unit that will include Rohm & Haas's business would have annual revenue of about $13 billion.

"We believe that by becoming a part of Dow, we secure a brighter future and greater growth prospects for our employees," Rohm and Haas chairman and CEO Raj Gupta said in a statement.

Both companies' boards have approved the deal. It is pending approval by Rohm and Haas shareholders and regulatory approvals. Haas family trusts, which collectively control about 33 per cent of Rohm & Haas outstanding stock, have indicated their support of the agreement.

Dow is currently the world's second largest chemical manufacturer behind Germany's BASF. Last year, it had annual sales of $53.5 billion and currently employs around 46,000 people worldwide. Rohm & Haas, with nearly $9 billion sales in 2007, is considerably smaller and has 15,700 employees on its rolls.