One of the world's largest and oldest pharmaceutical companies buys out one of the world's largest agriculture firms, and the stock collapses in freefall. One would think this to be impossible. Should such formidable combination of market power lead to even more power?
Since closing the Monsanto deal in June 2018 until it hit recent lows last May, Bayer AG (OTCQB:BAYRY) had lost as much as 47 billion euros in market cap. The euro back then was at $1.17. It is now at $1.10. That means that from the time of the deal closing to its May lows, Bayer lost nearly the entire dollar value of the Monsanto purchase.
Investors can claim, with some legitimate backing, that what spoiled the Monsanto deal and turned it into such a money pit is the ongoing litigation against Roundup weed killer. There is an element of truth to that, and it certainly exacerbated the situation, but the Roundup issue alone could not have been enough to wipe out the entire value of the deal from the root.
If we look at the raw numbers (page 93) for 2018, we find that the problem is much more endemic than external lawsuits alone. The combined company is mostly just buckling under its own weight. Net sales for 2017, before Monsanto became part of Bayer, were slightly over 35 billion euros. For 2018, sales had risen 13.1% to 39.59 billion euros, as should be expected for a combination of giants. At the same time, cost of goods sold skyrocketed from 11.382 billion euros to 17.01 billion euros, for a rise of over 49%. Not only that, but selling expenses, research and development, and administrative expenses all rose by higher percentages than net sales. The overall result was a collapse in Ebit of 33.7%. Net income fell nearly 80%.
This is all old news, but it reinforces the argument that antitrust law may be superfluous and unnecessary. Recall that Bayer was forced to sell $9 billion worth of assets just to get the deal through. Did that really protect consumers from a feared free market monopoly, or did it just make the deal all the more likely to crash and burn as it has?
Surely, when regulators sought to fight off the feared monopoly boogie man between Monsanto and Bayer, they did not intend to wipe out the entire market cap of the company being acquired. Let us be generous and assume that the Roundup issue accounts for 50% of Monsanto's fall. Had Monsanto continued along on its own, a 50% fall in its own stock price under current circumstances is not that diffcult to imagine. But its market cap certainly would not have gone to zero, as it has in the context of its combination with Bayer. It can also be assumed then that antitrust regulators did not have the goal of wiping out even half of Monsanto's value in putting up barriers to the acquisition in the first place. That happened on its own, without regulators having to interfere at all.
The truth is, judgments about what constitutes a trust and what doesn't are essentially market judgments. Regulators speculate what the market would look like in the event of the merger, and then make orders. Speculation though is best left up to the market itself and its players who put up their own money, rather than regulators who are not required to put up any of their own capital when making judgments. In the event that antitrust regulators happen to be wrong about their market prognostications as was certainly the case here, the ones that ultimately suffer are shareholders.
The same thing happened with Teva (NYSE:TEVA) when it acquired Allergan's generics unit back in 2016 for over $40 billion. That case was even worse. Since then, Teva has lost over $47 billion in market cap. Amazingly, despite the collapse, Teva has been under investigation since December for allegedly establishing a cartel and fixing prices for 300 drugs. It is hard to make such claims when a company is on the verge of collapse in what was viewed by antitrust regulators as an attempt to form a monopoly.
The point is, mergers and acquisitions, as well as divestments and spinoffs, are all market decisions made by executives speculating with their own capital. Sometimes they succeed, and sometimes they fail. This is the very nature and fabric of the market economy. Just as executives can be wrong in their decisions, so can antitrust regulators. The latter do not know any more than the former. Arguably they actually know much less. A perceived monopoly threat that could squeeze consumers can just as easily fail and squeeze the shareholders of the company instead.
What the Bayer and Teva cases show is that antitrust regulators may be unnecessary. Instead, the market itself can sort out the winners and losers. Markets in any case are far more brutal when misinterpreted than any antitrust regulator may be. Plus, if mergers actually had any natural tendency to breed monopolies, no company would ever engage in a spinoff or divestment in the first place.
Disclosure: No positions.
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