More Bayer and Monsanto Details

Companies Will Operate Separately for Now

Monsanto has accepted a buy offer of roughly $66 billion from Bayer. (Logos courtesy of Bayer and Monsanto)

DECATUR, Ill. (DTN) -- This is the time of year farmers fill their combine hoppers and place seed orders for the coming growing season. News Wednesday morning that Bayer and Monsanto, two of the largest seed and chemical suppliers, signed an agreement to merge shouldn't change those plans, officials from both companies said in a press conference.

"It's really important to highlight what we announced today is an agreement for the two companies to proceed together," said Liam Condon, a member of the board of management of Bayer AG and head of the Crop Science Division. He noted that the agreement is subject to both approval by Monsanto shareholders and regulatory approvals, which could stretch well into 2017.

"Until that point in time, we will operate as completely separate companies," Condon said. "Any farmer making decisions, say about seed, should make those decisions as they would have yesterday. There won't be any common activities until we get closing," he said in response to a DTN question during a telephone question-and-answer session for U.S. agricultural journalists.

Monsanto's agreement to a takeover by Bayer AG on Wednesday caps a year and a half of deal making that has the potential to reshape the $100 billion seed and pesticide sector. In the past year, Dow Chemical Co. and DuPont agreed to merge while China National Chemical Corp. is buying Swiss company Syngenta AG. If all three deals pass regulatory muster, the emerging three entities would effectively control more than three-quarters of U.S. corn-seed sales and 70% of the world's pesticides. Other agricultural companies are also talking. Proposed mergers between Potash Corporation and Agrium and between John Deere and Precision Planting have been announced recently.

The U.S. Department of Justice has remained quiet on the seed-and-chemical mergers, but the U.S. Senate Judiciary Committee has a hearing scheduled for next week on the topic. The National Farmers Union condemned the Bayer/Monsanto deal and indicated the importance of next week's Senate Judiciary Committee review of agricultural consolidation.

Senate Judiciary Committee Chairman Chuck Grassley, R-Iowa, made the following statement regarding the latest merger announcement from Bayer and Monsanto.

"Iowa farmers who I've spoken with are worried about rising input costs, especially in an increasingly weak agriculture economy," Grassley said on Wednesday, adding the Monsanto-Bayer announcement heightens those concerns. "As mergers continue to occur in the seed, agrochemical and fertilizer industries, federal antitrust regulators must be ever more vigilant to ensure a robust competitive environment in this important sector. And, with several proposals under review, it's crucial that the antitrust authorities collaborate as appropriate with each other, and the Department of Agriculture, in their analysis to ensure that competition is preserved for farmers and consumers."

However, leaders from the merging firms say the deals will help them bring new products to markets faster and lead to bigger profits for farmers in the long run. Still, some farmers worry that a shrinking number of suppliers could mean higher prices for seeds and crop-chemicals and fewer overall products.

Agriculture Secretary Tom Vilsack said in an interview with DTN earlier this week that the large mergers reflected companies looking for ways to be more efficient while dealing with the low commodity prices and weak overall global economy. Mergers allow the companies to acquire a competitor's customers and reduce administrative costs at the same time, he said. "I think there is a correlation on those things and what happens when commodity prices are what they are," Vilsack said.

Robb Fraley, Monsanto's chief technology officer, said in the call with U.S. journalists that the merger was more about innovation than streamlining. "We believe that working together as a single company we can invest more and create more innovation," Fraley said. "What is unique about this combination is it is driven by that shared vision."

Regarding the question of what to do this year, Fraley quipped that the answer is simple: "They need to buy more DeKalb corn and Asgrow soybeans." Condon took good-hearted exception to that statement. Bayer sells cotton, soybean, canola and vegetable seeds, often in direct competition with Monsanto. In recent years, Bayer's LibertyLink herbicide trait technology has become the go-to trait for growers struggling with glyphosate-resistant weed problems. Monsanto developed the Roundup Ready glyphosate technology and their new Roundup Ready 2 Xtend herbicide trait system that uses dicamba herbicide is positioned to compete with Bayer's LibertyLink system.

Herbicide traits, cotton and vegetable seeds have been the areas where the companies seem to overlap. However, the company spokesmen were unwilling to reveal any details about what spinoff or divestitures might come of the union. Officials said they do not want to preempt regulatory assessment or put suggestions into the minds of regulatory authorities as to what the product overlaps might be.

Last week during meetings in Germany with U.S. journalists, Condon acknowledged that lack of competition in the marketplace is a concern often mentioned by farmers. However, he noted that there is a second tier of more regional-type companies and generics that are strengthening in market presence and that two companies currently control the seed market shares in the U.S. (Monsanto and Pioneer) and that doesn't change with the new marriages being proposed.

Now that the two companies have agreed to merge, more talks can take place as to how they might go forward with the integration and what the new combined portfolio could and should look like, Condon said. "These are discussions that will take place from now and into 2017, and by the end of 2017, I think we could give further guidance," he said. If the sale is squashed by regulators in the U.S. or Europe, Bayer has committed to a $2 billion breakup fee.

Bayer operates in several industries, but Monsanto is largely an agricultural company. Combined agricultural sales last year from the two companies equaled roughly $25.8 billion. Bayer also noted that once the transaction is completed and the two companies are combined, "synergies" over the next three years would lead to roughly $1.5 billion in savings.

Condon emphasized that he hopes the merger is seen as a way to grow rather than save. He did allow that there would be areas where both companies had some inter-structural costs that would overlap that could result in savings. In the meantime, he said that each company has products and brands that are strategically placed and farmers should expect to see investment continue in core brands.

Fraley said one of the benefits of the combination will be the bringing together of complementary research and development programs. "Traditionally, if we were going to develop an herbicide-tolerant trait, we would wait until Bayer or another company had developed and registered a new herbicide and seven to 10 years later we would have a trait/herbicide combination," Fraley said. "This transaction opens the opportunity to roll out these things in parallel and that means more products faster for farmers, and that's one of the key drivers for future value for the new company."

It's all about offering farmers a one-stop-shop for seeds, chemicals, digital tools and agronomic advice. Condon said he sees Monsanto bringing the seed/biotech and digital platform together with Bayer's abilities in crop protection. The companies, he said, have had a shared vision, but together he believes it can be taken to the next level.

Again, Fraley insisted the transaction is not about creating cost synergies, but about creating innovation. "The combined company will have a combined research and development budget north of $2.5 billion and nearly 10,000 researchers that wake up every morning wanting to bring new innovations to farmers, which is key.

"It's important that the ag industry goes through the kind of changes it is going through today. When I look globally, I see compared to almost every other industry on the planet, a very fragmented industry that doesn't have the kind of scale and capability to bring the innovations together," Fraley said. He specifically mentioned the need to invest more in the digital space. "When we were looking at our strategic options for the future, one of the key attractions was to be able to invest more.

"More investment in R&D that drives innovation will allow growers to compete more successfully and more profitability," Fraley said. He added this merger raises the bar for other companies and overall consolidation should benefit growers.

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