It looks like a rejection but it is in fact just an invitation to talk some more. The American seed company Monsanto rejected an offer by German chemical giant Bayer of $125 (€113.70) per share on Tuesday, while simultaneously signalling it was prepared to conduct further talks.
In a brief communiqué Monsanto announced that the board of directors regarded Bayer’s new offer as “financially inadequate” and insufficient to conclude a deal. However, the company added that it remains open-minded for constructive discussions with Bayer and other parties, to check if a deal is possible in the best interest of Monsanto stockholders.
Both sides are pushing for concessions to help them make the transaction palatable to their respective stockholders. Bayer boss Werner Baumann and Monsanto boss Hugh Grant have long been in agreement that the combination of Bayer’s strong pesticide business and Monsanto’s market leadership in seeds makes strategic sense.
Bayer had increased its offer at the beginning of July, from $122 to $125 per Monsanto share, but didn’t go public with this new approach until last Thursday. The transaction would work out at a total of €58 billion ($63.9 billion), including financial liabilities, making it the biggest takeover ever completed by a German company.
Bayer now has Monsanto in a bear hug from which the Americans cannot easily escape,
Bayer insists its offer is fair, given Monsanto's weak recent performance and sluggish medium term prospects.
Its management still remember what happened when its main rival BASF bid for American catalyst maker Engelhard a decade ago. The talks started off friendly, but turned after Engelhard's chief executive rejected the offer. BASF then made a hostile offer that many Engelhard shareholders supported. Eventually, the two sides came to an agreement, and BASF took over the company at a price that was just 5.4 percent higher than the original bid.
Bayer could try a similar hostile approach, but it would then have to hold its nerve over the final price.
Market observers and U.S. investors estimate that no agreement with Monsanto will be reached for less than $130-$135 per share, making the deal worth between €60 billion and €62 billion. Bayer, for its part, insists that a further increase is only conceivable if Monsanto agrees to the German company having access to its books beforehand.
Both companies talk of a confidentiality agreement which would facilitate a thorough auditing of the books, but no further progress has been made so far.
Sources say Monsanto’s management believes that Bayer’s estimate of the synergy potential resulting from a takeover is much too low. So far Bayer has estimated that synergies of around $1.5 billion would be possible within three years, in terms of earnings before interest, taxes and amortization. That is equivalent to about 6 percent of combined agricultural business revenues.
There is also the matter of the break fee offered by Bayer in the case of the deal falling foul of anti-trust authorities. Monsanto clearly considers this too low – not least against the background of Chemchina’s assurance of a $3 billion break fee if its planned takeover of Swiss seed-producer Syngenta falls through.
Merger and acquisition experts still expect the takeover to happen despite all the obstacles. They see the most recent rejection as a negotiating tactic. Bayer now has Monsanto in a bear hug from which the Americans cannot easily escape, said John Colley, a professor at the Warwick Business School in England, adding that negotiations had made progress under pressure from Monsanto stockholders.
Mr. Colley went on to say that Monsanto’s management had made it clear from the outset that they were not in favor of selling the company to a German owner. But Monsanto’s poor operational performance meant they had few counterarguments. “Monsanto‘s declining profitability should encourage further shareholders – who are as yet undecided – to call for the company to be sold,” said Mr. Colley.
Meanwhile, a number of hedge funds have invested in Monsanto stock, indicating they expect a sale to Bayer. The Corvex investment fund, for example, headed up by a former protégé of aggressive investor Carl Icahn, has picked up minor share packages of both companies. According to a report by the news agency Reuters, he favors Bayer taking over Monsanto if the price is right. And one of Monsanto’s biggest stockholders is already the Glenview hedge fund which holds 2.5 percent of the stock.
So far there are no complaints from Monsanto stockholders at the negotiating tactics of Mr. Grant’s management. “Monsanto wants the best possible deal,” said Jim Russell of the investment company Bahl & Gaynor, a Monsanto stockholder. He said that management was handling the whole process like an auction. “We like the method and tonality they have chosen.”
Monsanto has also continued to emphasize that it was checking out alternatives to a takeover by Bayer - another way of ratcheting up the pressure on the German firm.
Siegfried Hofmann is Handelsblatt's chemical and pharmaceutical industries correspondent. Bert-Friedrich Fröndhoff leads a team of reporters that cover the chemicals, healthcare and services industries. To contact the authors: [email protected] and [email protected]