In an acceleration of a trend towards mega-mergers in the agribusiness area, German pharma and agro-chemicals major Bayer has announced an all-cash $66 billion deal to take over American seed major Monsanto. To clinch the deal, Bayer raised its initial bid thrice from $122 to $128 a share, to touch a level that implies a 44 per cent premium over Monsanto’s early-May stock market price.
On the surface, the deal seems to bring together firms with activities that complement each other. Monsanto is a controversial seed company producing genetically modified seeds for different crops, while Bayer is focused on agricultural chemicals. As a result, the takeover, if cleared, would create the world’s largest supplier of seeds and agricultural chemicals since Monsanto accounted for 26 per cent of the global seed market in 2013 and Bayer for 18 per cent of the pesticides market.
Sixty per cent of Monsanto’s revenues come from the United States, whereas Bayer has a substantial European and Asian presence. But Monsanto has an important presence in India, for example. So the merger creates a company that can service farmers across the globe in multiple ways. It would also give the company an oligopolistic position in some markets. If the combination passes regulatory scrutiny, the new entity will be responsible for 70 per cent of the area on which cottonseed is sown in the U.S., a major GM seed user. This may partly account for Bayer’s eagerness to swallow up Monsanto.
According to one unconfirmed estimate by Bernstein Research quoted by Financial Times, the deal value for Monsanto (including its debt) could involve a 60 per cent premium on the firm’s actual worth. Despite having substantial interests in the pharma and healthcare business, Bayer has obviously decided to pay a high price to hugely expand its presence in the agribusiness market.
Despite its large size, the Bayer-Monsanto merger is not completely unexpected. Agribusiness companies have been striving for some time now to grow in size and scope to sustain profitability. This attempt at union is the third in a series of recent merger/takeover bids in the agribusiness area, preceded by one between equals, Dow Chemical and DuPont (valued at $130 billion), and another by ChemChina of Syngenta (valued at $47 billion). To meet anti-trust requirements, Dow-DuPont is expected to split into three units, one of which will focus on the agricultural seeds and pesticides areas. The European Union’s Competition Commissioner, Margrethe Vestager, sees the potential size of that hived-off entity as adequate to warrant an investigation into the effect the merger will have on prices and innovation and on the livelihoods of farmers. Not surprising because it is estimated that the entity would account for around 40 per cent of the corn and soybean seed market in the U.S.