In rejecting Bayer's (OTC:BAYRY) $62 billion merger offer, Monsanto (NYSE:MON) said it didn't think its German rival was crazy for trying to buy the agrichemical giant, but that Bayer would have to be out of its mind if it thought it could buy the business so cheaply.
Monsanto agrees that a tie-up between the two offers "substantial benefits" to both farmers and society, and it said it's long admired Bayer's business from afar, but the $122-per-share offer that was put on the table Monday was "incomplete and financially inadequate."
The German healthcare and pesticides company said the all-cash offer to acquire Monsanto was based on a belief that a broad product portfolio across seeds and traits, crop protection, and biologicals would help establish Bayer as a leader in the industry. Insofar as that goes, Monsanto doesn't disagree, as it is the world's largest seed supplier and holds the leading position in genetically modified crops, which it helped pioneer, but you have to pay up when you buy a preeminent player, and despite the troubles it's run into over the past year, it doesn't have to run a fire sale to get along.
It wasn't Monsanto's rejection that was a surprise, as few thought it would be eager to accept a price that was essentially the same as where its stock traded a year ago. Rather, it's Bayer's motivation in making a lowball bid for its rival that's something of a head-scratcher.
Has the best offer already been made?
Bayer isn't seen as having the financial wherewithal to go much beyond the terms it offered Monsanto, as the debt and equity financing necessary to complete the deal would significantly leverage its balance sheet. The Financial Times says its net debt load would balloon to four times earnings before interest, tax, depreciation, and amortization, and that doesn't even include its pension liabilities.
Moreover, just the rumor of a merger between the two companies angered Bayer's investors who have been looking for the company to continue on the path it started on of narrowing its focus to core competencies. Acquiring Monsanto would change the company from healthcare-centric business to one that's predominantly agricultural, an industry that's been feeling commodity pricing pressures, the most recent rally notwithstanding.
Falling crop prices have taken their toll, with corn prices softening substantially over the past few years along with soybeans. Even though they have made significant gains in 2016 alongside most other commodities, Monsanto reported a nearly 8% decline in corn seed and trait revenues in the second quarter while experiencing an 11% drop in soybean sales. Dow Chemical (NYSE:DOW) was also hurt by soft corn and soybean demand, which caused caused it to realize lower volumes for its crop protection products.
That sort of market upheaval is leading to a wave of industry consolidation. Monsanto, of course, tried and failed to buy Swiss rival Syngenta (NYSE:SYT), which ultimately agreed to be acquired by ChinaChem, and Dow and DuPont (NYSE:DD) have also agreed to merge.
What Monsanto's rejection seems to signal is that it's open to a tie-up if someone is willing to step forward with a more serious offer. Certainly Bayer can still come back with a sweetened bid -- it hardly makes sense to think the original was its one and only -- but it risks creating a further rift with its shareholders by doing so.
Many analysts seem to agree BASF (OTC:BASFY) is the most logical candidate to acquire Monsanto, as it's also a major player in crop protection, but just like Bayer, a merger with Monsanto would mark a serious departure from its primary focus, and that might not sit well with its shareholders, either. It also might not be willing to proffer the sort of premium Monsanto would demand.
Certainly, Monsanto was smart to reject Bayer's offer, but it's not clear anyone else will be so feverish as to step forward and up the ante further.