Star investor Warren Buffett is famous for sniffing out a good deal. It has made him very rich. And just a few days ago, he surprised market observers by buying 8 million shares in the American seed manufacturer Monsanto.
That’s just a 1.8 percent stake. But the decision got attention. Mr. Buffett did not publicly explain his move. But it is clear he thinks Bayer’s $66 billion takeover attempt will gain approval from the U.S.’ Federal Trade Commission and the Department of Justice, the two authorities tasked with enforcing antitrust law in the United States.
If the deal goes through, Mr. Buffett stands to make a tidy profit: He paid around $830 million for the shares, which Bayer would buy from him for $1.02 billion.
“We now rate the probability of success for Bayer’s takeover of Monsanto at 75 percent, up from 50 percent.”
Monsanto shares have recently risen to $109 per share, still substantially below Bayer’s offer of $128. Many investors are holding back, wary of the uncertainty that will persist until regulatory investigation is completed toward the end of the year. But Mr. Buffett is not the only optimistic investor. “We now rate the probability of success for Bayer’s takeover of Monsanto at 75 percent, up from 50 percent,” said Jonas Oxgaard, a senior analyst at the American brokerage house Bernstein and an expert on the recent wave of agrochemical mergers.
The growing confidence surrounding the merger is based on insights gleaned from ongoing approval procedures in other large mergers and acquisitions in the sector. As well as Bayer and Monsanto, the American chemical giants Dow Chemical and Dupont plan to merge this year and then split into three new companies, including a separate agriculture business. In addition, the Chinese state-owned chemical company ChemChina has bid to take over Swiss company Syngenta. If all three deals go through, the resulting companies, along with BASF, would dominate the world market.
In the case of Bayer-Monsanto, investigations are still at an early stage. Bayer has made its application in the United States, and will submit an application to the E.U. by the end of March. Intensive discussions are already under way with E.U. officials. Unlike in the U.S., takeover proposals must be submitted in detail at the beginning of the process. Bayer wants to have all approvals in hand by the end of 2017.
Regulatory examinations of other deals in the sector appear to be much further advanced. According to Brussels-based industry sources, the European Commission will approve the ChemChina-Syngenta deal by mid-March. In recent weeks, there have been clear signs of a positive decision. According to sources, the E.U. authorities are asking for only manageable concessions in the companies’ crop protection business.
A clear decision is possible in this case, because there is little existing overlap between ChemChina and Syngenta. The American authorities are certain to ask for more information on the deal, but security considerations are unlikely to cause problems. The Committee on Foreign Investment in the United States, or CFIUS, examines all takeovers for possible implications on security, but it has already waved through the ChemChina deal. Syngenta expects it will have all necessary approvals by the second quarter of this year.
Approval for ChemChina-Syngenta would be a good sign for Bayer, say Brussels experts in anti-trust law. But the fate of the Dow-Dupont agriculture merger is even more significant. Of course, the authorities look at each case separately. Nonetheless, Bayer management are watching the Dow-Dupont regulatory decision with extreme interest. The two American companies have the same basic strategic intention as Bayer: A large-scale combination of their seed and crop protection businesses.
In Brussels, the Dow-Dupont merger is undergoing in-depth inquiry, signifying that the European Commission has considerable misgivings. However, at least in Brussels, market dominance does not seem to be the main problem. Instead, criticism has focused on questions of innovation: The commission fears that the merger could adversely affect research into new crop protection products, explained Edward Breen, the DuPont chief executive.
To some extent, Dow and Dupont invited this concern, since their merger plan foresees a $300 million cut in their joint research and development budget. But Mr. Breen is convinced that a solution will be found that suits the European authorities. This may involve selling several crop protection products to competitors like BASF or Syngenta, who would also receive the associated research. Mr. Oxgaard, the Bernstein analyst, is also optimistic, saying he rates the probability of the Dow-Dupont merger at 90 percent.
In Brussels, market dominance is not regulators' main concern; they are more worried about impacts on research and innovation.
Experts in cartel law say that a particularly good sign for Bayer is that the European authorities have not objected to the market power that might result from a Dow-Dupont merger. Instead, emphasis is on research strength in the agrochemical business.
That suits Bayer. The company will not comment on the regulatory process, but one major reason it has always given for the Monsanto purchase is that it would foster faster and better innovation in seeds and crop protection. This will be the core of its arguments to U.S. and European regulators. Merger plans would see the combined Bayer-Monsanto budget for research and development, currently around $2.5 billion, being increased, rather than cut.
The two companies have already sought political backing for the deal: In January, the two chief executives – Werner Baumann of Bayer and Hugh Grant of Monsanto – presented the merger plans to the new U.S. president Donald Trump, outlining how it would help create jobs there. Afterwards, Mr. Trump mentioned the meeting approvingly via the social media network Twitter.
Bert-Friedrich Fröndhoff leads a team of reporters covering the chemicals, health care and service industries at Handelsblatt. To contact the author: firstname.lastname@example.org