Bayer takeover of Monsanto highlights tectonic shifts in global agrochemical industry
Updated: Apr 2, 2019
by Philipp Requat (Op Ed, Xinhua, 22.03.2018)
The progress of the Bayer-Monsanto mega-takeover, which on Wednesday secured regulatory approval from European Union (EU) competition authorities, is only the most recent manifestation of a wider trend of structural transformation in the global agrochemical industry.
With a final anti-trust decision pending from U.S. authorities, Bayer is on the cusp of becoming the world's largest producer of agrochemical products. By acquiring its rival Monsanto, the Leverkusen-based company would join the ranks of other chemical industry giants which have recently completed international mergers.
ChemChina's takeover of Swiss Syngenta for 43 billion euros (53 billion U.S. dollars), the biggest foreign acquisition to date by a Chinese company, was finalized in March 2017. Shortly thereafter, Dupont and Dow Chemical announced their successful merger in August last year, which established the world's largest chemical company by sales.
Bayer's own fusion in the agro-chemicals market comes with an eye watering price tag of 59 billion euros (66 billion U.S. dollars), reflecting a mark-up of 44 percent in the value of Monsanto shares prior to the first submission of a formal takeover bid. No other German company has ever paid as much to purchase an international corporate rival in the country's history.
Bayer has had to offer significant concessions to allay regulatory concerns that it could become too dominant in certain markets as a consequence of the takeover. The company will shed business units worth more than 6 billion euros in order to ensure "that effective competition on products and innovation continues after the merger in the markets for seeds, pesticides, and digital agriculture" as EU Competition Commissioner Margrethe Vestager put it.
In this context, another milestone for the acquisition of Monsanto was the clearance of Chinese authorities earlier in March. Bayer committed to divesting almost all of its seeds and traits activities, including vegetable seeds, as well as its glufosinate-ammonium business, and is conducting negotiations with German chemical company BASF to that end. In addition, a Bayer representative told Xinhua the company is "committed to grant fair, reasonable and non-discriminatory access to the combined entity's digital agriculture offerings in China."
Even so, the Bayer-Monsanto fusion nonetheless continues to face criticism for allegedly concentrating too much commercial power in a single industry player with a combined gross revenue of 23 billion euros recorded from agriculture-related business alone. Additionally, Bayer has been accused as tarnishing its own reputation by tying the knot with Monsanto -- a company which is mainly known in Europe as the producer of controversial genetically-modified crops and the potentially carcinogenic pesticide glyphosate.
In Germany, Green party (Gruene) parliamentary faction leader Anton Hofreiter is one of many voices who have publicly attacked Monsanto for representing "many issues in the agro-industry", adding that genetically-modified products and pesticides were a "risk, rather than future technologies."
Nevertheless, Bayer chief executive officer (CEO) Werner Baumann has expressed confidence that Monsanto's reputational problems can be overcome. Rejecting claims that the two companies would form a monopoly in the agro-chemical market, the CEO also highlighted that the bulk of Bayer's business takes place in Europe and Asia, while Monsanto's commercial activities were concentrated in the United States.
Defending the mega-deal, Baumann has further emphasized synergy effects worth billions of euros which would benefit the both companies involved. Given the current low-interest rate environment of global capital markets and the resulting availability of cheap debt, Bayer would be unwise not to seize the resulting opportunity.
At least on the surface, a company which recorded gross revenue of 35 billion euros in 2017 and employed 99,000 staff across the world would not appear to be in dire need of further economies of scale.
However, far-reaching developments such as climate change and a rapidly growing human population have instilled the agrochemical industry with widespread urgency to find solutions to related challenges. Against a backdrop of downward pressure on the global prices of seeds and agrochemicals, industry consolidation has been one of the logical outcomes of such considerations.
If Bayer's bet on a long-term recovery in agrochemical prices due to rapid population growth is successful, the company stands to be handsomely rewarded for its pivot from being a mixed chemical-pharmaceutical company to a more specialized leader in the subfield of biotechnology. A key rationale behind Bayer's takeover bid in this context is to gain access to Monsanto's "digital farming" products.
According to Monsanto CEO Hugh Grant, together, the two firms could hereby become "innovation drivers" helping farmers to cope with new pressures resulting from structural transformation in the agricultural sector.