John Paulson is best known as the hedge fund manager who called the subprime mortgage crisis spectacularly right, but his plea to Dow Chemical Co. (DOW) to complete its $15.3 billion acquisition of Rohm & Haas Co. (ROH) shows Paulson remains fully committed to his main strategy: merger arbitrage.

Paulson, who runs $36 billion Paulson & Co., now owns more than 9% of Rohm & Haas stock after buying more than three million shares during the fourth quarter, according to a filing made with the Securities and Exchange Commission. Paulson, not normally an activist investor, is taking unusual steps to turn around what until now has been a money-losing investment.

Paulson said in a letter Wednesday to Dow Chemical Chief Executive Andrew Liveris that Dow should cut its dividend to a penny and sell common stock and bonds to pay off the $13 billion in bridge financing needed to complete the deal.

Merger arbitrage had been Paulson's main focus ever since he started his hedge fund in 1994, after working as a managing director in mergers and acquisitions at Bear Stearns. But in 2007, Paulson put on a perfectly timed bet against subprime mortgages, earning millions for his investors and more than $3 billion for himself. He continues to invest in financial services, but he has never stopped with the merger arbitrage, holding large stakes in Rohm & Haas and other buyout targets, like Genentech Inc. (DNA) and Merrill Lynch & Co.

Dow agreed to buy Rohm & Haas back in July for $78 a share, a 74% premium to the prior day's closing price. Since then, Dow has been stung by a weakening chemicals market, which contributed to a $1.55 billion fourth-quarter loss, and a decision by the Kuwait Investment Authority to back out of a joint venture that Dow was counting on to help finance the acquisition. Earlier this week, Dow said a completed buyout would trigger debt defaults. The company is fighting the deal in court, saying it is bad for both sides.

Rohm & Haas shares were up 1.9% at $54.75 in recent trading, but have given up about a quarter of their value since the deal with Dow was announced.

Paulson's hedge funds have all been faring well, with most posting double-digit gains in 2008, according to investors. That said, considering Paulson bought his original 14.9 million shares in the third quarter when the deal was announced and Rohm & Haas shares traded in the $70s, the investment hasn't worked out so well.

The original investment, if Paulson isn't hedged, has resulted in losses of well over $200 million, considering the depreciation of Rohm & Haas' stock price. The more than three million shares bought in the fourth quarter have also lost Paulson money.

A spokesman for Paulson declined to comment for this story.

Other merger arbitrage and event-driven hedge fund companies also own Rohm & Haas shares, including York Capital Management and Mason Capital Management. One anonymous hedge-fund manager, who already owned more than a million Rohm & Haas shares, said he is buying more now in anticipation of Dow losing in court.

Paulson's letter to Dow is a bit out of character, considering that he has rarely played an activist role in his investments. It is also rare in that it is a letter to Dow, a company whose stock Paulson doesn't even own.

Technically speaking, Paulson's not even being an activist here. The firm filed with the SEC a Schedule 13G - the form reserved for passive investors - rather than a Schedule 13D, which is used by investors who may plan on talking to management.

But since it is Dow management - and not Rohm & Haas's - that Paulson is trying to push, declaring itself an activist isn't necessary.

Dow shares were up 14 cents to $10.91 in late trading Thursday. The shares have lost about two-thirds of their value since the company announced the acquisition plans.

-By Joseph Checkler, Dow Jones Newswires; 201-938-4297; joseph.checkler@dowjones.com

(Thomas Gryta and Kerry Grace contributed to this article.)