Why Bayer’s Buyout of Monsanto Will Likely Proceed

Bayer’s proposed buyout of Monsanto triggers concerns about less competition and higher input prices for farmers. Still, there’s more than meets the eye to this merger, according to an analysis by Mark Gulley, a New York City stock analyst with Gulley and Associates. 

Antitrust concerns exist, he says. Still, they mainly exist in the cottonseed and canola areas. Bayer’s LibertyLink technology may be up for divesture, but there’s a strong argument suggesting it may stay.

Generally, there’s a lack of overlap in products, research and development portfolios in the corn and soybean market. The two firms also have different geographies that help make overlap minimal. Bayer derives 70% of global sales from outside of North America, while 59% of Monsanto’s sales are in North America.

Two Companies, Two Paths

Monsanto is largely in the seeds and traits business, while Bayer concentrates on chemicals. Gulley’s analysis shows 74% of Monsanto’s 2016 sales came from seeds and traits, with the remaining 26% coming from crop-protection chemicals. Bayer’s flipped the other way. It derived 85% of its 2016 sales from crop-protection chemicals, with just 15% coming from seeds and traits.

Little overlap exists between the companies in the global seed and traits space for corn and soybeans. Monsanto’s 36% market share in corn would not change if the firms combined. In soybeans, Monsanto’s current 27% market share would rise to just 28% if the Bayer-Monsanto merger went through.

Meanwhile, Bayer’s 26%, 11%, and 32% global market share for fungicides, insecticides, and seed treatment would remain unchanged under a combined Bayer-Monsanto.

It’s in the herbicide area, though, where antitrust concerns rise. Bayer’s 15% global market share of the selective herbicide market would rise to 22% for the combined companies.

Currently, Monsanto has 27% of the global crop-protection market share for nonselective herbicides. (glyphosate in Roundup products). This would rise to 35% for the combined companies, mainly due to the addition of Bayer’s Liberty (glufosinate).

You say glyphosate, I say glufosinate…..

Having the two leading nonselective herbicide-tolerant technologies may raise the eyes of antitrust regulators. Still, other than the facts that glyphosate and glufosinate are both nonselective herbicides and start with the letter G, differences exist. Glyphosate is a systemic herbicide, while glufosinate is a contact one. Although application of both herbicides on smaller weeds 4 inches and below makes both more effective, glyphosate works better than glufosinate on taller weeds.

Gulley believes antitrust regulators will take into account that both are off-patent with multiple suppliers. For example, several dozen suppliers supply approximately 75% of global glyphosate production. Not surprisingly, generic Chinese manufacturers generally dictate pricing, though Roundup does enjoy a slight premium to Chinese glyphosate. This market commoditization should cause little harm to farmers, Gulley believes.

Regulators may also consider that Monsanto and Bayer have a long history of supporting stewardship of glyphosate and glufosinate, respectively. A generic firm may have little incentive to assume stewardship support, believes Gulley.

Regulators may also decide that controlling both herbicides may result in anticompetitive issues, but stipulate other remedies outside of divestiture, such as required licensing.

Even if significant anticompetitive issues between glyphosate and glufosinate are lacking, it’s still possible that Bayer will divest LibertyLink to proactively address concerns related to control of both Roundup Ready and LibertyLink, says Gulley. Both traits are widely licensed to many industry participants for use in current and future seeds.

Other Concerns

There are concerns, though, that have sprung up from the proposed merger that include the following. 

Consolidation Will Increase Barriers to Entry 

The Big Six in the agricultural seed, chemical, and traits area – BASF, Monsanto, Bayer, Dow, Syngenta, and DuPont – will be whittled down to the Big Four if Bayer-Monsanto, Dow-DuPont and ChemChina-Syngenta purchases proceed. The resulting industry concentration leaves numerous concerns that fewer players will mean less farmer choice when it comes to products.

Across agriculture, though, there are more players than ever, Gulley notes. Hundreds of start-ups have annually entered the agricultural space. Investment in agricultural technology investment over the last three years is estimated at $10 billion. Even among big players, plenty of collaboration between parties will occur and will not change the need for innovation investments, Gulley believes.

Cross-licensing agreements are one reason why. They now and will continue to be standard in the seeds and traits business. Gulley says they allow smaller firms to benefit from the innovation occurring at large companies at a lower cost than developing products on their own.
Cross-licensing also lowers barriers to entry and allows for easier access to the agricultural market by new and independent seed providers, Gulley believes. Without the need to replicate the stack of traits desired by growers, seed providers can in-license commercially available traits and focus on developing a new singular proprietary trait.

For example, agricultural biotechnology was launched by the cross-licensing of enabling DuPont biolistics machine technology that delivered exogenous DNA to plant cell tissues, allowing for the development of transgenic plants. Only later did several companies, including Monsanto, Bayer, and Syngenta, develop improved agrobacterium technology to deliver exogenous DNA to plant cell tissues and cross-license the technology to other industry participants, Gulley notes.

Nearly every large company in the sector cross-licenses traits from other large industry participants or smaller companies to stack technologies. For example, Dow AgroSciences and Arcadia Biosciences collaborate to develop and commercialize yield traits and trait stacks, leveraging Arcadia’s platform of abiotic stress traits.

Companies also license technologies from several different sources, including from universities and other public institutions. For example, Monsanto licensed dicamba from the University of Nebraska in 2005 and then licensed it to other industry participants. Monsanto also licensed CRISPR-Cas9 gene editing technology from the Broad Institute of MIT and Harvard University in 2016. The merger between Bayer and Monsanto will maintain this global collaborative structure as the two companies have committed to continuing their longstanding practices of cross-licensing, Gulley believes. Bayer and Monsanto currently maintain nonexclusive cross-licenses not only with each other, but also with their other competitors.

Consolidation Will Result in Less Innovation

That’s not likely, considering the advent of problems like herbicide-resistant weeds, points out Gulley. Meeting these challenges will require considerable investment from existing and new industry participants.

Venture-backed start-ups and large technology companies view agriculture as an attractive investment opportunity. For example, precision agriculture based on data analytics has begun to transform the sector, as with biotechnology.

Large companies must compete in this investment landscape, which is being disrupted by technology and new entrants, says Gulley. To remain competitive, they must keep pace. Even though they are large, few have the scale to do so from a product or technology portfolio standpoint (i.e. crop protection, seeds and traits, and precision agriculture) without consolidation.

This is also occurring in the face of a difficult agricultural industry cycle that’s pressuring all value-chain participants, ranging from large input providers down to farmers.

Integration of research-focused seeds and trait and crop-protection segments should allow for shorter new product development time frames, more focus on grower concerns such as increased herbicide resistance, and better products, says Gulley.

Monsanto estimates, for example, that the time line for new product development from discovery to commercialization could be shortened by more than a decade from parallel development of herbicide-tolerant traits. History has also demonstrated that industry investment has generally grown because of consolidation. From 1996 to 2006, annual research and development spending on seeds and traits and crop protection increased from $2 billion to over $4.5 billion and grew to over $7.7 billion by 2015.

The result? The resulting commercialization and rapid adoption of new technologies that increased crop yields by 22% globally (between 1995 and 2014). Those crops that benefitted from the greatest biotech innovation – corn and soy – experienced even more significant yield improvements, with U.S. corn yields increasing 38% (1996 to 2016) and U.S. soy yields increasing 40% (1996 to 2016).

Consolidation Will Raise Agricultural Input Prices

The lack of overlap on the seed and trait side makes it unlikely. They face competition largely from other companies, not from each other. Seed and trait cross-licensing also enables farmers to buy seeds with desired traits from a single seed provider that stacks traits produced by different seed developers.

The overlap is larger in the herbicide areas. However, most Bayer and Monsanto products are off-patent and, thus, generic manufacturers are the main drivers of (lower) prices.

This Merger Likely Will Proceed

Given recent positive regulatory developments in the ChemChina-Syngenta and Dow-DuPont transactions, Gulley believes regulatory concerns about Bayer-Monsanto are addressable for the transaction to commence. Although some asset divestitures will be necessary, he says they appear to be generally narrow and well defined.