What Will Investors Harvest From Bayer's Buyout of Monsanto?

In this segment from our MarketFoolery podcast, Mark Reeth and Million Dollar Portfolio's Jason Moser consider whether the merger of the German chemical and pharma giant Bayer (BAYR.Y 1.22%) and the U.S. agriculture powerhouse Monsanto (MON) is a good deal for shareholders. The two also examine the PR risk factors in taking on the polarizing pesticide and GMO leader, regulatory hurdles, and the outlook for the joint company. 

A full transcript follows the video.

This podcast was recorded on Sept. 14, 2016.

Mark Reeth: Monsanto has been bought out by Bayer. Is it Bayer? Bayer.

Jason Moser: Bayer.

Reeth: Bayer is what they call it, for $66 billion. That's billion with a B. Bayer, for those of you who don't know, it's the life sciences company. They make everything from aspirin to sunscreen. Monsanto produces genetically modified seeds and herbicides and stuff like that. This is a gigantic deal between two gigantic companies. It would create a company with about $26 billion in sales. Bayer is established in Germany. Monsanto is down in St. Louis, so it's going across borders here. This is a giant deal. First and foremost, J-Mo, if you were a Monsanto shareholder today, are you happy about this deal?

Moser: Honestly, I think you probably have to be. I think that Monsanto is an...it's an impressive business, but they are a bit of a polarizing business in that you mentioned herbicides, and Monsanto is known for Round Up. I think a lot of people rightly have some concerns in regard to Round Up and its effects on the environment. I think they are facing some headwinds in regard to that, not to mention the fact that there are more competitors in that space that will give them more challenges, at least as far as herbicides go, and then they're also known for the genetically modified seeds or the coatings that help maximize crop yields. I think, honestly, when you consider the entire planet, and how many people we have on this entire planet and how many places really are in need of food. We obviously aren't here. We're very, very lucky where we are and where we live, but the rest of the world is not quite that way. I think Monsanto serves a very unique and good purpose in that regard. Again, it is a bit polarizing. I think this whole genetically modified organisms issue, it polarizes people, right?

Reeth: I don't want to touch that thing.

Moser: Strong feelings, and so it's hard to say whether there's a right or wrong answer. It's just people feel one way or the other about it, and that's OK. I get that. I think that for Monsanto, this takes them a bit more out of the spotlight in regard to that. They get to roll up into becoming a part of something bigger in Bayer. This is a deal that they've been...Bayer's been kind of pursuing this for a little while, and it took a few offers to finally make Monsanto feel good about what they were getting, and shareholders, I think, are going to win from this, but I think with Bayer, you mention they do everything from pharmaceuticals to agriculture, and plastics, and all of this other stuff. It's a very diverse business, and I think that we're seeing a lot of consolidation in the agriculture business. I think Potash is recently the subject of acquisition here as well, so not terrible surprising to see this deal happen. We figured it was just a matter of time, and dollars and cents, and again, I think that these guys...honestly, this is going to be like peanut butter and chocolate. I think they are going to work very well together, and I think that for Monsanto shareholders, this'll give them a fair price for a stock that's probably going to have some challenges otherwise in the coming years.

Reeth: The stock itself isn't up all that much today. I think there's a lot of caution about this deal right now, because it's so big and because it spans the globe, we're going to have a lot of regulatory eyes on this, both in Germany and in the U.S., and like you said, there has been a lot of consolidation in the agricultural industry recently. Potash and Agrium merged. Deere and Co. is still trying to complete a deal with Monsanto as we speak. DuPont and China National Chemical are taking over Syngenta. Those names may not mean all that much to you if you're not paying attention to this industry, but, like you said, it's a giant industry across the entire world, and more and more than ever, its just coming down to these big players. There's no small players in agriculture anymore. Consolidation has left them all under the wings of these giant corporations, and now you've got this new, even bigger tie-up between these even bigger companies. Again, I have to expect regulators are going to be looking very, very closely at this. That being said, if you're not a Monsanto shareholder, are you diving in on the news today? Are you waiting until the deal is completely finalized. What should investors do with this news?

Moser: I think if you're not a Monsanto shareholder, then you probably just go on with life. This doesn't really affect you. I wouldn't worry about getting in there and trying some sort of arbitrage play there, because my feeling on that is there are plenty of people out there who know a lot more than any of us in this building about what's going on behind closed doors, and so when it comes to arbitrage plays with these acquisitions, that's news that somebody out there knows more than you do. You just have to make that assumption every time. Regulators will go through this one with a fine-toothed comb to make sure everything is on the up and and up. Again, I don't think it's something that will be turned down. I think it'll go through and I think, honestly, we talk a lot about competitive advantages and when you're looking at investments, what kind of competitive advantage would this business have? In agriculture, things like this really scale as a tremendous advantage, because not only do you have the financial resources to really do what you need to do, but you have the facilities, the research, and you just have everything at your disposal, so scale certainly is a competitive advantage in a market like this.

It seems like everybody's following everybody's lead here as one acquisition begets another, and they all fall in line. We see some consolidation, and I think in the end, what we've seen over the course of our lifetime...I know I'm a little bit older than you, but still we see it as technology continues to bring the cost of things down, continues to make our lives better in many ways, and that businesses like these, when they consolidate, then they put their resources together, it gives them an opportunity to at least try to make the world a better place in some capacity, and I'm sure that's what a lot of people are hoping will happen with this one. Again, Monsanto is a business that polarizes a lot of folks. A lot of people feel very strongly about what they do, and I get that. I personally don't, but I do understand people that do, so I imagine for Monsanto shareholders, this'll be a little bit of a relief in that the company's taken out of the spotlight, and they can go on about their business.