The Big Ag Consolidation: Synergy at the Expense of Innovation
Nov. 30, 2017
In December 2015, Dow and DuPont set off the greatest wave of consolidation ever seen in the agricultural chemistry and agricultural biology sector. Two years later, the two have become DowDuPont: the largest chemical company in the world. But in-between, the entire ag-chem-bio industry has been mired in uncertainty with a focus on demonstrating synergy, at the expense of innovation.
ChemChina was next into the fray in February 2016, announcing it was acquiring Syngenta; the transaction closed this June at $43B. Since then, Syngenta has announced it is transferring a large crop protection portfolio to Adama, while Syngenta and Adama will jointly divest an off-patent crop protection portfolio to Nufarm for $490M. The process may not be finished for Syngenta; ChemChina is in merger discussions with Sinochem with a view to quickly surpassing DowDuPont as the world’s largest chemical company.
Monsanto is used to having a target painted on it, but in the fever of consolidation, it became the belle of the ball. For a year, the press was awash in stories of interest from German giants BASF and Bayer. In September 2016, Monsanto stopped the rumors by agreeing to a $66B offer from Bayer. The acquisition is expected to complete in early 2018.
BASF is not left out of all of this. In October 2017, it announced it’s acquiring a large portfolio of seeds and herbicides from Bayer for $7B. This will make BASF a major player in seeds at last, after years of trying. That deal is also expected to close in early 2018.
It’s not just tier one. Simultaneous with its merger with Dow, DuPont agreed to sell its crop protection portfolio to FMC, while in turn acquiring FMC Health and Nutrition. In September, Agrium and PotashCorp announced they are merging to create the largest fertilizer company in the world, which should close sometime in the next few weeks.
Most of the ag-chem-bio companies were so preoccupied by their overwhelming immediate concern that innovation became a lower priority, as evidenced by the annual reports of “the big six”. Dow, DuPont, Monsanto, and Syngenta all cut their R&D spending in 2016 after also cutting it in 2015, with DuPont being the most aggressive: -8% in 2015 followed by -11% in 2016. Even BASF cut 2016 R&D by 5%. Of the tier one companies, only Bayer, the biggest acquirer, increased its R&D budget in 2016 by 9%, while increasing its headcount and R&D spend as a percentage of sales.
A few strategic venture investments were made over the period, including Bayer’s investment in a new $100M joint venture with Ginkgo Bioworks. Monsanto Growth Ventures co-led the Series C for Pangaea portfolio company NewLeaf Symbiotics as well as Series A investments in Arvegenix and FarmLead; compare these three deals in 18 months to ten in the 18-month period immediately prior. Syngenta Ventures invested in Solap4, AgriMetis, and Boragen during the acquisition period; three in an 18-month period (one of which was a follow-on) compared to eight investments in 2015.
Pangaea’s agtech portfolio companies did well in this period, with four significant up-rounds: Vestaron closed its $18M Series D in July 2016, NewLeaf its $30M Series C in July 2017, and Calysta closed two rounds with a $30M Series C in February 2016 and a $40M Series D in May 2017. Deal flow, however, was affected by the slowdown in the sector; Pangaea’s 2016 new agtech deal flow was down 20% compared to 2015. 2017 is looking up, though, with the first three quarters of the year already exceeding the 2016 total.
By the middle of 2018, with over $100B having changed hands, the “new normal” will be established. From an oligarchy of the big six, agricultural chemistry and biotechnology will be dominated by a new “big four”: DowDuPont as the new largest overall chemical company (at least for a while), BASF in the unfamiliar position of #2 but with a new seed portfolio, ChemChina trying to resolve diverse cultures in a new organization, and Bayer the new king of ag-chem-bio. Tier two is also strengthened, with Adama, FMC, and Nufarm enjoying greatly expanded crop protection offerings, and AgriumPotashCorp dominating fertilizer.
As the wave of consolidation recedes, the need to innovate is returning. BASF, Bayer, DowDuPont, and Monsanto’s latest quarterly reports all show an increase in R&D spend in 2017, with only Syngenta contracting further. There will, no doubt, be further divestitures, but I expect that acquisitions will increase. It has already begun: In September, John Deere acquired Blue River Technology, a venture-backed startup with less than $5M in sales, for $305M. And shortly before completing its merger, DowDuPont acquired Granular, another venture-backed startup with less than $3M in sales, for $300M. I predict another golden age of agtech exits, as a whole new crop of great agtech startups is ripe for harvest.
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