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Monsanto's Litany of Woes Makes It Ripe for Bayer Takeover

On any list of potential takeover targets, Monsanto Co. has to be right up near the top.

While it remains the world’s largest seed company, Monsanto has piled up a mountain of problems this year, making it more vulnerable to a offer from German competitor Bayer AG. The St. Louis-based company has cut its earnings forecast, clashed with some of the world’s largest commodity-trading companies and become locked in disputes with the governments of Argentina and India. The shares have fallen as much as 31 percent in the past 12 months.

“It’s a relentless string of bad news," Jonas Oxgaard, an analyst with Sanford C. Bernstein & Co. in New York, said. “It’s almost like they forgot to sacrifice a goat to the gods.”

Those headwinds come as Bayer, the inventor of aspirin, made an unsolicited takeover bid for Monsanto. “We all know they like to be the acquirer, but if the right deal comes along there’s no reason why they shouldn’t" be acquired, Piper Jaffray Cos. analyst Brett Wong said.

Monsanto is reviewing the offer, it said in a statement late Wednesday. Bayer, confirming the bid, said the combination would bolster its position as a “global innovation-driven life science company.” Monsanto shares jumped as much as 10 percent in pre-market trading in New York.

DuPont-Dow

A wave of consolidation is already convulsing the seed and crop-chemicals industry. China National Chemical Corp. agreed in February to acquire Switzerland’s Syngenta AG for about $43 billion, months after Monsanto abandoned its own bid for Syngenta. Meanwhile DuPont Co. and Dow Chemical Co. plan to merge and then carve out a new crop-science unit.

Monsanto’s management would probably resist a bid, Jeffrey Stafford, a Morningstar Investment Service analyst in Chicago, said in a note. There’s the possibility that any talks between Monsanto and other companies could lead instead to a partnership or joint venture, he said. Its market value is about $42 billion.

Monsanto was founded in 1901, its first product the artificial sweetener saccharin. Until the late 1970s, the company produced highly toxic polychlorinated biphenyls, also known as PCBs. It was also among companies that manufactured the mixture of herbicides known as Agent Orange and used as a defoliant by the U.S. in the Vietnam War.

Roundup Ready

It introduced one of its first genetically modified seeds in 1996, Roundup Ready soybean, spawning heated controversy with critics of biotechnology.

While Monsanto’s focus on seed technology ushered in years of growth, it has left the company with fewer chemical products to offer farmers compared with some competitors, said Jason Miner, an analyst with Bloomberg Intelligence. Facing flat or falling incomes, farmers are increasingly demanding products that are tailored to their needs, he said. 

“I think where they are today is a result of playing to their own strengths," Miner said. “They certainly bet hard on seeds and left the chemicals to others.”

Monsanto’s bid for Syngenta represented a recognition that it needed to broaden its product lines, according to Miner.

The company’s reliance on seeds means that any hold-up in the introduction of new products can put a dent in its sales. A longer-than-expected wait for European Union regulatory approval for Monsanto’s new Roundup Ready 2 Xtend soybeans led the company to cut the acreage forecast for the crop earlier this month. Meanwhile commodity traders Archer-Daniels-Midland Co. and Bunge Ltd. said they won’t accept delivery of the new variety because of the risk that exports might be blocked.

Royalty Fight

In Argentina, one of the world’s largest soybean growers, Monsanto’s problems are more deep-rooted. For years, the company has struggled to collect royalties on its seeds. Monsanto said Tuesday it’s disappointed with recent talks with the country’s Department of Agriculture and will suspend the introduction of new soybean varieties in the country.

Monsanto is also reassessing its business in India after a government move in March to cut the royalties the company’s joint venture in the country collects from farmers who sow its modified cotton. The company said Tuesday it’s in talks in Burkina Faso, Africa’s biggest cotton grower, after the government there decided to phase out the production of Monsanto cotton.

In the U.S., farmers face declining incomes amid depressed commodity prices. Analysts project Monsanto’s revenue and earnings to fall for a second year. Taken together, investors are questioning what will support the stock into 2017, Wong said.

“I do think that this sets up for an opportunity for Monsanto to be looked at to be acquired,” Wong said.

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