20 I EUROPEAN SEED I EUROPEAN-SEED.COM INTRODUCTION Dow Chemical and DuPont are propos- ing to merge in a 130 billion USD deal; ChemChina is planning a 44 billion USD takeover of Syngenta and Bayer is pursu- ing a 66 billion USD takeover of Monsanto. It will not have escaped many who are working in or with the agribusiness: these are the three megadeals which have the potential to shake up the world of agricul- ture as we know it. To find out more about the reasons behind these deals we asked Garrett Stoerger, partner at Verdant Partners LLC to shed some light on them. EUROPEAN SEED (ES): WHAT WERE THE MAIN REASONS FOR THE SIX COMPANIES TO ENGAGE IN THIS MERGER & ACQUISITION PROCESS? GARRETT STOERGER (GS): It’s important to set the groundwork first and we need to look at what are the drivers behind these deals. I think there are misconcep- tions within the industry about what’s happening here and in my view, there are several key drivers. None of the six companies are doing this as part of a strategy that was in place even three years ago. Times have changed, and a lot of that is being driven by the relatively weak commodity prices that we’re seeing, relative to what we have experienced beginning eight years ago. Farmers have less money to spend on crop inputs, and they revert to lower cost options. The seed companies, for most of the last decade, have had great successes on the farm, selling new varieties, new seed treatments, and steadily increasing the price of those goods. It’s like buying a car. When people have money, they are more likely to opt for navigation or leather seating. Times were very good. Money at the farm gate was quite high, and farm- ers were putting large amounts of invest- ments into their farming operations when compared to more difficult times in the industry. As that scale back started, earn- ings per share and other financial indica- tors that shareholders and investors look to, started to weaken. And all of a sudden there was a tremendous amount of pres- sure on these companies to produce more and better results in a struggling market. And if you can’t drive growth on the top line, you have to find ways to save money. If any of these companies pull back on R&D spending, they consequently reduce their product pipeline, which is a short-term fix for a long-term prob- lem. They can’t really afford to shut off the pipeline as a cost-savings measure. And so in this case they have looked to merge entities. As you can imagine, there is more cost efficiency in not having as many breeding locations across the globe, but scaling that down does not come without consequences. Another driver, and this is a little bit of a consumer/political driver, there has been a fairly substantial reduction in the adoption of technology. At one time, and this is a very US centric opinion, farmers were asking for every possible trait that could be put into seed that is beneficial to them at the farm level. In the meantime, consumers have spoken and Europe has largely maintained its strong resistance against GM technology. And even in the US, there is now more awareness then there once was. People are more uncer- tain of science and technology, mostly because they don’t understand it. And as far as they are concerned, they would rather not have GM crops in their food, as they perceive current traits as not bring- ing them any direct benefits. Meanwhile, they don’t understand that the indirect benefic of GM is a cost savings in the gro- cery store. The period from 2006 till 2014 were good times for the agricultural indus- try, possibly the best times we’ve ever experienced in modern agriculture in terms of cash flow at the farm level. It doesn’t take a crystal ball to predict that eventually something had to give. That is again a consequence of the tremen- dous commodity price support, and part of that was demand driven and part of that was supply driven. On the supply side there were two straight droughts in the Australian wheat market in 2005 HOW TO SURVIVE WHEN TIMES ARE TOUGH A CLOSER LOOK AT THE DRIVERS BEHIND AND IMPACT OF THE THREE MEGA-DEALS. BY: MARCEL BRUINS Garrett Stoerger, partner at Verdant Partners LLC