Proposed takeover of Monsanto adds to sector’s deal frenzy
Consolidation has boosted market shares for leading firms
Bayer AG’s agreement to buy Monsanto Co. adds a new layer of complexity for antitrust officials already reviewing tie-ups across agriculture, as suppliers race to tighten their grip on markets from planting machines to chemicals.
While the overlaps between Bayer and Monsanto are minimal, the $66 billion tie-up they announced today follows months of deal making that’s consolidated the industry’s top seed and chemical producers into a knot of global powerhouses.
Antitrust reviewers around the globe will have to consider not just each deal individually, but how all the deals combined would impact markets, said Elai Katz, an antitrust attorney at Cahill Gordon & Reindel LLP in New York.
“Whenever we think about merger review it’s always about the future. You’re imagining what will the world look like after this merger,” Katz said. “Here you have to say what will the world look like after this merger, and this merger and that merger. That by definition complicates it.”
The biggest producers of seeds and chemicals have already transformed crop-production worldwide, with a new round of consolidation promising to further shape the global food supply. Biotech crops, the result of decades of development and billions of dollars in investment, have increased farm productivity and in many cases led to lower prices for consumers. At the same time, critics say, crop diversity has declined and small-scale farms are disadvantaged.
Crop-Chemical Giant
The proposed combination of Bayer and Monsanto would create a seed and crop-chemical giant with about $26 billion in sales. The deal would give Bayer, whose businesses include chemicals and pharmaceuticals, a company that’s both the world’s largest seed supplier and a pioneer of crop biotechnology. The kind of genetically modified seeds that Monsanto started to commercialize two decades ago now account for the majority of corn and soybeans grown in the U.S.
While Bayer and Monsanto’s businesses are mostly complementary, seeds and crop chemicals are major expenses for farmers, which could trigger political backlash against the deal, according to Sanford Bernstein analyst Jonas Oxgaard. The Senate Judiciary Committee is planning to hold a hearing on mergers in the industry on Sept. 20.
Even before the Bayer-Monsanto deal was announced, some 250 members of the National Farmers Union, the second-biggest U.S. farmer group, descended on Washington on Sept. 12 to meet with more than 30 members of Congress and Agriculture Secretary Tom Vilsack to argue that the spate of deals will hurt competition and raise costs of seeds and fertilizers at a time when farmers are already being squeezed by weak commodity prices.
‘Major Inputs’
“There is a political angle to this that makes the deal a lot harder to get past regulators,” Oxgaard said in a Bloomberg Radio interview Sept. 6. “These are major inputs in the farm economy.”
The Bayer-Monsanto agreement follows pending deals between Dow Chemical Co. and DuPont Co., and China National Chemical Corp.’s planned takeover of Syngenta AG. The rush to consolidate doesn’t just affect seeds and chemicals: Fertilizer makers Potash Corp. of Saskatchewan Inc. and Agrium Inc. have agreed to merge, while Deere & Co. is fighting to complete a deal with Monsanto that the U.S. Justice Department says would give the manufacturer a virtual monopoly for high-speed planters used on farms.
“Economists have been raising questions about competition economy-wide — whether there have been too many mergers and acquisitions, whether companies are getting too big, whether they’re not being competitive enough. We see these same sort of trends happening in agriculture,” said Keith Fuglie, an economist at the U.S. Department of Agriculture.
Mergers among agriculture firms over the last two decades have helped the biggest players sharply consolidate their control over markets, according to the Agriculture Department. In crop seeds and biotechnology, for example, the four biggest companies had a market share of 54 percent in 2009, the most recent data available, up more than double from 21 percent in 1994.
The antitrust review of the Bayer-Monsanto tie-up will focus in part on competition between biotechnology companies that produce herbicide-resistant seeds, according to Jason Miner, an analyst at Bloomberg Intelligence. The companies also compete in selling herbicides, though Monsanto’s herbicide — Roundup — is a commodity product with lots of generic competition from other suppliers, while Bayer produces more advanced weed-killer, he said.
Market Shares
In crop chemicals like herbicides, the companies created by the Syngenta-ChemChina and Bayer-Monsanto mergers would control more than half the market, according to 2015 data compiled by Bloomberg. For corn seeds, a combined Dow and DuPont along with Monsanto would control nearly three quarters of the U.S. market, while in soybeans, they would hold about 65 percent, according to 2015 data from Verdant Partners, an agriculture consulting firm based in Champaign, Illinois.
A more important issue for competition authorities may be the effect of the deals on research and development, particularly in advancing the biotechnology that has revolutionized farming by producing traits in seeds like resistance to herbicides. Monsanto, Bayer, Dow, DuPont and Syngenta dominate this market, said Dean Cavey, a managing partner at Verdant, which has done work for the companies doing deals.
R&D Spending
Private agriculture R&D spending worldwide more than tripled between 1990 and 2014, rising to $15.6 billion from $5.1 billion, according to the Agriculture Department. Those high R&D costs have created significant barriers for new firms that want to enter the market, said Fuglie, the agriculture department economist.
The looming consolidation risks undermining competition between companies to innovate and introduce new products, according to of the American Antitrust Institute, a Washington-based organization that is critical of further concentration in the industry. Fewer competitors also mean reduced opportunities for the firms to collaborate in developing seed traits, said AAI president Diana Moss.
“You want them maintaining independent R&D programs so they can compete hard to be first to market, and the mergers would eliminate that,” she said.
Cavey at Verdant disagrees. While the proposed mergers would reduce the number of leading R&D spenders, he said, combining would give the companies the resources to increase spending on the innovations that benefit farmers.
“The only way innovation is going to take place is by spending lots of money, and that has to be by these companies,” he said. “They’re the only ones that can afford it.”