Bayer AG has given Monsanto Company its Best Chance to Thrive
Bayer AG (ADR) (OTCMKTS:BAYRY) has finally put an engagement ring on Monsanto Company’s (NYSE:MON) GMO-enhanced finger to the tune of $66.0 billion. This is the largest takeover ever by any German company. But it seems that Monsanto stock could not have responded in a more apathetic manner. It was up an insignificant 0.62% on Wednesday, despite the birth of an entity generating a potential $23.0 billion a year in revenues.
Shareholders have shown little enthusiasm for the fact that Monsanto’s marriage with Bayer has created a huge new player in global agribusiness. Bayer has even agreed to pay $128.00 per share, which is a slight premium over the $127.50 offered in its last bid for Monsanto stock.
That premium becomes all the more impressive, considering that last May, Bayer offered $122.00 per share for MON stock. Shareholders appear to be oblivious to the fact that if Monsanto did not find a buyer—and quickly—it risked being crushed by the rise of a series of new agrochemical giants. Mergers and acquisitions (M&A) activity in the chemical, pharmaceutical and agribusiness (i.e. seed and pesticides, such as Monsanto) have been all the rage in 2015 and 2016.
Just last week, ChemChina took over Switzerland’s Syngenta, a direct Monsanto competitor. In 2015, meanwhile, Dow Chemical Co (NYSE:DOW) and DuPont (NYSE:DD) joined forces. For Monsanto, accepting the takeover bid was a necessary step to confront tougher international competition in the face of the ever stronger pressure, which has forced commodity prices down.
Still, in the long term, investors of the merged entity might see some gains in Bayer/Monsanto stock after this giant introduces the dreaded “synergies.” This is bad for employees, but good for investors because Bayer expects savings from such synergies of over $1.5 billion after the third year of the merger. (Source: “Bayer and Monsanto used the one word that should make their employees very nervous,” Business Insider, September 14, 2016.)
If Deal Fails, Monsanto Would Still Get $2.0 Billion
So sure is Bayer that the deal will go through, it offered $2.0 billion to Monsanto in case of failure. That alone might be worth considering for some shorter-term gains on MON stock. And the risk of failure has by no means waned. Bayer’s CEO, Werner Baumann, has made a passionate case to his company’s investors who, like their Monsanto counterparts, have expressed skepticism over the deal.
If I were a Bayer or Monsanto shareholder (for the record I am neither), I would expect that, in the longer term, the Bayer/Monsanto union will create value. It’s the only way for both companies to survive. The agrochemical ocean is filled with new and dangerous predators. Alone, Bayer and Monsanto stock would collapse against the challenges from Syngenta/ChemChina and Dow Chemical/DuPont, evidently the product of recent mergers.
The agrochemical industry has suffered at least three years of falling commodity prices. They have lost their optimum economies of scale and strategies for reducing costs to cope. Thus, it comes as no surprise that the fall in prices has lasted three years. Bayer said that it has gotten good vibes from regulatory authorities that the deal will go through.
Monsanto Shareholders Should See the Long-Term Gains
But little else has filtered through about this delicate matter. That’s probably why MON stock has not enjoyed enthusiasm on the day of its merger deal with Bayer. But there’s no word on how the already-heavily-indebted Bayer will pay so much for its Monsanto quarry. The bait scenario for investors is that the Bayer/Monsanto entity will have different but complementary activities.
There is some elegance in the combination of Monsanto’s seeds with Bayer’s fertilizers and pesticides. The race for size among agrochemical companies has intensified in conjunction with the market approach of selling farmers a complete suite of products. This is nothing less than a one-stop shop for seeds, chemical fertilizers and pesticides.
Monsanto had tried unsuccessfully in 2014 and 2015 to swallow Syngenta, the world’s largest producer of pesticides. So it too shared Bayer’s notion idea that seeds and pesticides deserve to be sold together. In that spirit, providing that regulators approve the Bayer/Monsanto merger, the deal has more opportunities than risks for MON shareholders.