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Inside job (pg. 2)

Roger Parloff, senior editor
Last Updated: July 1, 2008: 11:05 AM EDT

Kreinberg was a superb executive within his operational silo, according to three independent directors, but they also say he was "autocratic" and "close-minded" and had a "my way or the highway" attitude that was abrasive to peers. He was a "very, very difficult individual to manage," a fourth director noted in his deposition, and he liked to live large on his Dow expense account.

In late 2005, Reinhard and Kreinberg were the two point men supervising Dow's joint venture with the government-owned Oman Oil Co. Reinhard and Kreinberg handled all dealings with the Omanis, according to director Arnold Allemang, a former head of operations at Dow, and they jealously protected their turf. Their attitude, said Allemang, was, "If you want to talk to [the Omanis], you'll do it through us."

While the executives' Oman connection was key to their eventual expulsion, Reinhard had a troublesome second connection that Dow scarcely understood until months after his termination: his role at Len Blavatnik's massive private holding company, Access Industries. Blavatnik, who made his fortune in Russian oil assets, is now one of the world's richest men, with a personal net worth estimated at $7 billion to $8 billion. Access holds interests in telecommunications, media, real estate, oil, metals, and - since August 2005, when Access closed on its purchase of the Netherlands-based Basell Polyolefins - the chemicals arena.

Upon buying Basell, Access hired Reinhard as an advisor. Having turned 60, Reinhard was phasing out his operational duties at Dow, though he was staying on as a director. Dow told him he could work for Access as long as he confined himself to matters that wouldn't conflict with Dow's interests. He was also advised that because Access now had the Basell unit, he couldn't sit on the Access board, since that might violate antitrust laws barring directors from sitting on the boards of competitors.

Reinhard's conception of what constituted a conflict proved vastly narrower than Dow's. By early 2006 he was not only a member of Access's investment committee - which some Access officials referred to as its "de facto board" - but also sitting as an "observer" on board meetings of Basell itself. Reinhard assured Access that Dow was comfortable with his roles.

In March 2006, Access's Blavatnik sent Dow's Liveris a letter formally offering to acquire Dow's commodities (or "basics") divisions. Unbeknownst to Dow, Reinhard had "edited and signed off" on Blavatnik's letter before it was sent, according to Access e-mails. Liveris, who was not receptive to the overture, made no response. Reinhard, however, again without Dow's knowledge, informed Access of Dow's reaction. "Spoke briefly to Pedro," an Access official reported to Blavatnik. "Later learned that Dow approached both Kuwait and Saudi Aramco with the assets we want.... He told me/us to sit tight."

In April, when Liveris became chairman of Dow's board, he directed Dow's general counsel to write Reinhard a stern two-page letter spelling out that Dow would consider it a conflict of interest for Reinhard, when advising Access, to discuss or receive any "information about Basell." Reinhard argued with Dow's chief counsel and tried to negotiate, but Dow wouldn't budge.

Reinhard told Access nothing about the letter and disregarded its dictates. In the ensuing months, Reinhard attended Access and Basell board meetings as Basell bid for and ultimately acquired Lyondell Chemical Co., forming LyondellBasell Industries, the third-largest industrial-chemical company in the world.

During the first half of 2006, Dow's share price was languishing, and the company was regularly being approached by investment banks with unsolicited presentations proposing deals to increase shareholder value, including breakup LBOs. A common view was that Dow was undervalued because it was seen as a commodities business. If it sold its commodities segments while focusing on its higher-margin "performance chemicals" units, the share price would soar, some predicted.

In July the company's senior management and board held a weeklong strategy retreat in Newport, R.I., where they debated six strategic "optionalities," including a breakup of the company. Liveris argued that Dow's commodities and performance segments were so interdependent that it was best to maintain the company's integrated structure. Instead of a breakup, he favored an "asset light" strategy, in which Dow would "monetize" its commodities assets by, for instance, selling joint venture interests in them while keeping operational control. The proceeds would be used to expand the performance units.

The board backed Liveris's asset light strategy and rejected breakup strategies. The only dissenter was Reinhard.

A tempting target

That same month an Omani-led LBO bid for Dow was in gestation. A freelance consultant and wheeler-dealer named Terry Ruane approached chemical industry consultant Eddie Wilson, asking him to do a breakup valuation of Dow. Ruane and Wilson both were based in Jersey, in the Channel Islands, and both were business consultants in Oman. Ruane worked for Dow on its Omani joint venture, the Oman Petrochemical Industry Co. (OPIC), reporting to Kreinberg and Reinhard. Wilson, who had spent 25 years at Dow earlier in his career, was also a consultant to OPIC, but for the Omanis. To help with the valuation, Ruane showed Wilson a short profile of Dow that had been prepared by J.P. Morgan Cazenove, a joint venture of J.P. Morgan Chase (JPM, Fortune 500) and the British investment bank Cazenove. Wilson did the valuation but didn't hear back from Ruane for several months.

In late July, when Dow announced disappointing second-quarter results, its stock plummeted 10%, making the company an even more alluring target for a breakup bid. Officials inside Blavatnik's Access - unaware of the nascent parallel activity in Oman - began mulling an LBO of Dow as an indirect means of capturing Dow's commodities assets. In August and September they prepared a breakup analysis for Dow using the code name Achilles (because Dow's commodities unit was its "Achilles' heel" as far as share price was concerned). Remarkably, Reinhard played a key role in preparing Access's breakup analysis of Dow, according to both internal Access e-mails and the later deposition testimony of Access's mergers and acquisitions chief, Philip Kassin. Reinhard identified appropriate comparable companies for each of Dow's business segments - information not provided in Dow's 10-K - and extrapolated appropriate earnings multiples.

By mid-September, Access officials had completed their analysis. The draft noted that the "deal would most likely have to be 'hostile.'" On Sept. 18, 2006, after a Basell board meeting at its laboratory in Ferrara, Italy, Kassin, Reinhard, Blavatnik, and Basell's CEO met in a small private office, and Kassin presented his LBO proposal. When he was just minutes into it, Kassin later testified, Blavatnik cut him off, saying the deal was "too big, probably not doable," and that he had "no desire to do anything hostile." Shortly after the meeting, Kassin e-mailed a colleague about the debacle, noting, "Pedro very very very pissed."

Someone - Dow hypothesizes Reinhard - wouldn't let the idea die. In October, Terry Ruane, the same consultant who had asked Ed Wilson to do a breakup evaluation of Dow in July, contacted Kassin at Access and described an Omani-led bid to do a Dow LBO, advised by J.P. Morgan Cazenove and to be sponsored by U.S. private equity players. He urged Access to participate. Ruane told Kassin not to tell Reinhard about the Omani bid at this point, acting as if it were a secret, but in an affidavit later submitted in the litigation, Ruane says it had actually been Reinhard who told Ruane to contact Kassin in the first place. (Reinhard's and Kreinberg's lawyers have sharply challenged Ruane's credibility, with some basis: Kassin and Wilson testified that he sometimes "exaggerates" or "spins" to get deals done, and Kassin added that he sometimes works multiple sides of a deal. Ruane also has ongoing consulting contracts with Dow.)

After having coffee with Ruane in London, Kassin e-mailed Blavatnik: "The consortium preference is to have Pedro as chairman and Romeo Kreinberg as CEO." Kassin stressed that the deal might not be hostile, after all. "[Ruane] said most of the management is supportive and involved - except, obviously, Liveris." Once an LBO bid is made, a board has a fiduciary obligation to shareholders to assess it on its merits, regardless of what the CEO may think of it. If a majority of the board approves, the deal would technically be considered friendly.

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