What's going on?
Negotiations have been going on for months, but a deal has finally been reached: Bayer, the German chemicals giant, has agreed to buy US seed maker Monsanto for $57 billion. It’s the biggest corporate deal to be announced this year! But there are still some hoops to jump through before it’s finalized…
What does this mean?
The companies expect to save about $1.5 billion each year by cutting overlapping costs (like, er, employees). The combination has a strategic rationale: Monsanto mainly sells seeds while Bayer’s agricultural business mainly focuses on crop chemicals (e.g. pesticides) – the theory is that they’re quite complementary. The move certainly heralds a big shift for Bayer, which has historically generated most of its revenue from pharmaceuticals – and some investors would prefer that it stays that way. Monsanto might just be happy to start living under a bigger tent: most of its competitors have merged with each other or been bought by a bigger company, and it could feel that it also needs to get bigger to compete effectively.
Why should I care?
For the stock: Bayer is stepping up at a time when agribusiness is struggling.
For Bayer, this is a big bet on agriculture. By combining Monsanto’s expertise in seeds and Bayer’s in chemicals, the combined operation is well-positioned to drive innovation in the field. But agriculture is going through a tough time right now: low crop prices are putting pressure on the prices that farmers can pay for seeds (for example). Nevertheless, Bayer senses an opportunity and is doubling down on agribusiness.
The bigger picture: This deal could get blocked by regulators.
Most countries have antitrust regulators that examine big deals for their impact on the competitive landscape in the relevant industry (e.g. when too many competitors combine, the remaining companies have more power to raise prices). The agribusiness has had a lot of mergers and acquisitions lately – and farmers (i.e. customers of agribusinesses) are an important political force. Although both companies say they’re confident of getting approval, there’s a significant risk that this deal will get blocked.