Germany healthcare and chemicals company Bayer has its eye on the $62 billion prize: American agrochemical giant Monsanto (MON).
Bayer on Monday disclosed that it has made an all-cash offer to buy the controversial U.S. seed and farm chemicals company, with its $122-per share bid providing a 37 percent premium over Monsanto's closing share price on May 9. If the deal succeeds, it would be the biggest corporate acquistion of the year, topping China National Chemical Corp.'s proposed $43 billion purchase of Swiss seed and pesticide vendor Sygenta. Buying Monsanto would also represent the largest German takeover of U.S. company, exceeding Daimler-Benz's $38.6 billion purchase of Chrysler in 1998.
Although most Americans may know Bayer as the maker of its eponymous aspirin, the 153-year-old company also has other lines of business besides consumer health, including crop science. Bayer and Monsanto are among the world's biggest agrochemical chemicals, but their businesses don't overlap geographically, according to a statement from Bayer chief executive Werner Baumann. More important, the merger proposal comes as the sector struggles with slumping demand, leading other rivals to join forces as a result.
"Further consolidation in the agricultural chemical space seems to have been stimulated by earnings headwinds following challenges to farmers from high-crop stocks, low-crop prices and, in Brazil, tight credit and currency challenges," Fitch Ratings senior director Monica Bonar wrote in a research note last week after Monsanto disclosed Bayer had approached it with an unsolicited bid.
In other words, the world's agrochemical businesses believe becoming bigger can help them overcome challenges such as sliding commodity prices, economic issues and the strong dollar.
But what would the merger mean for Monsanto's biggest hot-button issue, genetically modified seeds? And is the deal likely to pass scrutiny among antitrust regulators assessing if the merger could harm competition and raise prices for consumers? Read on for five things to know about the proposed deal.
A bigger GMO footprint. Monsanto is the world's biggest producer of genetically modified crops, sometimes derisively dubbed "Frankenfoods" by critics, which is one reason why it's a lightning rod for anti-GMO activists. But a combined Bayer-Monsanto would have an even bigger stake in the future of GMOs, given that Bayer is also involved in the modified-seed market. While it doesn't sell any GMOs in Europe, Bayer sells the crops in other regions, including North America. Earlier this month, Bayer announced plans to sell a new genetically modified soybean in Brazil to take on its chief rival there: Monsanto.
Antitrust issues could scuttle the deal. Given the market power of the businesses, the transaction will face significant regulatory scrutiny. How that will play out is hard to predict, but one fact that could help the deal is that Bayer and Monsanto don't overlap much either geographically or in its agrochemical businesses. "Herbicides [are] the only potential concern," Fitch's Bonar wrote.
Investors aren't wowed. Shareholders usually like to get a buyout offer at a hefty premium, but Bayer's offer may have some issues. For one, Monsanto investors aren't expressing their enthusiasm in the stock price -- the shares rose a restrained 4.8 percent to $106.41 on Monday morning, far below Bayer's $122-per-share offer. That suggests many Monsanto investors think the deal could collapse. Monsanto management, for one, could reject the offer and ask for a higher bid, or antitrust issues could derail it before liftoff.
Erasing Monsanto's name. If the acquisition succeeds, Bayer would likely drop the Monsanto name, Bloomberg News reported. While Bayer has taken this step with previous purchases, the German company may have another motivation. Monsanto has inspired hashtags such as #monsantoevil, while Modern Farmer magazine noted that the company has become a "pop cultural bogeyman." No wonder Bayer would shed the name.
A race to consolidate. The agrochemicals industry has been swept by a wave of consolidation after a slump in commodity prices, which has put pressure on their businesses. Monsanto, for its part, tried and failed to buy rival Syngenta, which was later snapped up by ChemChina. Dow Chemical and DuPont are also planning a merger. Three large agrochemical mergers may "prompt regulators to really dial up the scrutiny and think long and hard about whether that much consolidation is in the best interest of farmers and consumers," Edward Jones analyst Matt Arnold told the News Journal.