The rumors turned out to be true: Bayer has made a non-binding offer to acquire the shares of Monsanto. At $62 billion this would be the largest deal of the year and the largest M&A deal ever for a German company. The initial response by Bayer shareholders has been negative: the shares have plunged by more than 16% since the announcement – and no wonder:
- To raise $64 billion Bayer would have to a) sell off some valuable assets in its animal health business, b) dilute existing shareholders with a massive stock offering, and c) take on $billions in additional debt. On the final point The New York Times writes:
"Because $47 billion of the total value of the deal will be funded in debt, it will leave the merged group with borrowings of four times its combined Ebitda.
But in reality, much of that debt is being loaded onto Bayer’s health care business. If the crop science unit were buying Monsanto unaided, it would end up with net borrowings that were more than seven times combined Ebitda, which looks too high for comfort. The risk is that Bayer’s options for making acquisitions in health care will be stunted. Buying Monsanto could benefit one side of the business at the expense of the other.
The biggest concern for shareholders may simply be that the deal looks like it will destroy value. Bayer expects $1.5 billion of annual synergies. According to a Breakingviews estimate, this represents a net present value of around $11 billion compared with that $15 billion premium. And Bayer has not said how much is supposed to come from enhanced revenue, which is typically hard to achieve in real life."
Some other issues to consider:
- Bayer is primarily a (well-run) pharmaceutical company. Integrating a major non-German agriculture company would be a major challenge and lead to much internal management strife.
- The is a strong likelihood that the deal will be blocked by regulatory authorities due to anti-trust concerns.
- Monsanto – rightly or not – is one of the most hated corporations, especially in Europe. Many of its products – such as the genetically modified corn MON 810 – are banned in Europe, which would create a major headache for Bayer.
- Monsanto's flagship herbicide product RoundUp could be banned from Europe if an EU regulatory commission decides not to renew the license for glyphosate later next month.
- Farmers will lose out due to further consolidation in big agriculture following the DuPont-Dow merger.
- Monsanto wants to remain independent, so Bayer may have to considerably sweeten the deal beyond $62 billion to gain board approval.
I don't have a position in either stock, but at this point my recommendation is short BAYRY.
0 comment
Shareholders are stupid and impertinent – stupid because they give their money to
somebody else without any effective control over what this person is doing with it – impertinent because they ask for a dividend as a reward for their stupidity.
Carl Furstenberg, German Banker
Your risky recommendation (short BAYRY) means to place a bet on a falling stock price. To do that, one would have to find someone who believes the stock price will rise. That’s not a problem, but it sheds a light on a general dilemma unless you are an insider or, at least, a very experienced investor: You will make decisions based
a) on informations which are already implemented in the stock price,
b) on further expectations ‘heard on the street’ and wishful thinking.
Therefore, I would only buy stocks in situations when the majority is selling (bottom fishing) and never, when we are near of all time highs and interest rates at their lowest levels. Do you remember the Japanese stock market in the eighties? The Nikkei was at 40.000, the Japanese interest rates lamost at zero. 25 years later, the Nikkei ist still at 20.000…
I’d rather play poker 😛
Koogleschreiber, I would say you have a point 🙂
I am waiting for well over 9 months now for a major decline and will continue to do so before re-investing what is not already bound to the market.
” I would only buy stocks in situations when the majority is selling.”
There is a greater than 50% chance that Bayer will not succeed in its offer, in which case the stock would quickly bounce back.
Still, Baumann’s actions don’t give me a lot of confidence in his skills as CEO.
from OCA newsletter [see link] of 29 May 2016: “Is there an upside to the proposed merger, and the recently proposed mergers between agritoxics titans Dow and DuPont, and ChemChina and Syngenta? If so, it could be this. Industries that are thriving generally spin off. Industries that are performing poorly generally merge and consolidate.”
thank you for this.