The deal values Solutia shares at a 42 percent premium over Thursday's closing price and was viewed as a good deal by Eastman investors, lifting its shares by 6 percent in morning trading on the New York Stock Exchange.
Solutia, which emerged from bankruptcy in 2008, generated about 30 percent of its revenue in Asia-Pacific countries last year, and it expects that to grow by a third by 2015.
I don't think people expected it, said Eric Green, senior managing partner at Penn Capital Management, which owns 0.6 percent of Solutia shares.
The stock is cheap and business is getting better. ... They are leveraged to the Chinese auto market which is continuously getting better, he added.
After years of modest growth, Eastman is now expanding its lucrative specialty plastics and wood applications businesses, and its shares are up about 15 percent in the past 12 months.
Solutia has transformed itself into a financially strong, innovative performance materials and specialty chemicals company, with enviable market leading positions in virtually every market it serves, Eastman Chief Executive Officer Jim Rogers said in a statement announcing the deal.
The deal calls for Eastman to pay $22.00 in cash and 0.12 of a share for each Solutia share, or about $27.65 based on Thursday's close.
Solutia has 122 million shares outstanding, according to Thomson Reuters data, which would mean Eastman is paying about $2.69 billion in cash and $690 million in stock for the company.
The merger would add to earnings immediately, Eastman said, and the combined company would save about $100 million a year in costs by the end of 2013. The companies expect the deal to close around midyear.
Eastman said it now expects 2012 earnings to be around $5 a share, excluding acquisition-related costs and charges. It raised its 2013 earnings forecast to more than $6 per share.
Jefferies analyst Laurence Alexander said in a research note that the deal, along with Westlake Chemical's
Alexander said that other companies generally thought to also be takeover candidates include Albemarle
Including debt, the Solutia deal is valued at about $4.7 billion, Eastman said. It plans to pay for Solutia with cash on hand, shares and debt.
The deal does not include a financing contingency, Eastman said, meaning the company would have to close on the deal even if it is not able to get banks to fund the purchase. Solutia would have to pay a break-up fee of $102 million if it walks away from the deal.
Eastman Chemical was formed in 1994, when Eastman Kodak
Shares in Eastman were up 6.1 percent to $50.00, while Solutia shares rallied 40 percent to $27.30.
(Reporting by Matt Daily in New York and Vaishnavi Bala in Bangalore, Additional reporting by Michael Erman in New York; Editing by Sriraj Kalluvila, Lisa Von Ahn and Mark Porter)