The New York Times
by Andrew Pollack and Chad Bray
Over the last two decades Monsanto has cast off its century-long history as a chemical company and refashioned itself as an agricultural life sciences company, led by its genetically engineered seeds.
But with its $45 billion bid to acquire the agricultural chemical giant Syngenta — a bid Syngenta rejected on Friday as inadequate — Monsanto appears to be trying to get back into a business it largely abandoned. That is a possible acknowledgment, some analysts say, that the biotech seeds might not be the engine to carry the company forward much longer.
“If you go back 10 years, they put all their marbles on biotechnology and they’ve done fantastically well there,” said William R. Young, managing director of ChemSpeak, a consulting firm following the chemical industry. “But going forward, maybe the growth is limited,” he said. Buying Syngenta“allows for some diversification in product line.”
Syngenta both announced and rejected Monsanto’s unsolicited bid on Friday, saying the offer undervalued Syngenta’s prospects and underestimated “the significant execution risks, including regulatory and public scrutiny at multiple levels in many countries.”
Monsanto offered to pay 449 Swiss francs, or about $490, for each share of Syngenta; 45 percent of the payment would be in cash. The offer represented a 35 percent premium to Syngenta’s closing price on Thursday.
Monsanto, in its own statement, said it believed combining the two companies would create “an integrated global leader in agriculture with comprehensive and complementary product portfolios.” It said it was confident in its ability to obtain all necessary regulatory approvals.
The deal would create an agricultural behemoth, combining Monsanto, the world leader in seeds and genetically engineered traits (like herbicide resistance), with Syngenta, the largest producer of agricultural chemicals.
The two companies are in some sense mirror images of each other. They are similar in size, each with over $15 billion in annual revenue. But Monsanto gets most of its revenue from seeds and biotech traits; the rest comes mainly from the herbicide Roundup. Syngenta gets most of its revenue from chemicals, like weed control products, and less from seeds.
So far, investors have seen more potential in the seed business. Monsanto has had a market valuation more than 60 percent greater than Syngenta’s.
So why would it want to move back into chemicals? Perhaps it is because agricultural chemicals are still a bigger market than seeds. While certain biotech crops that incorporate their own pesticides have reduced the need for spraying chemicals, that has not been the case over all.
Moreover, the bulk of revenue from biotech seed sales come from two crops — corn and soybean — and two continents — North America and South America. There is resistance to planting such seeds in other places, particularly Europe.
In a recent conference call, Mike Mack, the chief executive of Syngenta, said the global seed markets was worth $40 billion, compared to $63 billion for agricultural chemicals.
“With the pace of G.M. growth having considerably slowed, this is unlikely to change,” he said, using the initials for genetically modified. “It reinforces our view that crop protection will continue to play a paramount role in raising agricultural yields globally.”
Monsanto executives, who would not comment on Friday, have said in the past that they are still enthusiastic about the potential for biotechnology. But the company has been diversifying, emphasizing more conventional breeding and moving into new businesses, such as using microbes to control pests and offering digital data to help farmers manage their fields. That latter effort has been off to a somewhat slow start.
Analysts expect the deal would raise antitrust concerns since Syngenta is still the world’s No. 3 seed company, with about 11 percent market share compared with 34 percent for Monsanto, according to estimates by Jefferies, the global investment banking firm. In agricultural chemicals, Syngenta has 19 percent share and Monsanto 8 percent. But Monsanto’s sales are almost all from Roundup, the herbicide, while Syngenta has a broader range of products, including a new fungicide called Elatus that is said to have bright prospects.
Ben Scarlett, an analyst for J.P. Morgan, said Syngenta’s corn and soybean seed businesses in North American and South America might have to be sold to satisfy regulators, and possibly some chemicals in certain markets. The combined company would also have high market share in nonselective herbicides, combining Roundup with Syngenta’s leading market share for paraquat.
Both the seed and agricultural chemical businesses have already been undergoing a rapid consolidation. According to one study from the Agriculture Department, the top four seed companies controlled 54 percent of the global market in 2009, up from 21 percent in 1994. For agricultural chemicals, the figures were 53 percent in 2009 and 28.5 percent in 1994. Consolidation is believed to have continued since 2009.
The Justice Department and some states undertook antitrust investigations of Monsanto’s seed practices a few years ago but the investigations were closed and no findings were ever released.
Both Monsanto and Syngenta are suffering from a decline in corn prices and the strength of the dollar. Also, the World Health Organization has said that glyphosate, the active ingredient in Roundup, is a probable carcinogen. Syngenta’s seed treatments containing chemicals known as neonicotinoids are suspected by some researchers of being harmful to bees.
Laurence Alexander, an analyst at Jefferies, said a deal would be “strategically logical” for Monsanto, given the tough times in the agriculture business right now and the “increasing acknowledgment that biotech traits are not ‘silver bullets.’” But he said that for Syngenta, this “would be a sale at almost the worst possible time.”
One benefit of the deal for Monsanto could be relocating its official headquarters to Switzerland and getting a lower tax rate. The federal government has been trying to clamp down on such so-called inversions, however, making them less financially attractive.
Senator Dick Durbin, an Illinois Democrat, urged Monsanto not to undertake an inversion. In a letter he sent on Thursday to Monsanto’s chief executive, Hugh Grant, Senator Durbin said that Monsanto benefited from federally funded research and the patent system. “You and your board must recognize that your company’s continued commitment to America would be good, not only for the country, but also for Monsanto Company’s bottom line,” he wrote.