Bayer and Monsanto: The Biggest M&A Deal of 2016

After months of negotiations, US seed manufacturer Monsanto Company has finally agreed to be acquired by German chemical giant Bayer AG for US$128 a share, totalling US$66 billion, in what is known as the ‘biggest M&A deal of 2016’. Monsanto, who rejected Bayer’s initial offer of $122 a share on May 23, stating that the proposal ‘undervalues’ the company, is predominantly engaged in seed genetics and biotechnology whereas crop chemicals are Bayer’s agricultural division’s main focus. Bayer’s lead financial advisors of this deal are Credit Suisse and Bank of America Merrill Lynch, alongside Rothschild as an additional financial advisor.

Bayer CEO Werner Baumann speaks to the press at the company’s head office in Leverkusen, Germany, earlier this year. PHOTO: ROBERTO PFEIL/AGENCE FRANCE-PRESSE/GETTY IMAGES

Some investors such as Henderson Global Investors, a minority investor in Bayer, believe that the company should only focus on the industry that they have historically made most revenues in, which in this case would be healthcare, representing 49.83% of total 2015 sales. Henderson Global is not keen on the idea of such a colossal deal that could threaten the strength of the company in the long-term and is unconvinced that the deal would create value for shareholders. On the other hand, Werner Baumann, the CEO of Bayer, has publicly announced that both Monsanto and Bayer are ‘highly complementary’ and that their product portfolios ‘compliment each other perfectly’.

“The beauty of this combination is that both businesses are highly complementary, and it’s very much a growth story that is behind the combination. The product portfolios complement each other perfectly. The regional fit is really great.”
Werner Baumann, Bayer CEO

For Monsanto, this deal could mean peering ahead of the competition, as most of its competitors have either been acquired by a larger company or have merged with each other, such as in the case of the Dow Chemical and Dupont merger. The companies expect to save $1.5 billion each year after the third year due to synergy. Additionally, the combined businesses are expected to generate strong cash flows; accompanied with Bayer’s experience with deleveraging after large acquisitions in the past, this mix is a perfect blend to enable quick deleveraging post-acquisition.

It is expected that approximately 30 regulatory agencies around the world are required to approve the deal. To increase the probability of the deals closing, executives said the companies are willing to divest certain operations. If the deal is blocked by regulators, Bayer has agreed to pay Monsanto $2 billion.

Between September 2015 and 2016, corn futures, the most active agricultural futures contract, fell 12%. Low crop prices are putting pressure on farm income. At a time when agribusiness is struggling, this is a big bet on agriculture for Bayer. However with the collaboration of Monsanto’s prowess in seeds and Bayer’s in chemicals, the united operation is ideally positioned to propel innovation in the industry.