Bayer-Monsanto merger: the story of the rise of the “endless company”

When about two weeks ago the world learnt that the German multinational company Bayer, leader in the chemical and pharmaceutical industry, had made an offer to acquire Monsanto, the world’s largest seed company, no one could believe it at first. It sounded so crazy and complex it might have as well needed some time for people to analyse with care. Then some time passed, and all became real – and extremely big. Here’s the story of the last two weeks.

Initial rumours

On May 18 the world’s main news outlets reported the news of German drug and chemicals giant Bayer AG having approached US seeds company Monsanto Co about an unsolicited takeover proposal in the past days. At those times, no specific news and details around the offer were available, and it was unclear whether Monsanto would have been open to a discussion. Agencies such as Reuters were reporting of a shocking $42 billion deal, equal to Monsanto’s current market capitalization, but there was nothing more. Only one thing was clear: such a deal could create the world’s biggest farm chemical group and agricultural supplier, changing the face of pesticides and seeds markets (and possibly beyond) forever.

Monsanto initially declined to comment, although already on May 19, the St. Louis, Missouri-based company confirmed the approach in a statement, saying “an unsolicited, non-binding proposal” for a potential acquisition was received, as reported by The Wall Street Journal. The statement said Monsanto’s board was reviewing the proposal, but also added that there was no assurance a deal would ever take place.

First reactions

Bayer did not immediately respond to the many requests for comment although, according to rumours, its top management became “furious” when hours later its shares dropped. Reuters reported a fall of more than 8 percent to a 2-1/2 year low of 88.39 euros in early Thursday trading, with some investors openly worried by the potential cost of a merger. Monsanto shares were seen 7.6 percent higher at $104.50 in pre-market trades.

The German giant’s executives then confirmed they had met with the leaders of Monsanto to discuss a possible acquisition, saying a tie-up would “create a leading integrated agriculture business”. Bayer supervisory board member Reiner Hoffmann said the same; that Monsanto “is a complementary business” and spoke about future “synergies” between the two, to reassure investors.

Bayer’s mammoth bid

Last week, after a few seemingly calm days, the size of Bayer’s bid to Monsanto became known: the German giant had made an offer for $122 per share in cash, or a total value of $62 billion. Reuters reported on Monday 23 that Bayer planned to finance the deal with a combination of debt and equity, which would include a rights offering.

If successful, it would be the biggest foreign takeover by a German company ever, and would ultimately create $67 billion of annual sales. However, despite Bayer’s bid to the US giant being so ridiculously huge, many analysts were immediately sceptic of Monsanto accepting it. The main knot was actually whether Monsanto was interested in a deal at all.

Monsanto’s “No”

And so another big news then came: on May 24 Monsanto rejected Bayer’s $62 billion takeover bid, calling it “incomplete and financially inadequate”. News agency Reuters was the first to report the surprising news, adding in a second moment parts of a then-released statement by Monsanto. On its website, Monsanto said its Board of Directors “unanimously” sees Bayer’s proposal as insufficient, as said, also specifying it is “open” to “continued and constructive conversations” to engage further negotiations.

“We believe in the substantial benefits an integrated strategy could provide to growers and broader society, and we have long respected Bayer’s business,” Monsanto Chief Executive Hugh Grant said. “However, the current proposal significantly undervalues our company and also does not adequately address or provide reassurance for some of the potential financing and regulatory execution risks related to the acquisition,” he added.

Bayer’s position and its key-player

The ball was thrown then back into Bayer’s field, with the German company almost immediately responding its offer represents “full and certain value” for Monsanto shareholders. “Bayer remains committed to working together to complete this mutually compelling transaction”, Reuters quoted Bayer Chief Executive Officer Werner Baumann as saying last week.

Mr. Baumann is indeed the key-person behind this unexpected move. Baumann was appointed CEO less than three months ago, succeeding Marijn Dekkers, after a life-long career in the company. Former finance manager and more recently Head of Strategy, he played key roles in delicate moments for the company, and he is now going to be asked to solve the many complicated points that the Monsanto merger will involve.

Many open points

First of all any deal between the German and the US giants are likely to raise US antitrust concerns because of an alleged overlap in seeds business, particularly in cotton, soybeans and canola, antitrust experts have already declared. Antitrust issues could hit also herbicides, as Bayer and Monsanto are currently selling most direct competitors to each-others’ products.

There might be some reputation issues that Bayer may want to consider as well. Monsanto indeed has been targeted many times by environmentalists and campaigners for being either the creator or the main producer of controversial products such as the environmentally disastrous pesticide DDT and the Agent Orange herbicide. It has also been under the lens of scientists and researchers for being one of the main creator of products containing glyphosate, an herbicide that the World Health Organisation suspects causes cancer.

GMO risk

Monsanto also happens to be accused often by environmentalists when it comes to GMOs diffusion. Many non-governmental organizations are indeed voicing concerns that such gigantic new company could indeed have easier way to lobbying towards delicate trade deal such as the TTIP, where GMOs play a substantial role. Campaigners fear that the group’s future dominant position would somehow open the door to Monsanto’s genetically modified crops and seed into European market.

Bayer’s “open day”

Bayer’s latest move says the German company knows the risk of facing reputation issues. In an interview with German Sunday newspaper Frankfurter Allgemeine Sonntagszeitung, Mr. Baumann said he would be ready to meet environmental groups to address concerns about his company’s plans to take over US agrochemicals giant. “Our way of doing business may differ from the way Monsanto does. I can assure you that we would conduct these businesses based on the same standards as our other operations,” he said.

In that newspaper interview, Mr. Baumann invited Monsanto opponents to a dialogue with Bayer management. “As much as I talk to our investors to convince them of the plans, the offer also stands for environmental groups and other nongovernment organizations,” Mr. Baumann told the newspaper. “Let’s talk about the matter and its prospects”, he added.

Monsanto’s name to disappear?

The same interview did tell the world Bayer is also aware of Monsanto’s bad name, and contained an incredible revelation: Mr. Baumann indeed declared that the Monsanto brand could disappear, should the acquisition by Bayer see the light. “We’ll decide that when the time comes”, Baumann said. “Suffice to say that Bayer enjoys an excellent reputation and appeal worldwide – this needs to be used”, he then added with confidence. “We are aware of Monsanto’s reputation,” Mr. Baumann told the newspaper.

Enormous potential

The Leverkusen-based Bayer’s unsolicited bid for Monsanto is indeed an enormous, record breaking deal. It is the largest all-cash takeover on record, according to Thomson Reuters’ data, just ahead of InBev SA’s $60.4 billion offer for Anheuser-Busch in June 2008. Several analysts cautioned that the transaction could be too much of a financial stretch though and that Bayer’s business focus would then shift too much towards agriculture.

Bayer, for its part, seems more than confident the deal would make strategic sense and it actually looks more than interested into this new path. Agriculture is today a segment that currently accounts for about 22% of the German company’s business, and absorbing St. Louis-based Monsanto, the world’s top seed company in terms of sales, would represent a game changer for Bayer.

The “endless company”

According to Morgan Stanley’s estimates published by The Wall Street Journal, the record-breaking merger would create a company with a boundless portfolio, from Aspirin pain-killer pills to weed-killers, a sort of an “endless company”. The companies are also geographically complementary, with Americas as Monsanto’s largest markets and Bayer having a greater presence in Europe and Asia. The combination would sell about 28% of the world’s pesticides and about 36% of U.S. corn seeds and 28% of soybean seeds, the Wall Street Journal revealed, something that many people already consider scary.

However, this was not enough for Monsanto, which still doesn’t seem interested – only on paper, at least. Truth? Trick? Reuters quoted JPMorgan analysts as saying $135 to be a “more likely price”, given the expansion potential the merger would have for Bayer. A match with no equal has just started and the Sting will monitor the matter very closely.