Bayer Bids Billions for Monsanto (MON)

Germany based chemical and pharmaceutical giant Bayer AG, has made an unsolicited take over offer to buy U.S. based chemical and biotech company Monsanto (MON) for $62 billion. If successful this would fuse together the world’s two largest suppliers of crop seeds and pesticides. A written proposal was sent by Bayer earlier this month on May 10th, so Monsanto had some time to consult with its legal and financial team to carefully consider the deal.

So far Monsanto has rejected the offer but says it’s open to further talks with Bayer. $62 billion already represents a sizeable premium for Monsanto’s stock at $122 per share, from its $90 per share in early May. But experts say the deal will probably end up being higher. JPMorgan analysts wrote in a research note that they “believe it is unlikely that the deal gets done at $122 and still believe $135 is a more likely price.” It’s interesting how Bayer’s bid seem to come right after China Natural Chemical Corporation’s bid to take over Syngenta for $43 billion earlier this year, not to mention the planned merger between Dow Chemical and DuPont.

If Bayer becomes successful with it’s deal to purchase Monsanto it would be able to tap into the growing demand of agriculture as farmers are expected to feed an estimated 10 billion people world wide by the year 2050. Bayer’s Chief Executive Officer Werner Baumann says rationale will win over skeptical investors and overcome a public black lash against Monsanto’s genetically modified seeds. About twenty years ago Monsanto started selling these GMO seeds and they now account for the majority of corn and soy beans that grow in the United States. This potential merger would be the largest German company take over of a U.S. company. But some stakeholders are not too fond of the deal. The proposed merger has attracted criticism by some major Bayer shareholders who believe the company is simply playing empire building. They don’t want to see Bayer stretching its finances too thin in an attempt to become the world’s biggest seller of seed and agricultural chemicals. They also see no benefit of getting into Monsanto’s business of selling genetically modified crop seeds. Such seeds have been blocked in some countries and been a subject of anxiety among some consumers and the target of environmental activists. Other investors remain skeptical as well as they think the deal is likely to face antitrust scrutiny in several countries, including the U.S. and Germany. Bayer shares dropped 6% on Monday earlier this week, and is down nearly 13% since it confirmed it was in talks with Monsanto. Some of Bayer’s long term shareholders would have invested in Bayer due to its primary focus on pharmaceuticals so they may not be very happy about the business getting a stake in a seed company.

But despite the backlash and criticism Baumann is optimistic. In a statement he says, “We are confident that we can address any potential financing or regulatory matters related to the transaction. Bayer remains committed to working together to complete this mutually compelling transaction.” Bayer says that it would finance its cash bid with a combination of debt and equity.

Even if the merger becomes successful it doesn’t necessarily mean Bayer will start to sell genetically modified Monsanto crop seeds in Europe. Political resistance to genetically modified crops remains strong in Germany and other European countries. As of right now Monsanto only has one product there, which is variety of corn that is pest-resistant. As large multi-national companies run out of ideas to foster organic growth, mergers and acquisitions such as this one will likely become more frequent in the financial markets in the foreseeable future.

This author has no positions in any stock mentioned in this post and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.