Monsanto Says ‘No’ to Bayer, But Still Faces Long-Term Struggles

Last week, German chemical and pharmaceutical giant Bayer said it would pay shareholders a 37 percent premium on the value of Monsanto’s stock in order to become the global leader in what it describes as “digital farming.”

Expounding on the need to feed the additional 3 billion people expected to live on the planet by 2050, Bayer’s executives described its potential acquisition of Monsanto as a global solution for farmers and businesses. This combined company, with an assumed value of $95 billion, would blend Bayer’s “best-in-class” agrochemicals strength with Monsanto’s innovation in seeds (as in GMOs).

When Bayer first expressed its interest in Monsanto earlier this month, the typical market reaction took place: Monsanto’s shares jumped in value while that of Bayer’s suffered a slight decline. Then the deal hit the newswires late last week, and Bayer’s stock price plunged even more. It was not just the fact that such a merger could drive down Bayer’s credit rating and that the company would possibly have to sell off some assets in order to acquire Monsanto. The specter of regulators nixing the deal rattled the markets, and while Monsanto’s stock price edged up as rumors of a Bayer takeover amplified, analysts noted that its stock price was nowhere near the $122 per share Bayer said it would pay to shareholders.

After mulling Bayer’s takeover bid, Monsanto announced yesterday that it rejected the offer as being “incomplete and financially inadequate,” but said it would leave the door open to future discussions with Bayer.

The spurning of Bayer’s offer, yet purported interest in further negotiations with the $51.6 billion company, caps a rough few years for Monsanto. Part of the St. Louis-based company’s challenge is due to the global collapse in commodity prices, which curbed demand for the company’s seeds and other products. But the company’s reputation also suffers because of its manufacture of glyphosate, the herbicide Monsanto has marketed as Roundup since the mid-1970s. Then, 20 years ago, Monsanto began to sell genetically modified soy seeds marketed as “Roundup Ready,” which resisted the herbicide. Monsanto developed a massive revenue stream with more farmers. But the company also became a bulls-eye for protesters who objected to the fact that these same farmers became dependent on Monsanto's seeds, as the seeds resulting from those harvested crops were sterile.

So, while no study has firmly concluded that GMOs are unsafe -- and many organizations including the National Academy of Science, European Commission, World Health Organization, American Medical Association and American Association for the Advancement of Science have found no evidence that GMOs pose any harm to human beings -- the anti-GMO movement is winning the war over the future of food, and Monsanto is its favorite bogeyman. Challenge just about anyone over the evidence of GMOs’ harm to human health, and the overwhelming response will be “Monsanto+Roundup.” Add the fact that Monsanto’s history was built upon saccharine, agent orange and PCPs, and the company, according to many activists and consumers, is guilty as charged.

But Monsanto also had a hand in creating its struggles, many of which should concern any investor who holds shares in Bayer stock. Monsanto’s joint venture in India, where the company’s GMO cotton enjoys longstanding popularity with farmers, has become the focus of a government antitrust probe. Monsanto also protested against government cuts to royalties paid by farmers to Monsanto.

The biotech giant claims its seeds are integral to India’s future food security and economic development for the country's agriculture sector. But considering India's success with genetically modified crops during its “green revolution” of the 1970s and 1980s, however, such pleas are falling on deaf ears within the country's bureaucracy.

Halfway across the world, Monsanto is mired in another long legal fight with the government of Argentina. After riding the wave of the past decade’s commodity boom, the country of 41.5 million has hit hard times. Its agriculture ministry, now run by the more business-friendly Mauricio Macri, asked Monsanto for more time to allow farmers to pay off royalties owed for sowing the company’s Intacta soybeans — but Monsanto has refused such an arrangement. The company also complained about many Argentinian farmers’ preference to reserve seeds for future harvests or purchase from seed sellers that do not pay royalties to Monsanto. Earlier this month, Monsanto said it would no longer introduce new soybean crops in Argentina.

The company has also fought accusations by activists, including the Mothers of Ituzaingó, who have long claimed that the use of Roundup in Argentina’s soybean farms cause high rates of birth defects and cancer. So, while Argentina could offer an even larger market for soy, Monsanto’s history in the world’s third largest soybean producer, with the potential for even more litigation in the near future, should also make Bayer shareholders nervous about its possible acquisition of the company.

These ongoing problems in some of Monsanto’s most important global markets, as well as regulatory scrutiny of an industry that is already undergoing consolidation, should make shareholders of both company’s stocks take a second look. "Bayer's shareholders will be less pleased as their shares have already fallen 10 percent and are falling further now the bid value is known,” said John Colley, a professor at the Warwick Business School in the United Kingdom, in an emailed statement to TriplePundit. “It is a classic transfer of value from the bidder’s shareholders to those of the target. Few megabids go well and research shows more than half destroy value, and only around a quarter deliver on their promises.”

In this case, Monsanto's past promises and deals might give Bayer's shareholders pause in pursuing such an acquisition, as the result has often been controversy and expensive legal fights with foreign governments.

Image credit: Mike Mozart/Flickr