History will say Bayer got a bargain in its $66 billion purchase of Monsanto.
The Creve Coeur agriculture giant is selling for less, in relation to its earning power, than it offered to pay for Swiss rival Syngenta last year. Syngenta, which ended up selling to a state-owned Chinese company instead, has nowhere near the technological prowess or new-product pipeline that Monsanto has.
Because of its genetics expertise and investments in futuristic digital-farming technology, Monsanto has always considered itself the top-shelf player among the six big worldwide sellers of seeds and crop chemicals. So how did it end up in the bargain bin?
Blame the deep slump in world agriculture and, to some extent, the short-term nature of U.S. capitalism.
It’s no accident that, among those six ag-chemical giants, all three U.S. companies are involved in mergers. Dow Chemical and DuPont agreed to combine last year after coming under pressure from activist shareholders.
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Meanwhile, the industry’s two big German firms remain independent. If shareholders and regulators sign off on its deal, Bayer will be a dominant No. 1 player after buying Monsanto, and BASF hopes to snap up products its rivals must sell to gain antitrust clearance.
Bayer, like other German companies, has substantial worker representation on its supervisory board, a structure that helps insulate it from the whims of the stock market.
All of Monsanto’s directors, by contrast, are elected annually by shareholders. In the U.S., a board that rejects a credible takeover offer is vulnerable to lawsuits, fierce criticism on CNBC and a nasty proxy fight.
Radhakrishnan Gopalan, associate professor of finance at Washington University’s Olin Business School, says Monsanto had little maneuvering room once Bayer made its initial offer.
Given the bad news it has delivered recently — last month, Monsanto said its earnings would be at the low end of its target range for this year and would remain under pressure next year — Gopalan believes the stock market would have reacted harshly if the company had rejected Bayer outright.
“They needed a change of direction, because the industry is going through some tough times,” Gopalan said. “This is a pretty darned attractive offer considering the state of the industry and the target.”
Even though Bayer’s initial bid of $122 a share struck many analysts as too low, the German company’s no-nonsense stance worked. It ended up paying just 5 percent more at $128 a share.
Although Monsanto said repeatedly that it was considering other strategic options, in the end it had to say yes or no. “If the alternative is selling to Bayer or standing alone in a weak environment, you don’t have all that much bargaining power,” Gopalan said.
Had Monsanto walked away, the market reaction would have been ugly. Its shares might have fallen 15 percent to 20 percent, putting them back where they were before Bayer expressed interest, or more. Lawsuits would have been inevitable.
“Many shareholders are short-term in nature,” says Matt Arnold, an analyst at Edward Jones. “The board can govern for the long term, and I think they do, but shareholders are holding them to a short-term standard in many respects.”
So the U.S. version of capitalism, along with a farm slump that has been longer and deeper than anyone expected a year ago, has handed the Germans a great bargain.
In a way, that may be good. If Bayer had paid more, it would be under more cost-cutting pressure and would have less ability to invest in research while profits remain depressed. Such investments, in the end, are St. Louis’ biggest stake in this deal.
