After months of negotiating and three raised buyout offers,Bayer AG(NASDAQOTH: BAYRY)finally won the prize it had been seeking:Monsanto(NYSE: MON). However, the positive aspects of the tale end there. Not only do shares of Monsanto currently trade at a 18.75% discount to the offer price of $128 per share -- implying little faith on Wall Street that the deal will, in fact, close -- but the rationale for the merger itself is also questionable at best. Here's why.
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Why buy Monsanto?
Bayer's proposed acquisition of Monsanto is a defensive move, not an offensive one. That alone should raise some eyebrows.
Both companies, looking on as their peers have merged and gained economies of scale, felt the itch to do something. Dow Chemical is planning to merge with DuPont and spin off their seed and crop-chemical operations into an agricultural-focused company. ChemChina, meanwhile, has taken over Swiss company Syngenta. Even fertilizer producers PotashCorp and Agrium have merged to save themselves. So why not join the party? Because tales like this rarely end well.
True, there is rationale for the deal. The combined entities would be a one-stop-shop powerhouse. It's estimated that the combined Bayer/Monsanto will create a company that owns a quarter of the world market for seeds and pesticides. Not a bad place to be in the 21st century with a growing population.
Not only that, but it has been noted that one of the major rationals for the deal involves Bayer's desire to bring Monsanto'sagricultural data analytics platform under its umbrella. The idea being that the future of seeds, as with so many other things, lies with big data located in "the cloud." True enough, but if this is true then Bayer is spending a lot of money for something that is at best a reasonable speculation. As noted byJohn Killmer, once a Monsanto executive andnow CEO of Apse, a St. Louis gene developer, in a recent interview: "[The]deal is being driven by 'bloodless accountants in green eyeshades not by technology."
But even assuming a best-case scenario, a great deal of work needs to be done to bring the merger to fruition.
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The companies still have to get through scores of antitrust regulators. In fact, Monsanto's CEO, Hugh Grant, has stated publicly that the two companies will have to file for clearance in approximately 30 countries.
This process alone will probably take a year, and it will involve many side deals, concessions, and asset sales.Wall Street analysts who cover the two businesses see just a 50% chance that the deal will close with all regulators. The idea that American Monsanto would be taken over by German Bayer is also further complicated by the election of Donald Trump and his focus on American jobs.
Perhaps worst of all, if the merger is not successful, Bayer would be expected to pony up a $2 billion break up fee to Monsanto. Not exactly a great spot for the German giant's shareholders to be in.
Foolish bottom line
The rationale for Bayer's acquisition of Monsanto seems sound at first glance. The industry is consolidating, and there are economies of scale to be had. Not only that, but the deal is also not outrageously priced, at 16 times Monsanto's forward earnings guidance for 2017.
However, these justifications are where the facts end and a little faith is required. There are the regulators in 30 countries to please, and there's no telling what divestitures antitrust regulators will demand -- which means there's no way to tell what the final enterprise will look like to Bayer shareholders.
The only real potential winners here are Monsanto's shareholders. Were I a Bayer investor, I would be more than a little confused by this defensive move that could wind up being both time consuming and extremely costly, no matter how it turns out.
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