In late July, Werner Baumann, chief executive of German chemicals, life sciences and pesticides giant Bayer AG, was full of confidence. Bayer’s $66-billion (U.S.) takeover of Monsanto Co., the United States’ leading agricultural chemicals and seeds company, was in the bag, he told analysts on a conference call. “There is absolutely no reason to doubt that this transaction cannot close by the end of the year,” he said.
He spoke too soon. His assurance came before he ran into Margrethe Vestager, the Europe’s hard-charging commissioner for competition. On Aug. 22, her office announced an in-depth investigation into the proposed merger, one that will not be completed until Jan. 8, blowing up Mr. Baumann’s prediction for a gift-wrapped merger at Christmas.
But given the complexity and size of the deal – the two companies’ collective market value at the end of August was $157-billion – and the push-back from the powerful farming lobbies on both sides of the Atlantic, there is a good chance a decision will come weeks later, rather than the day the probe ends, as is usually the case.
Worse for Mr. Baumann, a deal of some sort, while still likely, is no longer absolutely certain, especially if Ms. Vestager insists that either or both companies unload key divisions to secure the merger’s approval. For Bayer and Monsanto, the signs are not promising. In a rather blunt statement, the competition commission said: “The commission has preliminary concerns that the proposed acquisition could reduce competition in a number of different markets resulting in higher prices, lower quality, less choice and less innovation.”
For Bayer and Monsanto, the timing of their deal could not be worse because the global agribusiness market was already gripped by merger mania before they unveiled their tie-up and competition regulators all over the world were already on alert.
Not long before Bayer and Monsanto decided to become one, Dow Chemical Co. and DuPont joined forces, and ChemChina bought Swiss seeds, biotech and agrochemicals company Syngenta, which was Monsanto’s closest rival in Europe. In each case, the European competition officials said the merger would not be approved unless certain big divisions were sold to prevent competition-clobbering market dominance. DuPont, for instance, was forced to sell its crop-spray, research-and-development arm – a blow to the company.
Putting Bayer and Monsanto together would largely complete the consolidation of the global agribusiness market. No wonder competition authorities in some 30 countries, from Canada to South Africa, are reviewing the deal.
“You have a consolidation wave going on,” Silvio Cappellari, a competition law partner at the Brussels law firm of Schilling Zutt & Anschutz, said in an interview. “When you look at the market as it now stands, you have already gone from six players to four. Who comes last tends to have a problem.”
Indeed, would three big players – DowDuPont (as it is now called), Syngenta-ChemChina and Bayer-Monsanto – constitute adequate competition? Farmers fear not. “From six to three [agribusiness] players? There’s no question that when you have more diversity, it’s better,” Lindsey Lusher Shute, executive director of the National Young Farmers Coalition, based in Hudson, N.Y., said in an interview. “When you have only three suppliers in control of the world’s food supplies, it puts all of us at great risk. The more suppliers, the better.”
Other farming groups and coalitions, including the National Farmers Union in the United States, the Canadian Federation of Agriculture and the European farmers’ groups Copa and Cogeca have expressed serious concerns about the rapid consolidation of the agribusiness sector in general and the Bayer-Monsanto deal in particular (the Canadian farmers say that, together, Bayer and Monsanto would control about 90 per cent of the Canadian canola seed market).
They have been supported by anti-trust lobbyists and environmental groups.
“The merger substantially eliminates competition across a number of important markets,” said Diana Moss, president of the American Antitrust Institute. “It could squeeze out smaller rivals and saddle farmers and consumers with higher prices, reduced choice and less innovation.”
Food & Water Watch, a lobby group in Washington that promotes safe food and clean water, wants the U.S. Department of Justice to block the merger. “The wave of megamergers sweeping the food and agribusiness sectors is turning over the food system to a corporate cabal that thwarts the movement to build a fair, sustainable and healthy food system,” said executive-director Wenonah Hauter.
For Bayer and Monsanto, the potential showstopper is Ms. Vestager. There is no doubt she is the most aggressive competition official on the planet and does not shy away from targets armed with formidable lobbying power and the most expensive lawyers.
Ms. Vestager, Denmark’s former deputy prime minster, has been the European Union’s competition commissioner since 2014 and is famous for keeping a ceramic hand on her desk, its middle finger raised. She has set the global trust-busting standard by going after powerful targets such as Google Inc. (now Alphabet Inc.), Russia’s Gazprom, Europe’s biggest truck makers and Apple Inc.
In the Apple case, she ruled that the Irish government’s ridiculously low tax deal – well less than 1 per cent – constituted an illegal subsidy in disguise and ordered the iPhone maker to pay €13-billion ($19.5-billion Canadian) in taxes to the government. She fined Europe’s main truck makers, including Germany’s Daimler AG and Italy’s Iveco Trucks, a record €2.9-billion for colluding on prices. In June, she hit Google with a €2.4-billion fine for abusing its dominant position in Internet search. (The commission ruled that Google manipulated its search service to favour Google Shopping at the expense of smaller rivals.)
Ms. Vestager probably hasn’t finished because consolidation in every industry – driven by cheap money and, apparently, U.S. tolerance for oligopolies as traditional American zeal for trust-busting wanes – continues at a turbo-charged pace. This week, it was the aviation industry’s turn, with United Technologies Corp. reportedly close to a $30-billion (U.S.) deal to buy Rockwell Collins, a maker of cabin equipment for passenger planes. U.S. President Donald Trump’s vow to deregulate banks and other industries, a process that started in the Ronald Reagan era, could accelerate the trend.
A recent report in The Economist on “superstar” companies noted that the share of nominal gross domestic product generated by the Fortune 100 – the top American companies – reached 46 per cent in 2013, up from 33 per cent in 1994. Their share is probably higher today.
Over the same period, the share of revenues of those companies among the Fortune 500 rose to 63 per cent from 57 per cent. The management consultancy McKinsey calculated that the top 10 per cent of global companies generate 80 per cent of all profits.
Bayer’s takeover of Monsanto, announced on May 23 and pitched at $122 a share, a premium of 44 per cent over Monsanto’s share price at the time, was promoted by the duo as a “compelling opportunity to create a global agriculture leader” with the firepower to fund innovation in everything from seed development to digital farming platforms, which use data on weather patterns, soil quality and other factors to help farmers determine what crops should be planted at what time.
Specifically, the merger would unite Monsanto’s expertise in seeds and traits (the patented characteristics of genetically modified seeds) with Bayer’s broad crop-protection line of herbicides, fungicides and insecticides. Monsanto would build Bayer’s business in the United States and Bayer would do the same for Monsanto in Europe.
But where Bayer and Monsanto saw market clout, cost-saving synergies eventually worth $1.5-billion a year, shareholder wealth creation and fat innovation budgets, Ms. Vestager saw competition problems – and lots of them. Her office had specific concerns in several key areas.
One was competition in herbicides. Monsanto makes glyphosate, which is marketed as “Roundup,” the most popular agricultural herbicide in Europe. The product’s main competitor is glufosinate ammonium, made by Bayer. The merger, in other words, might substantially reduce farmers’ choice in the most popular herbicides. Another was competition in vegetable seeds, especially rapeseed and cottonseed, markets in which each company has a high market share. Ditto in traits, where Bayer and Monsanto are strong competitors.
Finally, the commission is worried that potential “bundling” – tying the sales of pesticides with seeds – would also reduce farmers’ choices. Ms. Shute, of the National Young Farmers’ Coalition, thinks it might. “It’s not a good thing,” she said.
Bayer and Monsanto are not commenting on what Ms. Vestager and her trust busters may or may not do, though the two companies realize that some business sales are inevitable. “Bayer has been anticipating that regulatory authorities could require certain divestitures,” Bayer said on the day the commission announced its in-depth investigation.
But given Ms. Vestager’s take-no-prisoners reputation, Bayer and Monsanto cannot count on one plus one equalling three. One plus one could end up at well less than two, or even zero if she gets particularly aggressive.