Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Bayer notched the year's biggest takeover this week with a $66 billion agreement to acquire Monsanto. Any way you slice it, that's one big and expensive endeavor. To what end? 

A Monsanto spokesman offered one way of looking at it in August:

``Speaking hypothetically, I find it difficult to see how an acquisition of a company whose seeds help feed the world by a company whose products help keep us all healthy longer could be anything less than saintly."

Saintly mega-mergers? That's a new one. I mean, these aren't evil corporations and they do have legitimate reasons for wanting to combine -- and good intentions. But, let's be honest, this isn't the work of Mother Teresa we're talking about here. So what is it all about?

Neither company is pursuing a combination from a position of strength. A supply glut has pressured commodity prices, forcing farmers to cut back their spending on seeds and pesticides. In such an environment, consolidation offers a way for companies like Bayer and Monsanto to strengthen their market position and keep profits churning higher. It's an unfortunate reality that's befallen many a mature industry lately, as we at Gadfly have noted before: When you're out of other options, do a mega-deal.

We'll Take It
I don't know if Monsanto shareholders will feel blessed, but they'll probably like the idea of a $128-a-share offer that's a premium to the company's post-financial crisis high.
Source: Bloomberg

One reason that Bayer can justify paying $66 billion for Monsanto (in addition to low borrowing costs) is that it expects to reap $1.2 billion in cost savings from the purchase. Those are going to come from eliminating overlapping public company expenses, negotiating better deals with suppliers and taking out "redundancies" -- i.e. jobs. 

 The potential profit boost from those savings isn't exactly selfless, but Bayer and Monsanto will likely reinvest some of those savings in R&D. Farmers will have to boost food production by 60 percent through 2050 in order to feed the ballooning world population, the companies said. A Bayer-Monsanto behemoth (Bonsanto? Mayer?) will have the resources to develop the kind of innovative tools needed to make the most out of depleting farmland. Or so the logic goes.

The idea of an R&D superpower is one that's often been espoused by Monsanto CEO Hugh Grant, who kicked off a wave of consolidation in agricultural chemicals with his pursuit of Syngenta starting back in 2014. And it does make some sense. Combining will allow Bayer and Monsanto to eliminate duplicative (and expensive) R&D costs and pool their expertise in crop chemicals and seeds, respectively, so that a farmer's entire arsenal works in sync. Monsanto has also been investing in the concept of "digital farming," a means of using big data to help growers get the most out of their crops. Teaming up with Bayer may give that endeavor more heft.

It's not certain whether farmers will want to buy their seeds and crop chemicals from the same company, nor is it clear what kind of prices they're going to have to stomach for whatever new innovations Monsanto and Bayer come up with. This merger isn't happening in a vacuum, after all, coming on the heels of ChemChina's $46 billion agreement to buy Syngenta and Dow and DuPont's plans for a blockbuster merger.

Join the Club
Chemical deal volume has exploded over the past few years, led by mega-mergers in the agricultural chemicals sector.
Source: Bloomberg

The companies formed by the Syngenta-ChemChina and Bayer-Monsanto mergers would control more than half of the crop-chemicals market, according to 2015 data compiled by Bloomberg. Monsanto and the merged Dow-DuPont would control nearly three-quarters of the U.S. market for corn seeds and about 65 percent of the market for soybeans, according to 2015 data from consulting firm Verdant Partners.

Politicians and farm groups are already raising questions about the potential harm this deal may cause for farmers, as well as consumers who may also have to bear the burden of increased crop input costs. Bernstein analysts are expecting significant pushback and assign only a 50 percent probability to the deal actually getting across the finish line -- hence why Monsanto shares were trading at about $105 on Thursday, well below the $128-a-share offered by Bayer.

But as Monsanto CEO Grant said, taking its chances on Bayer's bid (with a handy security blanket in the form of a $2 billion breakup fee) was the superior choice compared to the alternatives. There weren't any obvious substitute partners left for either Monsanto or Bayer apart from BASF , which has signaled it's not interested in selling its agrochemicals division. Without a deal, both would have arguably been at a disadvantage relative to the stronger Dow-DuPont and ChemChina-Syngenta while the agricultural markets continued to struggle.  

So does a deal have some logical and valid benefits? Yes. Is it saintly? Heaven help us.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net