Written by Pooja Narayanan, Class of 2019
The potential merger between German chemical giant Bayer and American seed and fertilizer giant Monsanto has the potential of restructuring of global agribusiness. In mid-September, Bayer AG announced the acquisition of Monsanto for $66 billion, including $10 billion in debt, in an all-cash deal. Bayer manufactures and wholesales chemicals and pharmaceuticals, while its popular product lines include Aleve, Aspirin, and Claritin. Monsanto, on the other hand, sells agricultural products such as seeds and herbicides. Pre-market trading for Monsanto the day of the announcement was stagnant at $106 per share, while its stock faced a steady decline, indicating that investors did not believe the merger will go through.
The Bayer-Monsanto merger comes in response to a global grain surplus that has lowered crop prices, hurting farmers and reducing purchases of fertilizers. The merger will strengthen Bayer’s crop sciences division. If the deal goes through, Bayer’s cropscience sales is projected to rise to around 50 percent of revenue, compared to 30 percent in 2015. This deal also allows Bayer to expand beyond its stagnant home market. On the other hand, the acquisition will give Monsanto the ability to pursue research and development, reducing the risk of market saturation in corn and soybean producing areas by spurring innovation. According to the press release following the announcement, the deal would lead to “significant value creation with expected annual synergies of approximately $1.5 billion after year three; plus additional synergies from integrated solutions in future years.” Bayer expects significant sales and cost synergies. The merger would also diversify each company’s distribution channels.
Though the acquisition may catalyze innovations and synergies, it comes with its fair share of challenges from a regulatory standpoint. The biggest concern is oligopolistic pricing. The merged company would be the largest supplier of seeds and pesticides by sales. In addition, the Bayer-Monsanto merger is one of many deals in the global agriculture market in recent years, with others including DowChemical and DuPont, ChemChina and Syngenta, and Agrium and Potash. Approval of all these deals will consolidate and significantly reduce the giants dominating the global agribusiness market. Over 80 percent of the U.S. corn seed market would be in the hands of only a few companies, leading to a drastic reduction in competition.
The acquisition needs approval from regulators globally, including those from the US, Canada, Brazil, and the EU. However, EU regulators are anticipated to be hard-pressed to approve the move, hoping to prove they have consumers’ best interests at heart. Margrethe Vestager, EU Antitrust Chief, said that her agency would consider the fact that all three mergers are in the same industry when investigating antitrust concerns. “We will consider the concerns you have raised over the effects of the Bayer-Monsanto merger on prices, the variety of available seed products as well as on research and development,” said Vestager in an online letter.
“This consolidation wave has become a tsunami”, says Iowa Senator Charles Grassley, chairman of the Senate Judiciary Committee, reflecting the US government’s take on the deal. Grassley also expressed concern over the pressure on farmers, who are already hurting from lower prices due to the grain surplus. Despite the prevailing skepticism, Bayer is willing to divest $1.6 billion of its business needed to pass antitrust regulations though it is not yet clear what the company will choose to divest. However, according to analysts at Sanford C. Bernstein & Co., cottonseed and canola seed herbicide assets may have to be divested to clear certain regulatory hurdles. Bayer has also explored the idea of selling its dermatology business.
The public has also expressed unease over the massive number of consolidations. Over 700,000 people have signed a petition urging the US government to reject all three acquisitions. Andrew Kimbrell, the executive director of the Center for Food Safety, expressed worry for “the availability and genetic diversity of seeds that are critical to a sustainable food system and to our ability to respond to the impacts of climate change.” Other groups worry that the mergers would raise prices for farmers already ailing from the global grain glut. Processors and shippers will be affected as well.
The deal is expected to close at the end of 2017. If the acquisition is rejected, Bayer will have to pay Monsanto a $2 billion break-away fee. Though it is unknown how large the effects will be, it is clear that the consolidation of Bayer and Monsanto, alongside those of other agricultural behemoths, will have a profound effect on the global agricultural market.