Bayer Monsanto Merger – a Shiny New Example of Today’s Hot New M&A Market

Bayer Monsanto Merger – A Shiny New Example of Today’s Hot New M&A Market

2017 was an important year for the agribusiness, AgTech and farming industries. Robust activity in agribusiness deals, particularly in the mergers and acquisitions sector, has started reshaping these industries. Numerous deals have been structured over the course of the last few years, of which the Dow DuPont merger, ChemChina’s acquisition of Sygenta, the Bayer Monsanto merger and AGCO’s acquisition of Precision Planting have all been marked to change the face of the industry through large scale consolidations. We have also seen an upward trend in cooperative mergers with the focus being on increasing efficiencies in a difficult market.

Bayer Monsanto Merger Gets The Green Light

In a very recent development, the Bayer Monsanto deal received the green light from the US Justice Department on the 9th of April 2018, after the companies struck a deal with the Justice Department to sell more assets in order to win the antitrust approval – an effort that has been both heavily reported and criticized.

Terms of the Merger

Bayer AG, a German pharmaceutical and chemical conglomerate, and a leader in the pesticide industry publicly disclosed, in September of 2016, its private proposal to buy Monsanto, a St. Louis based market leader in seeds and crop genes, for an aggregate value of USD 62 billion.

As per the Agreement and Plan of Merger filed with the SEC, KWA Investment Co., a Delaware corporation and indirect wholly-owned subsidiary of Bayer AG, shall merge with and into Monsanto. Monsanto shall be the surviving entity in the merger, following which, it shall become a wholly-owned subsidiary of Bayer. Merger consideration is set to be paid in the form of cash, with each share of Monsanto to receive USD 128.00 in cash. This puts the value of Monsanto at an extraordinary USD 62 billion.

Reverse Triangular Merger

The companies have chosen to structure the merger as a reverse triangular merger. A merger is a transaction that unites two entities into one. A reverse triangular merger is a type of merger in which the acquiring company creates a subsidiary often called a “Merger Sub,” in this case KWA Investment Co., in order to complete the merger. The Merger Sub, created specifically for the purpose of effectuating the merger, purchases the target company. Following the purchase, the Merger Sub is absorbed by the target company resulting in the target company being the surviving entity and a wholly-owned subsidiary of the acquiring company.  A popular structure, the reverse triangular merger is often thought to be a quick(er) and simple(r) structure, than a direct merger or a forward triangular merger as it only involves the shareholders of the target entity. Typically, and in the case of the Bayer Monsanto merger, the Merger Sub has only one shareholder – the acquiring company or the parent; and hence, would only need the approval of the acquiring company. Shareholder approval of the target entity is required. However, this still limits and contains the number of shareholders involved by eliminating the need for approval by the acquiring company’s shareholders, thereby making the process one step simpler.

Another reason the reverse triangular merger structure is viewed as beneficial is that the merger structure allows the assets and contracts of the target company to remain with the target company. As the target company becomes a wholly-owned subsidiary of the acquiring company, it is then easier for the acquiring company to gain control over the target/ surviving company’s assets and contracts. Contract clauses that restrict ‘assignment’ of rights under the contract often are not triggered in the case of a reverse triangular merger since the contracts remain with the target company which is the original party to the contract – thereby preventing any assignment of contractual rights. This characteristic of the reverse triangular merger will certainly prove to be beneficial once the Bayer Monsanto merger is completed.

Antitrust Approval

While the merger structure may have worked out well for Bayer and Monsanto, what seems to have given them some cause for concern is the antitrust approval. Under the Hart-Scott Rodino Act, the Federal Trade Commission and the Justice Department review proposed transactions that affect commerce in the United States to ensure that they are not anticompetitive. Per the FTC, current law requires companies to report deals valued at more than USD 84.4 million for review. A preliminary review is first conducted to determine if any antitrust concerns are raised. Transactions requiring further review are assigned to either the FTC or the Justice Department on a case-by-case basis.

In the case of Bayer Monsanto, it was assigned to the Justice Department. The process had remained in abeyance for a period of time and was announced to be concluded on the 9th of April 2018 with the Justice Department finally providing the go ahead. The approval came in after the companies entered into an agreement with the Justice Department, in which Bayer is reported to have agreed to sell off (additional) assets related to its seed and seed-treatment businesses, and to make concessions related to its digital agriculture business, to secure the approval. This tactic is said to be a pleasant deviation from the usual practice of obtaining promises from the companies on how they would run their businesses post-merger.

The approval follows a conditional approval from the European Union in which the antitrust authorities required Bayer to sell some of its assets to BASF SE, an entity in direct competition with Monsanto’s line of business. BASF SE is also set to acquire the assets to be sold by Bayer per its agreement with the Justice Department.

Future Concerns

While the Justice Department seems to have been satisfied with the future landscape of the seed, crop gene, and pesticide market, the Bayer Monsanto deal is still met with heavy criticism and has raised serious concerns for farmers already struggling with increasing prices and diminishing incomes. Will they survive? Only time will tell!

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Pooja Sudarshan

Pooja Sudarshan is a corporate lawyer practicing in the firm’s Corporate & Securities and M&A groups. She focuses her practice on representing companies in mergers and acquisitions and corporate finance transactions, primarily in the healthcare and technology industry sectors.
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