If Bayer (NASDAQOTH:BAYRY) does end up buying Monsanto (NYSE:MON), and reports indicate the two are closer than ever to cementing a deal, it may just cause an investor upheaval that could rock the German chemicals giant.
According to Bloomberg News, the CEOs of both companies have held constructive talks in recent weeks. Bayer has also finally gained access to Monsanto's books so that it might properly conduct due diligence. By all accounts, the chemical and seed companies are inching closer to an agreeable purchase price, but one that includes an acceptable breakup fee if the deal runs into antitrust concerns.
Monsanto has twice rejected Bayer's bids as "financially inadequate," and CEO Hugh Grant has said Bayer failed to address the significant antitrust hurdles any deal would make, even though Bayer has promised to pay $1.5 billion if the merger falls through.
Analysts have suggested that an increased bid somewhere between $130 per share and $140 would most likely be accepted, a price in line with a survey conducted by global asset management firm Sanford C. Bernstein that found Monsanto investors believed $137 per share to be a fair price. Yet it presents a problem for Bayer, who's felt the wrath of some of its largest shareholders who are concerned that the original $122-per-share buyout price was too high, let alone the $125 it offered to sweeten the deal.
When I want your opinion, I'll ask
Bayer CEO Werner Baumann has made it clear to investors he doesn't need their approval and isn't looking for it, but that may be a line of arrogance and hubris he'll come to regret if he's successful. Henderson Global Investors, one of Bayer's 20 largest investors with a 0.7% stake, has called the merger an "immediate destruction" of value for Bayer and is seeking a shareholder vote on the deal. Analysts, too, are finding it difficult to locate shareholders who actually support the merger.
Complicating the matter is the wave of consolidation sweeping the industry among the biggest players. China National Chemical just received approval from Washington's national security watchdog, the Committee on Foreign Investment, to proceed with its $43 billion merger with Syngenta (NYSE:SYT) while DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW) are moving forward with their own $130 billion merger. The problem is no one wants to be the last deal outstanding to get regulatory scrutiny.
It's a small world after all
Because the industry will be highly concentrated in the hands of just a few companies, the deal laggard is going to face a harder time getting approval to close their merger than the early ones. The Justice Department has cast a jaundiced eye before on big industry tie-ups that leave too few competitors, killing deals between Halliburton and Baker-Hughes in oil-field services; Sysco and US Foods in food services; Aetna and Anthem from acquiring Humana and Cigna, respectively, in healthcare; and Staples and Office Depot in office supplies. Three huge giants left in chemicals and seeds might not sit well with antitrust regulators.
That pressure from the time clock might push Bayer to offer Monsanto more than it otherwise would and keep it from making a hostile bid for its rival, as was once rumored. DuPont on Dow, however, must be resigned to the fact they're going to spend an inordinate amount of time convincing European Union members that their merger is acceptable as regulators there have opened up an investigation into the deal.
So if Bayer offers up a large enough breakup fee, it might allow Monsanto to accept a bid that's lower than what it would otherwise hold out for, because it can become a win-win scenario for its shareholders. Too large, though, and Baumann is going to have an even rockier time with his shareholders than it seems he will already.
The dogged determination with which Bayer is pursuing this deal heralds trouble down the road. Rarely do such mergers go smoothly, even when there is no opposition, and this one could go south sooner considering all the turmoil. Werner Baumann may have only just assumed his duties as CEO in June, but if he's successful in winning this battle, he may ultimately find he loses the war -- and his job.