The Birth of an Agribusiness Behemoth: The Far-Reaching Implications of the Controversial Bayer-Monsanto Merger
In September 2016, after four months of bidding, German pharmaceuticals giant Bayer AG acquired American agribusiness firm Monsanto Co. for the whopping sum of $66bn, the largest German takeover of a U.S. firm to date. The deal was recently approved by Bayer shareholders in near unanimity, but has yet to pass through significant regulatory hurdles for it to be complete. Were the contentious deal to go through, it would give birth to the world’s largest seed and pesticides firm, controlling more than a quarter of the global market, while still holding significant pharmaceuticals and chemicals businesses as well. The emergence of a corporate giant of this size has far-reaching, and potentially deeply harmful consequences for the future of agribusiness, with many advocacy groups already expressing deep concern about the impact this new firm might have on their livelihoods.
Bayer, the owner of Aspirin and Alka-Seltzer, had been involved in a lengthy bidding process with Monsanto, the American crop science leader, since May 2016. Though the firms eventually agreed on the $66bn figure, some Bayer shareholders expressed concern about Monsanto being overvalued by the German pharmaceuticals conglomerate: Monsanto was bought at a 44% premium of its share price from the day before the deal was formally proposed.
Werner Baumann, chief executive of Bayer, has emphatically expressed his vision for this newborn company: he hopes to transform it into a “one-stop shop” for farmers, offering a comprehensive range of products to increase crop yields and diminish costs, and believes that the synergy between the two firms’ expertise will allow them to meet the world’s ever-rising food demand. Bayer officially stated that “the acquisition of Monsanto would be a compelling opportunity to create a global agriculture leader, while reinforcing Bayer as a Life Science company with a deepened position in a long-term growth industry.” Whether this is simply corporate grandiloquence or a genuine, personal goal of Baumann’s is unclear. What is certain, however, is that the merger will have deep repercussions on the lives, diets, and jobs of millions of people, and will fundamentally reshape the world’s food supply.
A significant challenge that lies ahead for Bayer and Monsanto is approval of the deal by regulators. Indeed, deals of this size often fall under the scrutiny of trustbusters, whose goal is to enforce antitrust laws that seek to ensure a healthy level of competition in a specific market for the benefit of consumers.
Projections for the outcome of the antitrust ruling vary: Bayer might plausibly be forced to divest some of their assets that overlap with Monsanto products (like soybeans, cotton seeds, and canola) before approval. Baumann’s reply to this concern is that “there is very little overlap between [Bayer and Monsanto]” and that his firm is “not only complementary from a product portfolio perspective, but also in terms of geography.”
Analysts from Bernstein Research, an American investment management and research firm, project only a 50% chance for the deal successfully passing regulatory scrutiny, but report that a survey of Bayer shareholders shows 70% of them being confident that the deal would be approved. Bernstein analysts believe “political push-back to this deal, ranging from farmer dissatisfaction with all their suppliers consolidating in the face of low farm net incomes to dissatisfaction with Monsanto leaving the United States, could provide significant delays and complications”.
Nonetheless, both American and European farmers are understandably worried about the prospect of rising seed and pesticide prices that might occur from the lessened competition between suppliers were the deal to be approved. Indeed, the consequences of an oligopoly in the seed and pesticides industry has been raised at a US Senate Judiciary Committee hearing on the implications of such consolidation in the agricultural industry: Dr. Diana Moss, president of the American Antitrust Institute, argued against megamergers in agribusiness saying “competition limits incentives for just a few large players in a tight oligopoly to tacitly or even explicitly ‘agree’ not to compete”.
The firms’ defense was structured around a “pro-innovation” argument, positing that mergers allow private firms to address challenges facing food supply more adroitly than they could each independently, due to much larger R&D budgets. To put it in perspective, Bayer-Monsanto’s prospective R&D budget over the next six years would be a colossal $18bn worldwide, with about half of that being invested in the US alone. While it is true that R&D budgets of consolidated private firms would be larger than anything we’ve ever seen, the potential of crop yields might unfortunately be outweighed by the even faster rise in seed prices, a phenomenon that would only worsen were the amount of competition in the industry to diminish, as Dr. Moss mentioned during the hearing.
The repercussions of steeply rising seed prices have already directly contributed to tarnishing Monsanto’s corporate reputation: The epidemic of farmer suicides in India, a public health issue with a wide and complex etiology, has been partly blamed on price gouging by Monsanto, notably by certain provincial governments in India. While farmer indebtedness, to which rising prices from seed suppliers undoubtedly contribute, might not be that pressing of a public health concern in the USA relative to India, an agrarian society where about half of the population’s income depends on agriculture, it is important to acknowledge the effects of rising prices and debts on the quality of life of farmers everywhere. Bayer-Monsanto’s combined pricing power raises concerns about similar price hikes potentially occurring on a global scale. Roger Johnson, president of the National Farmers Union, did not mince words in his testimony to the hearing, expressing concern about how “it is also easier to fix prices when there are fewer market participants”, a realistic worry given the evidence of the consequences of consolidation.
American employees of Monsanto are, on their end, rightfully concerned with potentially losing their jobs at the company’s current headquarters in St-Louis, Missouri. To appease these fears and appeal to the protectionist American president, Bayer and Monsanto’s chief executive officers met in early January 2017 in New York with then still president-elect Donald Trump and promised $9bn in R&D investment (leading to upwards of 9,000 new jobs, of which 3,000 would be tech focused) in America, as well as pledging to keep the St-Louis headquarters of Monsanto open.
Consumer advocates have also expressed their concern, along the same lines as farmers: less choice and higher prices would drastically overwhelm any benefits more efficient R&D spending or “corporate synergy” mergers like these would ostensibly create. Gene Kimmelman, the DOJ’s antitrust chief counsel during the Obama years, stated that “if a transaction is harmful to competition and merging companies raise prices to consumers by 10 to 15 percent, it would not be good to allow that to happen just because the merged companies created some jobs.”
Bayer shareholders, on their end, have mainly expressed concern about the possible deterioration of the firm’s brand image following the acquisition of one of the most criticized firms in the world, whose contentious products (ranging its genetically modified seeds to the oft criticized Roundup™ line of crop pesticides) will now be associated with Bayer’s relatively uncontroversial brand.
A deal of this scope carries with it not only an enormous impact on the economies of Europe and the United States, but will also potentially affect the lives of all stakeholders involved in the business of farming and agriculture. Bayer’s merger with Monsanto comes in a wave of similar “megadeals” in the chemicals and pharmaceutical sectors, with Chinese ChemChina taking over Switzerland-based agribusiness Syngenta, and the two largest US chemical firms, Dow Chemical and DuPont, agreeing on a similarly enormous merger. Considering all these concerns about what such mergers entail, regulators must carefully weigh and analyze the benefits of this deal in innovation and cost-efficiency against the consequences of substantially diminishing competition.