Takeovers of one company by another are often touted as a way to create value due to company synergies and to reduce cost by eliminating duplicated functions. But do takeovers create value? The Bayer offer to buy Monsanto for $62 billion brings this thought to mind. It may or may not succeed as noted in The Wall Street Journal which says that Bayer’s Monsanto bid has fallen flat.
One problem with conglomerates is that there is something to dislike for everyone. Bayer’s bid to buy U.S. seeds and pesticides company Monsanto risks suffering the same affliction, at least as far as its shareholders are concerned.
This remains true, even if details released Monday of the $62 billion offer including debt look better than expected. Bayer, whose business spans pharmaceuticals, crop sciences and consumer health, seems to be shoveling as much low-cost debt as possible into the all-cash deal, which helped it promise a substantial uplift to earnings and play down the need for asset sales. It plans to sell some $15 billion in discounted equity-hefty but below most forecasts-after it confirmed its approach last week.
The concern voiced by the journal is that the benefits to shareholders of a cash purchase of Monsanto by Bayer are not sufficient to pay cover the cost of acquisition. In short this takeover does not create sufficient value to justify itself in the near term. Rather Bayer seems to be thinking that factors such as the increasing need for more food from a limited amount of arable land will make Monsanto’s seed and herbicide business more and more profitable. In this case why would Monsanto shareholders want to sell?
Too Much for Too Little Current Value
Bloomberg notes that investors are showing alarm at the final price of the Bayer bid for Monsanto.
The German company on Monday said it had told Monsanto it’s willing to pay $122 a share in cash. Bayer’s stock dropped as much as 6 percent, extending losses since the potential deal was first revealed. Monsanto shares posted muted gains, rising 4.9 percent to $106.45 in New York trading, signaling that investors remain skeptical about the deal.
“I don’t think Monsanto will accept” Bayer’s proposal, said Andrea Williams, a fund manager at Royal London Asset Management Co. “The danger is that you start then having discussions about how you are going to fund a higher offer, because they are already stretching the balance sheet.”
Bloomberg also notes the likely true reason behind this takeover attempt, the need to boost productivity and feed 10 billion people by 2050. If Bayer is going to convince its own shareholders that having to pay even more for the deal is a wise decision they will lead with the argument that Monsanto is a growth engine due to its unique product mix in crop protection and seeds.
What Constitutes Shareholder Value?
According to Investopedia shareholder value
is the value delivered to shareholders because of management’s ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm’s ability to efficiently increase the amount of free cash flow over time.
Do takeovers create value? They do if the end result is growth of earnings, dividends and share price for the company that does the taking over. In the case of Bayer taking over Monsanto the seed and crop protection business will need to grow more and faster than the market is currently assuming based on Monsanto’s share price.