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Do Takeovers Create Value?
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.
2. 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.
3. But do takeovers create value? The
Bayer offer to buy Monsanto for $62
billion brings this thought to mind.
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5. It may or may not succeed as noted
in The Wall Street Journal which says
that Bayer’s Monsanto bid has
fallen flat.
6. One problem with conglomerates is that
there is something to dislike for
everyone.
7. 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.
8. This remains true, even if details
released Monday of the $62 billion offer
including debt look better than expected.
9. 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.
10. It plans to sell some $15 billion in
discounted equity-hefty but below most
forecasts-after it confirmed its approach
last week.
11. 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.
12. In short this takeover does not create
sufficient value to justify itself in the
near term.
13. 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.
14. In this case why would Monsanto
shareholders want to sell?
16. Bloomberg notes that investors are
showing alarm at the final price of
the Bayer bid for Monsanto.
17. The German company on Monday said it
had told Monsanto it’s willing to pay
$122 a share in cash.
18. Bayer’s stock dropped as much as 6
percent, extending losses since the
potential deal was first revealed.
19. Monsanto shares posted muted gains,
rising 4.9 percent to $106.45 in New
York trading, signaling that investors
remain skeptical about the deal.
20. “I don’t think Monsanto will accept”
Bayer’s proposal, said Andrea Williams,
a fund manager at Royal London Asset
Management Co.
21. “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.”
22. Bloomberg also notes the likely true
reason behind this takeover attempt,
the need to boost productivity and
feed 10 billion people by 2050.
23. 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.
26. is the value delivered to shareholders
because of management’s ability to grow
earnings, dividends and share price.
27. 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.
28. 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.
29. 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.
