The Meaning Behind the Mergers

The announcement of three mega mergers has sent ripples through the crop protection market. The potential of turning six companies — Bayer/Monsanto, Dow/DuPont, and Syngenta/ChemChina — into three could have huge implications for the industry. AgriBusiness Global spoke with M&A experts to get their insights on what impact the deals could have on the industry.
“Companies are starting to realize you have to have a certain amount of scale,” says Duane Dickson, Global and U.S. Chemicals Sector Leader at Deloitte. “They must have a certain breadth of services and products.”
According to Vijay Sarathy, a partner of PwC’s Strategy&, the global strategy consulting arm of PwC, both macro- and micro-factors are driving the spate of proposed mergers.
At the macro level, “Industry consolidation across the value chain is a logical development whenever there is a downturn in commodities,” he says. “We are witnessing efforts to consolidate within the various stages of the agricultural value chain, most notably in chemical inputs.”
On the company (micro) level, reasons for M&A vary. “For some, it could be the prospect of combining a world-leading traits portfolio with a leading chemicals portfolio,” Sarathy says. “For private equity firms, it could be the opportunity of buying an otherwise attractive asset at bottom-of-the-cycle valuation. Other firms are waiting in the wings ready to scoop up any businesses that might have to be disposed of by participants in megadeals in order to placate regulators.”
Conventional wisdom suggests if a Bayer/Monsanto deal indeed happens, one company must divest its seed business.
There are pros and cons to mega mergers in ag and crop protection, Sarathy says.
“On the pro side, the promise of mega mergers is that by combining R&D resources and by focusing on the most promising leads for improving yields, participants serve humanity’s need to feed more people from limited land,” Sarathy says.
“The argument most often made against mega mergers is that the resultant corporations amass too much market power and could exploit this power at the expense of farmers and society,” Sarathy says. “The risk of this can be mitigated if regulatory authorities subject these transactions to close scrutiny and mandate remedial actions as conditions for greenlighting the deal — this will most likely be the case for the mega mergers currently being contemplated.”

Influence on Innovation
When companies merge, it diminishes the number of research pipelines. But that might not necessarily translate into less innovation.
“When things consolidate, there are fewer decision makers,” Dickson says. “The pipelines (can) benefit from deeper pockets and the ability to invest more. In the next five to 10 years, it will enhance innovation. Longer term, that’s a different question. I don’t see any reason the innovation wouldn’t continue as long as the market growth is still there.”
According to Dickson, when two companies merge, they go through an evaluation process looking at what each has in its pipeline. If they’re working on competing products, leadership must decide which is closer to commercialization or offers more promise.
Increased innovation isn’t always the result of a merger. There are many factors to consider, not the least of which is intent, Sarathy says.
“A sweeping statement that applies to all mergers will most certainly be inaccurate,” Sarathy says. “Targeted acquisitions of specific capabilities are more likely to spark innovation than large transactions where cost synergies are the primary motivation. In the latter case, the disruption and distraction caused by the big transaction can cause R&D efforts to lose focus.”

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Future Deals
Should these deals be completed, the multinational landscape will look much different, and it will leave fewer players at the top. That doesn’t mean the dealing is complete.
“There could be some reshuffling,” Dickson says. “To different degrees, the large deals involving crop science still have to be completed. Assuming they are, there’s really only one or two more big mergers one could even contemplate.”
Sarathy suggests any future mergers probably won’t have “mega” attached to them.
“Looking beyond the Big Six, we do not see a great deal of potential natural combinations amongst the smaller firms,” he says. “Private equity firms that recently entered the crop protection chemicals space may continue to make selective acquisitions to round out their crop, region and/or chemistry portfolio. Smaller companies may wish to participate in the spin-off transactions that result from potential mega mergers.”
Dickson offers an answer to the next moves question, one that suggests we could expect some more wheeling and dealing.
“If we think of a two- to five-year timetable to get integrated, chances are one or more of the companies we are reading about today will make another major move before completely integrating the moves they’re making now,” he says.

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