Werner's Blog — Opinion, Analysis, Commentary
Bayer acquires Monsanto: good parenting required

Big mergers raise big questions. While some cross-border mergers work out well, many blunder and fail. When Germany's Daimler acquired America's Chrysler in 1998 for $36 billion, Daimler's CEO claimed that it was a "marriage made in heaven". The two corporate cultures clashed, and the promised synergies never materialized. Daimler sold Chrysler for a paltry $6 billion in 2007. As Bayer [its factory in Leverkusen, Germany, pictured on the left] is due to pay $66 billion to acquire Monsanto, the question lingers: will this deal realize its full potential, or will it flounder like Daimler-Chrysler? This deal has the potential to deliver value, but there are great risks along the way.

Here are a few answers to pertinent questions:

Will the size of the new Bayer stifle competition?

Bayer and Monsanto have quite different corporate profiles by segment and region. Whereas Bayer's North American revenue only makes up a quarter of its total, Monsanto's revenue is 82% based in the Americas. And whereas Bayer's core segments are fungicides, herbicides, and insecticides, Monsanto's core segment is seeds for corn, soybeans, and vegetables. The two companies have complementarities, but the combination of their operations will not itself lead to market dominance either regionally or in particular market segments. What is more worrying for competition is that the Bayer-Monsanto merger is part of a wave of mergers.

What explains the shake-out in the agri-tech business?

The agricultural products sector has seen rapid consolidation in recent years. Other seed developers have already teamed up: Dow Chemical and DuPont announced a merger in 2015, and ChemChina (Adama) is on track to buy Switzerland's Syngenta for $43 billion. There is pressure to find efficiencies and cost reductions in the face of sliding crop prices that have forced producers of seeds and agri-chemicals to slash prices. As the cyclical downturn continues, this shake-out may continue with further mergers. After Monsanto failed to acquire Syngenta, Monsanto itself became a takeover target.

‘The wave of mergers in the agri-tech sector is worrisome for competition.’

What does Bayer's acquisition of Monsanto herald for the global agricultural industry?

The recent wave of mergers in the crop science industry is worrying as it leaves only a handful of companies competing in major market segments. In the United States, Bayer-Monsanto and Dupont-Dow will control three-quarters of the market for corn seeds. Bayer-Monsanto will control a third of the world's herbicides market, Adama-Syngenta another quarter, and Dupont-Dow another fifth. These three companies will also control two-thirds of the global insecticides markets. Lack of competition is bad news for farmers.

Why did Bayer target Monsanto?

Bayer has been on a course of reorganization for over a decade. In 2005, it spun off its basic chemical division into a new company, Lanxess. This allowed Bayer to focus more on its core business of health care, nutrition, and materials. A decade later, in 2015 Bayer further consolidated its operations by spinning off its materials science division into Covestro. While divesting some units, it strengthened others. In 2014 Bayer bought Merck's consumer health business in the United States. Acquiring Monsanto continues Bayer's repositioning. What made Monsanto particularly appealing to Bayer is its deep and complementary R&D capability and patent pipeline in crop science. Combining crop traits (Monsanto's strength) with crop protection (Bayer's strength) makes a lot of business sense. Even more enticing to Bayer is Monsanto's digital farming platform. The next generation of farming will require customizing solutions to local circumstances.

Will this merger create value for Bayer shareholders?

At $66 billion, Bayer is paying a 44% premium over Monsanto's share price before the merger announcement in May. It is a big gamble for Bayer. In order to unlock such massive gains in value the merged corporation needs to find significant synergies, scale economies, and other efficiencies. Perhaps Monsanto's tarnished brand image has depressed the company's market value and Bayer can unlock this hidden value—but if not, Bayer will have paid far more than Monsanto is worth. Bayer is also financing the merger through a debt issue—a departure from its pervious conservative approach, and a move that could prompt a downgrade in its credit rating. Tellingly, the debt financing avoids taking the deal directly to Bayer shareholders, who might have scuttled the deal. Since rumours of talks between Bayer and Monsanto started surfacing a year ago, Bayer's share price has dropped from €150 to €90—a warning sign that investors are not yet convinced that the the merger will succeed.

Stock price Bayer AG [FRA:BAYN] 2011-2016

click on image for high-resolution PDF version

Monsanto was seen as "evil" by many activists—will Bayer be better?

‘Retiring the Monsanto brand name will not be enough to restore trust.’

Genetically-modified crops have been controversial. On one side, GMO crops promise higher productivity to farmers and a more secure food supply for a growing population. On the other hand, unknown long-term consequences of using GMOs have prompted calls by activists to ban GMOs altogether, or at least label them. Monsanto developed a negative image because its marketing had a tendency to be arrogant, and its sales tactics had a tendency to be aggressive. As a result, Monsanto became the target of much protest, ridicule, and even hatred. Bayer's takeover of Monsanto may provide a fresh start if it fixes Monsanto's deficiencies in corporate culture. Based in GMO-hostile Europe, Bayer has a good track record for engaging stakeholders and critics. Bayer has been around for more than 150 years and knows a few things about corporate social responsibility that Monsanto doesn't. For the merger to succeed, Bayer's CEO Werner Baumann needs to avoid the mistakes that Daimler's CEO Jürgen Schrempp made in 2005. In order to make the new Bayer "Mr Nice Guy" in the market place, Mr Baumann needs to be "Mr Bad Guy" in the executive suites in St. Louis where Monsanto is headquartered. Even though Monsanto will probably disappear as a brand name, this itself will not be enough to restore trust.

Can this deal still falter?

Competition policy watchdogs in several countries, in particular the United States, may yet find that Bayer or Monsanto will have to divest of some divisions before they will let the merger proceed. Technically, there is very little overlap between the two firms, and thus it is more likely than not that the deal will receive regulatory approval. Opposition is fermenting in other quarters, however. Vermont senator Bernie Sanders, former presidential candidate for the Democratic Party, called the takeover "a threat to all Americans". Friends of the Earth called the merger a "marriage made in hell". Local politicians in Missouri also worry about losing jobs at Monsanto's headquarter. On balance, the odds are in favour of this deal going ahead.

Will Bayer succeed where Daimler failed?

Corporate mergers are not for the faint-hearted. In 2004, The Economist magazine penned "Corporate mergers are hard to resist, but rarely turn out happy". The magazine illustrated its cover with two camels mating, awkwardly, and the byline The trouble with mergers. The trouble comes after the first infatuation is over. Daimler and Bayer are strong brands; Chrysler and Monsanto were/are weak brands. What gives Bayer in 2016 an edge over Daimler in 1998 is the fact that an acquisition is a takeover, not a merger of equals. A takeover requires chutzpah and single-mindedness—the willingness to disrupt chains of command in the acquired business, split units, move units, eject underperforming units, and unify the corporate culture. That is why hostile takeovers tend to perform better: the acquiring firm bites down hard on a nut, chews, swallows, and digests. Friendly takeovers run the risk of drifting into conglomerative indifference.

‘The Bayer-Monsanto merger needs a clear goal and a compelling positive vision.’

What is also missing in the Bayer-Monsanto deal is the compelling vision of a clear goal that can only be achieved jointly. Illusory "synergies" often don't materialize. The question to ask is: what problem does this acquisition solve? If the answer to this question is: there was no big problem, than the merger is doomed at the outset. If Mr Baumann wants to succeed where Mr Schrempp failed, he needs to execute his strategy with aplomb, and deliver a compelling vision of how the merged entity will transform the future of farming around the globe. To his advantage, Mr Baumann knows Bayer better than some of his predecessors as CEOs. As a company insider for nearly 20 years with plenty of international experience, he understands the strengths and weaknesses of his company like few others. At the helm only since May, this father of four children just got himself a new "kid"—an unruly but gifted teenager with a reputation of being a bully. Good parenting will be required.

Further readings and sources:

Posted on Friday, September 16, 2016 at 14:20 — #Mergers
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