Everyone knows that uncertainty is part of investing. In addition to the normal risks of market competition, other shocks such as scandals, lawsuits, and unforeseeable regulations can impact a company's bottom line. When investors can't fully quantify a problem's extent, the resulting uncertainty can depress a stock's price for years.
Monsanto notes that it did not create Solutia's problems; technically, that's true. Unfortunately for Monsanto, Pharmacia insulated itself from Solutia's liabilities by passing the buck to the St. Louis-based agricultural company. When Monsanto spun off from its parent, it agreed to indemnify Pharmacia for any costs that Solutia did not meet.
Until yesterday, Monsanto only partially dealt with the Solutia issue. Most recently, in December 2004, the company took a $284 million charge to cover costs related to tort litigation and environmental remediation costs. The new plan offers a more complete solution: Monsanto will invest $250 million in Solutia in exchange for up to 50% equity ownership. The deal, which a bankruptcy court must approve, would bring Solutia out of bankruptcy and begin to split future cleanup costs between the two firms.
Predictably, the market reacted enthusiastically to the proposal yesterday, sending Monsanto shares up as much as 7.7%. The plan is certainly good news for Monsanto, which continues to deliver strong results. Still, investors should not overstate the likely effect of settlement on Monsanto shares, since the liability has hardly been much of a drag. Monsanto shares are up 82% from their 52-week lows. For now, it might be prudent to hold off on buying Monsanto shares until the firm demonstrates how well it is digesting its recentacquisitions.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.