Bayer-Monsanto sows seeds of doubt

among regulators
Antitrust officials likely to raise issues such as the impact on R&D
May 30, 2016
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by: David J Lynch in Washington and Guy Chazan in Berlin
Back in 2007, global agricultural group Monsanto was intent on gobbling up Delta & Pine
Land Company, a large cotton seed producer.
But the US Department of Justice refused to approve the $1.5bn acquisition on antitrust
grounds until Monsanto agreed to sell off a similar enterprise, the Stoneville Pedigreed
Seed Company.
The sale to German drugs and chemicals group Bayer was needed to prevent a
bulked-up Monsanto from raising prices for US farmers, slowing development of new
cotton seeds, and posing a serious threat to competition, the DoJ said.
Nine years later, Monsanto and Stoneville may be on the verge of a reunion. Bayer has
launched a $62bn bid for the US group, hoping to form the worlds largest seed and crop
chemicals company.
So far, it is unclear how the bid will pan out. Last week, Monsanto rejected Bayers $122-ashare offer as incomplete and financially inadequate while opening the door to further
discussions on a deal. Bayer has yet to respond.
But it is already clear that any merger would be subjected to intense scrutiny by regulators,
not only in the US but in the EU, China and Brazil too.
The question of whether the Stoneville-Monsanto combination still poses a competitive
danger is just one of the issues authorities will be confronting. For the Bayer-Monsanto
combination would be just one of three large deals that have shaken up the agrochemicals
sector over the past few months. Dow Chemical and DuPont last December announced a
$130bn merger while ChemChina has launched a $43bn takeover of Syngenta.
If all of the deals were to be approved, the number of big companies that supply farmers
around the world would shrink from six to three: Bayer-Monsanto which had $23.1bn in

revenues from crop protection and seed in 2015; Syngenta-ChemChina with $14.8bn; and
Dow-Dupont with $14.6bn, according to data provided by Bayer.
Farmers in the US are already starting to worry about the impact of reduced competition
and choice. Crop prices have more than halved over the past three years, putting pressure
on farm incomes, so they are particularly vulnerable to higher prices for inputs such as
seeds.
Its troubling that six major players in the seed and crop protection industry will fall to
three or four, says Roger Johnson, president of the National Farmers Union. The biggest
question it raises, its not even a question, problem it creates is almost certainly will be
higher costs as a result of less competition in the market place, fewer choices of products
offeredless innovation.
When several deals arise simultaneously in the US, the justice department normally looks
holistically at the market consequences, says Christine Varney, who headed the Obama
administrations antitrust division from 2009 to 2011 and is now a partner at Cravath,
Swaine & Moore in New York.
If approving all would reduce competition, then staffers consider alternative scenarios
involving one or more rejections or required spin-offs. You take the market as you find it.
Well look at the totality of the market, says Ms Varney. Its not sequential.
Last year, the DoJ and communications regulators approved a merger between AT&T and
DirecTV even as they blocked a deal between Comcast and TimeWarner Cable. In the late
1990s, the Federal Trade Commission prevented the nations four largest drug wholesalers
from combining into two via a pair of mergers.
The European Commission takes a different approach to the DoJ. When faced with
simultaneous mergers, EU competition regulators have established a principle of first
come, first served. They deal with the first transaction they are formally notified about.
They then analyse the second deal on the assumption that the first will be resolved to their
satisfaction.
In China, all three deals will be subject to an anti-monopoly review by a body under the
Ministry of Commerce. Mofcom regulators solicit feedback from Chinese state-owned
enterprises before ruling on international mergers, a process that can take months. Lawyers
say Mofcom has become more sophisticated in dealing with complex cases.
Theyre being less nationalistic, says Becky Koblitz, special counsel at Sheppard
Mullin in Beijing. I think theyll be careful because people are watching them.
Bayer predicts its proposed tie-up would clear all the hurdles. In a letter to Monsanto
management, chief executive Werner Baumann said Bayer and its lawyers had analysed all
the regulatory issues and are very confident that we will be able to obtain all necessary
approvals in a timely manner.

Bayer executives argue that there is little overlap in the two companies businesses. Bayers
strength is in chemicals such as herbicides that protect crops while Monsanto specialises in seeds
and genetic traits. Geographically, Monsanto has a much bigger presence in the US and Latin
America than Bayer, which is stronger in Europe and the Asia-Pacific region.

However, the confluence of big deals in the same sector has increased the odds of
regulators balking at further consolidation or ordering significant divestitures, says Peter
Carstensen, a professor of law emeritus at the University of Wisconsin and a former DoJ
antitrust attorney.
Youre talking about a radical contraction in the total number of competitors in this field,
where there are enormous barriers to entry, he says.
The proposed Bayer-Monsanto deal would bring together the USs two largest cotton seed
sellers in a single company with almost 70 per cent of the market, according to Verdant
Partners, an agricultural consultancy.
Garrett Stoerger of Verdant says he expects US regulators to order Bayer to spin off some
of its cotton seed and vegetable seed operations.
There is also overlap in the two companies herbicide-tolerant seeds: Bayers Liberty Link
product line and Monsantos Roundup Ready.

Regulators will look very closely at what that means if those two come together, says Mr
Stoerger.
Antitrust officials are likely to raise issues beyond competition in particular seed markets. If
the six big companies shrink to three, the number of independent research and development
laboratories will likewise fall.
Thats the real story in these deals: the elimination of parallel paths in R&D, the
elimination of head-to-head competition in research and development, in traits and
potentially even in chemicals, says Diana Moss of the American Antitrust Institute. These
mergers would substantially diminish innovation competition.
Bayer says its combined crop science R&D budget post-merger would be $2.5bn a year
$900m more than its nearest competitor, Dow-Dupont, and enough to achieve critical mass
in all relevant R&D platforms.

Farmers also point out that seeds are not an isolated market. Agriculture is increasingly
dominated by bundles of products designed to work together. Packages of seeds-traits-andchemicals that only work with one another, such as Monsantos Roundup Ready package,
already are making it harder for smaller rivals to compete.
When the DoJ has concerns about a proposed merger, it often requires the purchaser to spin
off elements of the combined business. Given the consolidation that has occurred in the
industry, Ms Moss doubts such remedies will work.
There arent that many viable buyers in the industry that can be patched together to create
a national competitor, she says. We have hit the wall in terms of consolidation.
As a result, some analysts say, the deal faces political risks that are not fully captured by
looking at overlapping markets and products. Farm state politicians have traditionally

wielded more power in Congress than the population of their states would suggest, and they
have a variety of ways to influence what is officially an independent review by the DoJ.
On a technical level they shouldnt have so many problems, says Jonas Oxgaard, an
analyst at Bernstein Research. But its more about what constituents are saying if if
farmers in, for example, Iowa or South Dakota press their senators to block it. That might
then prove problematic.
Syngenta-ChemChina deal faces extra hurdle

ChemChinas plan to acquire Syngenta is expected to raise fewer competition issues than
Bayers proposed tie-up with Monsanto, but it could run into US regulatory issues of a
different sort, write David J Lynch and Lucy Hornby.
Although antitrust watchdogs will take a look at the deal in a number of big markets around
the world, Swiss-based Syngenta argues there is minimal overlap between its portfolio and
that of ChemChina. The two groups say they expect to win approvals in time for the deal to
be completed by the end of the year.
Syngentas share of the global crop protection market is more than three times that of
ChemChinas ADAMA unit, which accounts for about 6 per cent of sales. The Chinese
company does not have a seed business.
But Syngenta has substantial US assets so its purchase by a state-owned Chinese buyer will
trigger a separate review by the Committee on Foreign Investment in the United States
(CFIUS).
Four senators are urging the Treasury department, which chairs the panel, to add
representatives from the agriculture department and the Food and Drug Administration to
the panels review of the Chinese bid.
The risk of negative outcomes is heightened to the extent that an acquired US agricultural
asset becomes in some part governed by a foreign government with clear strategic
interests, Iowa Republican senator Charles Grassley and his colleagues wrote in a March
letter.
Competition regulators at Chinas Ministry of Commerce are expected to clear
ChemChinas purchase of Syngenta, despite strong misgivings in China about genetically
modified crops. Very few major GM crops are approved for commercial planting in the
country.
China will make it clear to other countries that they shouldnt create extra complications
when reviewing the ChemChina-Syngenta deal, says Mei Xinyu, a researcher at a thinktank affiliated with the Chinese commerce ministry. Should structural reorganisation of
the company be necessary, the Chinese authority could help speed up the process.

Additional reporting by Luna Lin in Beijing

Additional reporting by Lindsay Whipp in Chicago, Christian Oliver in Brussels, Ralph
Atkins in Zurich and Lucy Hornby and Luna Lin in Beijing
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