Bayer – Monsanto: win-win or lose-lose?

The proposed take-over of Monsanto by Bayer has initiated a debate about the implications for the agricultural sector: in the European Union, the United States, and developing countries. One of the major concerns is the increase in the concentration in the seed and pesticide sector. Of course will increase as one big player, Monsanto, will leave the sector and join another big player, Bayer. Will this be to the disadvantage of the agricultural sector, i.e. will this increase the pricing power of the “new” company as well as the other players in the field?

The European Union as well as the United States use criteria to assess when a merger or acquisition should raise concerns from a competition point of view. They use as a criterion the Herfindahl-Hirschman Index (HHI). This is a commonly used index to measure the centration in a sector that considers the size of individual companies as well as the number of companies. In the EU, a post-merger HHI between 1,000 and 2,000 points in combination with a change of less than 250 points or a post-merger HHI of more than 2,000 points with a change of less than 150 points are not considered to raise competition concerns (European Commission 2004). Similarly, in the United States a HHI below 2,500 is considered not to represent high concentration, while a post-merger change in the HHI by more than 200 points as an indication of potential market power in highly concentrated markets (US Department of Justice 2010).

In a study conducted for the European Parliament earlier this year (Wesseler et al., 2016) we calculated the concentration in the pesticide as well seed supply sector. The results can be used to calculate the changes in the concentration by the recent merger and acquisition announcements. The table below shows the HHI index for the European pesticide and seed sector for different years.

Table: HHI concentration index for the European pesticide and seed sector for and after proposed mergers and acquisitions.

Source: derived from Wesseler et al. (2015).

Prior to the announcements of the recent mergers and acquisitions the HHI for the pesticide sector ranged between 1566 and 1646 for the period 2008 to 2010 (using most recent data) and between 673 and 764 for the seed sector for the period 2012 to 2014. The results tell us that the pesticide sector is more concentrated than the seed sector. The acquisition of Monsanto by Bayer increases the concentration more strongly in the pesticide sector than in the seed sector. The merger between DOW and Dupont has a stronger effect on the concentration in the seed sector than in the pesticide sector.

The results also show that the changes in the HHI as well as the absolute levels of the HHI are below the levels the EU as well as the US uses for starting an investigation. If the changes in the HHI for the acquisition of Monsanto by Bayer and the merger between DOW and Dupont are considered simultaneously the picture changes. Than indeed the HHI can change by more than 250 points and the HHI is above 1000 points and close to 2000 points in case of the pesticide sector.

Should this be of concern?

The mergers and acquisitions in the agricultural input sector are a response to a changing environment. The new developments in modern biotechnology in combination with data-mining tools (precision agriculture) provide new opportunities for the control of pest and diseases in agriculture. Those developments are knowledge as well as capital intensive. Seed companies compete with pesticide companies compete with biological control strategies. The reported HHI for the EU overestimate the potential for market power as only the specific sectors have been considered. At world market level, the concentration is less pronounced as there are other important players in China and India such as China National Chemical Corporation (ChemChina).

Further, a merger or acquisition not necessarily implies that competition will be reduced. The competition between companies will be moved to competition within companies. This can be as fierce or even more fierce than between companies. The merger between the automobile manufacturers Daimler-Benz Ag, Germany and Chrysler Corporation, United States in 1998 serves as an example. The companies were never able to realise the expected synergies. Chrysler was sold again in 2007. Cultural differences are now considered to have been the major problem.

May the same happen to the Bayer Monsanto deal?

The new developments in micro biology like CRISPR-CAS provide insights in the functioning of human, animal, and plant cells and the knowledge can be applied for developing new pharmaceuticals, improve the breeding of animals and the development of better control strategies for plant pest and diseases. Bayer has the advantage being active in the pharma as well as the agricultural sector so that they can more easily benefit from spill-over effects.

Many environmental groups look very critical at the Bayer – Monsanto deal. They reject the use of modern biotechnology in agriculture, be it genetic engineering including new breeding technologies or genomics despite the social benefits the technologies provide. Their concerns have not been ignored and did result in more stringent and more costly regulations in the EU, the US, but also in other countries, making it more difficult for smaller companies to compete. The restructuring of the industry and the rise of larger companies is to a certain extend also a result of those opposing the new technologies.

Nevertheless, the success of the recent merger and acquisitions announcements will depend on the ability to use potential synergies. DOW and Dupont may have it easier as they are both US based companies with a similar governance culture. In the acquisition of Monsanto by Bayer two different governance cultures meet, which will be more difficult for realizing synergies. The Bayer – Monsanto deal offers great opportunities to improve sustainable agriculture, if a “cultural clash” will be avoided.

References:

• European Commission. 2004. Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings. Official Journal of the European Union C 31/5-18, 5.2.2004.
• U.S. Department of Justice. (2010). Horizontal Merger Guidelines. Washington DC.
• Wesseler, J., A. Bonanno, Dusan Drabik, V. C. Materia, L. Malaguti, M. Meyer, T. Venus (2015): Overview of the Agricultural Input Sector in the EU. Directorate – General for Internal Policies. Policy Department B: Structural and Cohesion Policies. Agriculture and Rural Development. IP/B/AGRI/IC/2014_67.