What's going on?
Monsanto: you might’ve never heard of this company before, but it just got an offer to be acquired for $62 billion (including debt)! Bayer, the German pharmaceutical and chemicals giant, said on Monday that it has made an offer to buy the massive American seed and pesticide maker.
What does this mean?
So far, this is just an offer and Monsanto’s board is, in their words, “carefully reviewing” it. Also, there’s a significant risk that the deal won’t be approved by competition bureaus in various countries. Creating the world’s biggest agribusiness (seeds, pesticides, etc.) company – as this deal would do – is potentially bad for farmers because they’d probably have less power to negotiate prices with the combined company. Regulators could deem that “unfair” and block the deal. The fact that Monsanto’s stock closed significantly below the price that Bayer is offering shows that investors consider this a significant risk.
Why should I care?
The bigger picture: There’s pressure to merge when industries struggle. The agribusiness has been hurt in the past few years by a number of factors, including falling prices for crops like corn and soybeans. As farmers make less money, they have less ability to pay for seeds. And so, there is pressure on agribusinesses to join forces to cut their costs and increase their revenues – and that’s why we have seen so many mergers (i.e. Dow & Dupont and Syngenta & ChemChina).
For the stock: Bayer’s stock has sold off on the possibility of it buying Monsanto. If the deal isn’t blocked, Bayer will have to raise money for this purchase (because it’s so big). To do so, it would issue new stock (as well as borrowing some money). That means current Bayer shareholders would own proportionally less of the company once new stock is issued – and that’s one reason that Bayer’s stock has fallen about 20% since the deal was first leaked to the press a few weeks ago (it’s also probably an indication that Bayer’s investors don’t like the rationale for this deal).