Last year saw robust mergers and acquisitions activity that may start to reshape the agribusiness, ag tech and farming industries. The Dow DuPont merger, ChemChina Sygenta acquisition and the Bayer Monsanto merger are some of the deals marked to change the face of these industries through large-scale consolidations, along with cooperative mergers focused on increasing efficiencies.
Bayer Monsanto Merger Gets Green Light
The Bayer Monsanto deal received the green light from the U.S. Justice Department on April 9, after the companies struck a deal to sell more assets in order to win the antitrust approval.
Bayer AG, a German pharmaceutical, chemical and pesticide giant, announced its proposal to buy Monsanto, a St. Louis seeds and crop genes leader, for $62 billion in September 2016.
As per the agreement and plan of merger filed with the SEC, KWA Investment Co., an indirect wholly-owned subsidiary of Bayer, will merge with and into Monsanto, leaving it as the surviving entity and Bayer’s wholly-owned subsidiary. Merger consideration is set to be $128 cash per share, valuing Monsanto at an extraordinary $62 billion.
Reverse Triangular Merger
This deal uses a reverse triangular merger structure, which is a type of merger in which the acquiring company creates a subsidiary, often called a “merger sub” (in this case KWA Investment Co.), to effectuate the merger. The merger sub purchases the target company, following which, the target company absorbs the merger sub, leaving the target company as the surviving entity and a wholly-owned subsidiary of the acquiring company. The reverse triangular merger is thought to be a quicker and simpler structure than a direct or 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 would only need the approval of the acquiring company, its sole shareholder. Shareholder approval of the target entity is required. However, this still eliminates the need for approval by the acquiring company’s shareholders, making the process one step simpler.
The reverse triangular merger also allows the assets and contracts of the target company to remain with the them. When the target company becomes a wholly-owned subsidiary of the acquiring company, it is easier for the acquiring company to gain control over assets and contracts. Contract clauses that restrict “assignment” of rights under the contract often are not triggered since the contracts remain with the target company, the original party to the contract. This characteristic of the reverse triangular merger will prove beneficial in the Bayer Monsanto merger.
The antitrust approval seems to have given some cause for concern in the merger, however. 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, companies are required to report deals of value over $84.4 million for review. Upon preliminary review, transactions requiring further review are assigned to either the FTC or the Justice Department.
In the Bayer Monsanto deal, the process was announced to be concluded on April 9. The Justice Department provided approval after the companies entered into an agreement, under which Bayer is to sell off (additional) assets related to its seed and seed-treatment businesses, and make concessions related to its digital agriculture business—a deviation from the usual practice of companies providing promises on post-merger business practices. BASF SE, a direct competitor of Monsanto, is set to acquire the assets sold by Bayer under this agreement.
This 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.
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 has raised concerns for farmers struggling with increasing prices and diminishing incomes. Will they survive? Only time will tell.
Pooja Sudarshan is a corporate lawyer at Royse Law Firm. She focuses her practice on representing companies in mergers and acquisitions and corporate finance transactions, primarily in the healthcare and technology industry sectors.