When DuPont and Dow Chemical agreed to merge in December, the $130 billion deal seemed a prime example of American managers’ ruthless pursuit of shareholder value and dedication to building monopoly positions. The chemical firms, with a combined 300-odd years under their belts, had both been beaten up by activist investors in the 20 months or so leading up to the deal.
Partly in response, the companies said they would combine and then split into three new firms. Huge cost cuts are planned when the deal closes, probably later this year. The unspoken message to investors is that the three new firms, with higher market shares, will also be able to raise prices.
What has become clearer since then is that Dow-DuPont is also part of a global trend: a wave of consolidation in the agricultural seeds and chemicals industry.
In February, ChemChina, a state-owned Chinese firm that has been on a buying spree, agreed to pay $43 billion for Syngenta, a big Swiss firm that specializes in selling chemicals to farmers. This week Monsanto, valued at $42 billion, confirmed that it had received an unsolicited takeover bid from Bayer, one of Germany’s biggest firms by market value.
Overall, the deal-making could exceed $200 billion.
Three trends explain the surge in activity. First, a slump in sales: The agricultural-product industry’s top line, growing at 2 percent in 2014, fell by 10 percent in 2015. Second, bosses think that selling bundles of products to farmers will be more profitable in the long run. Monsanto talks of having a footprint of millions of acres around the world upon which seeds, bug-killers and nutrients can be used, helped by better mapping and data-crunching. The third trend is specific to Syngenta: China’s government wants to modernize its farms and to own the intellectual property involved, such as seed patents.
Merger waves have struck many other industries. Often the grand themes used to justify deals make some sense, but the numbers don’t add up. ChemChina will borrow a cool $35 billion to buy Syngenta which, based on its 2015 profits, will make its new Chinese owner a hopeless 3 percent return on capital. Were Bayer to try to buy Monsanto with cash, the combined firm would have net debt four times its gross operating profits. Investors so far aren’t happy, sending both companies’ stock down.
Regulators both in the U.S. and Germany could block any Bayer-Monsanto merger. The Syngenta deal will likely get national security scrutiny. Other companies might try to get into the game. In the obscure world of chemicals, though, times like this happen only once in a generation.