A traditional merger-and-acquisition (M&A) analysis reveals two companies with myriad reasons to combine. Bayer and Monsanto are each grappling with their own set of growth constraints. Bayer is struggling to spur growth in developing markets in an effort to offset stagnating pesticide sales within developed agriculture markets, owing in large part to the introduction of genetically modified (GM) seeds. Meanwhile, Monsanto faces the combined risk of market saturation in key corn and soybean producing regions while also struggling to protect seed royalty payments in places like Argentina and India.
Consequently, the acquisition could provide a quick fix to both firms’ revenue growth problems by expanding their regional distribution channels and product offerings. Although both companies operate globally, each has its own product expertise and regional dominance. Bayer is the number two global crop chemical producer, with a 15 percent market share, while Monsanto leads global seed sales with a 17 percent market share. Bayer would triple its sales reach in North America, and Monsanto would get access to distribution networks in Europe and Asia, where, in each market, Bayer’s sales are more than double Monsanto’s.
A recovery in global grain prices in years to come and improved price leverage should bump up revenue, but both companies will eventually run into the same problem: how to fuel long-term growth without access to additional farmers?
A look beyond conventional M&A basics illuminates two new avenues for exceptionally strong revenue growth: agricultural biologicals and digital farming. Although the individual economic potential of each isn’t a sufficient rationale to pursue the blockbuster transaction, together they have the potential to contribute several billion in additional revenue.
Agricultural biologicals, the first promising growth arena, include seed treatment and topical crop products that are made from or contain natural materials. They can even include products containing living microbes, called microbials, designed to improve nutrient uptake, promote growth and yield, and offer insect control and pest protection.
Both companies have been aggressively investing in this nascent industry in order to complement their core crop chemical and seed businesses, and with good reason. The global agricultural biologicals market is expected to grow by an annualized 14.5 percent to $10.1 billion by 2020 according to a May 2016 market report by MarketsandMarkets. In comparison, the global crop protection chemicals market is expected to grow only an annualized 5.8 percent from 2016 to 2021, according to a recent report from Mordor Intelligence. Narrowing the category to exclude product lines not currently served by Monsanto or Bayer, such as biofertilizers, the market is smaller but still substantial. By Monsanto’s own estimates, sales of relevant crop biologicals are currently roughly $2.6 billion. If the same annualized growth is assumed here, the crop protective biologicals market is projected to hit $5 billion by 2020, a potential boon for a Bayer-Monsanto’s future growth.
Many of the potential commercial products being developed for crop health are still in the early stages of R&D, and it is not yet clear who the ultimate leader will be in this space, but both Monsanto and Bayer have been aggressively pursuing development in biologicals. Monsanto has cultivated its BioDirect pipeline and BioAg Alliance with Novozymes, and Bayer has invested more than half a billion dollars acquiring biologics companies and building research facilities devoted to the field.
Since many of the agricultural biological solutions may be applied to plant surfaces by chemical spray, Bayer’s experience in developing delivery systems and overseeing crop chemical formulation and manufacturing is a strong advantage from which Monsanto could also benefit. Combining their R&D and operational expertise to build a global biologicals brand has the potential to not only offset declining pesticide use in developed markets, but also open up new acreage opportunities among organic farmers.
Assuming that a combined Bayer-Monsanto could capture market share in the potential $5-billion crop biologicals industry similar to that which they currently hold in their respective product expertises—between 15 and 17 percent—the proposed transaction could deliver another $750 to $850 million in revenue.
With prices of corn, soybeans, and wheat—crops that drive the majority of agrochemical producer margins—remaining at historically lofty heights for most of the past 10 years, branded crop chemical companies (such as Bayer, Syngenta, Dow, and BASF) were fairly successful in staying ahead of newcomer generics competitors nipping at their heels. Branded crop chemical companies benefited from stronger crop prices and robust demand growth in Asia. They were also able to limit the feared profit hit from generic versions of new off-patent products by establishing either private label–manufacturing or distribution-licensing agreements with other companies. For a while, this strategy worked. Growers were in yield-seeking mode, and the fallout from generic and private-label competition was more muted than initially feared.
But competition in developing markets, and to a lesser extent in developed markets from Indian and Chinese chemical companies, has increased. In fact, a Capgemini analysis found that from 2003 to 2008 generic crop chemical companies’ revenues grew twice as fast as those of product innovators (an annualized 12 percent and 6 percent growth rate, respectively). As result, generic crop chemical companies captured 30.9% of the US crop protection market by 2012 according to Agribusiness Global. While generic sales wane and wax as farm incomes fluctuate and products come off patent, generic crop protection products will clearly remain a challenge for branded companies in the future.
As such, in order to mitigate the threat of generics and private label competition, it behooves the branded crop chemical industry to not only introduce new product innovation, but also strengthen its pricing leverage via consolidation.
On the other hand, the potential mergers by several of the top crop chemical producers could actually open up market opportunities for private-label companies as some farmers may become concerned about concentrating their spending among fewer suppliers. In fact, one of the larger distributors of crop chemicals in North America told Gro that they expect potential industry consolidation to create more opportunities for private labels to thrive, albeit not immediately in the current season. Finally, regulators could pressure top branded companies to sell off parts of their crop chemical and seed businesses, which could present a market opportunity for both private labels and generics.
Another benefit from a merger could be a collaboration between both firms’ burgeoning digital farming divisions. The field includes a diverse array of farming management practices that utilize emerging technologies such as drone and satellite imagery. These technologies, combined with rapidly declining data storage costs and increasing computational capabilities, allow farmers to monitor and manage variations within a crop area to maximize yields. Digital farming has become one of the major focal points in agricultural technology at the farm level.
Currently, only about 20 percent of global acreage is managed with precision agriculture technologies (the larger tech umbrella under which digital farming falls), but adoption has been rapid. The global market for precision farming technologies is growing at an annualized rate of 13 percent and is expected to reach $4 billion by 2018.
A combined Bayer-Monsanto stands to become a market leader in digital farming, which would benefit the merged entity tremendously. Bayer, without a strong platform of its own, would get Monsanto’s FieldView, one of the most widely used in the industry. In exchange, Monsanto, primarily limited to North America, would have more access to the European market where Bayer is a dominant player.
Revenue potential just from the software sold as a service is strong. Right now, precision agriculture platforms like Monsanto’s FieldView and DuPont’s encirca provide basic value-added digital services for free while offering a premium product at a fee. Currently, Monsanto has more than 75 million acres subscribed to its platform, five million of which are registered under paid premium subscriptions.
In the long run, Monsanto sees global digital agriculture as a 600 million acre opportunity. With the pricing structures and acreage adoption rates it has laid out, the math indicates that the division would bring in between $900 million and $3.2 billion in additional revenue. Given that almost a third of those acres are in Europe, a partnership with Bayer could help Monsanto secure the upper boundary of these projections, pushing the theoretical revenue closer to the $3 billion mark.
High adoption rates of its digital agriculture platform also provide several other benefits. The additional oversight provided by digital agriculture tools can also prevent overuse of crop chemicals, reducing the emergence of resistant species and appeasing environmental regulators, who are increasingly placing pressure on farmers to reduce crop chemical use. Farmers would in turn have more success with crop protection products, strengthening their loyalty to the overall brand. As such, a Bayer-Monsanto could become a one-stop shop for farm inputs, providing a full suite of seeds, chemicals and biologicals along with the digital tools to optimize the use of each.
One final consequence of crop science megamergers is that digital farming start-ups and small precision agriculture companies may find it more difficult to compete head-to-head with the Bayer-Monsantos and Dow-DuPonts. To survive, the rest of the industry will likely need to adapt by developing a more cohesive ecosystem for development and distribution of independent digital farming technology. For some, an acquisition exit strategy may be the best option. Digital farming technology can still thrive regardless of a Bayer-Monsanto deal. But additional consolidation among seed and crop chemical companies may make the outlook more daunting for those who intend to go at it alone.
Given the advantages, pursuing the deal sounds like an obvious choice, and yet, Monsanto rejected Bayer’s initial offer, drawing to attention some major drawbacks. First, there are the substantial regulatory hurdles to be scaled. A combined Bayer-Monsanto would be the largest global provider of both seeds and crop chemicals, a fact that won’t escape antitrust regulators. If Monsanto perceives that the chances of approval are low, it may conclude that the financial and time costs of pursuing the buyout may not be worthwhile. Second, after a series of its own M&A proposals were rejected, Monsanto has had to reevaluate its strategy, choosing to focus on driving cost savings amounting to over half a billion dollars over the next several years. It may be reluctant to change course yet again. Finally, Monsanto may simply want more than the $62 billion Bayer offered.
Still, as Bayer and Monsanto’s sales continue to be dampened by depressed farm incomes, emerging generics competition, and regulatory pressures, building additional streams of revenue and abating competitors is critical. If the two firms combined they would capture an estimated 22 percent of the $115-billion crop chemical and seed industry. The fortitude of such a firm would present formidable competition to its peers, including producers of off-patent crop chemicals. By combining their crop science businesses, Monsanto and Bayer could accelerate the realization of their mutual ambition of building a dominant global brand in both agriculture biologicals and digital farming.