Are big agriculture company mergers a good or bad thing for the ag industry in general and for farmers specifically?
“It is a big question that doesn’t have any real clear cut answers,” says Murray Fulton, a business professor at the University of Saskatchewan. Historically mergers haven’t been all that favourable in industry in general, he says.
“The evidence in the literature looking at company mergers over the years shows that the majority of the time the (union of two companies) doesn’t measure up to expectations,” says Fulton. “About 55 per cent of the time there is no real benefit. The expectation of increased profitability and/or a decreased cost structure just doesn’t materialize.”
Fulton wasn’t commenting specifically on recent mergers such as the union of Bayer and Monsanto or DuPont merging with Dow Chemical, saying with those company changes that only time will tell. And often, he says the value of merger may be determined by the eye of the beholder.
The benefit or driver of a merger is often described as two companies coming together to improve efficiencies and deliver improved products and service due to the synergy the merger creates. “Some research shows that often that is just a rationalization,” says Fulton. The real driving force behind a merger can be the desire or ego of a CEO just wanting to build a “bigger kingdom… the potential for improved synergies and cost savings are oversold,” he says.
Even within a company, it is possible for managers of different sectors to over-estimate the value of a merger — oversell the benefits — in hopes that if the merger does happen they will have a bigger division, and a more responsible job. “So it could be the whole system within a company that overstates the revenues and underestimates the costs, creating a scenario that is inflated,” he says.
What makes the success of mergers difficult to measure is the fact that in merging two companies or creating a new company altogether there is little or nothing left behind to compare. “There’s a new corporate entity but the old companies are gone so we don’t have in economics what is called a counter factual condition. We can’t say here’s what would have happened to the old companies if the merger hadn’t taken place, because they don’t exist. Sometimes the argument supporting a merger claims the productivity or profitability of the new company isn’t quite as good as expected, but it would have been a lot worse if the merger hadn’t taken place.”
Fulton says he also sees mergers in recent years as a means for companies to position or strengthen themselves in changing times. He says there were several seed and chemical company mergers back in the early 2000s as smaller companies moved to create more size and stability.
Today, he says, companies are merging in more uncertain times. “The industry is changing, society is changing, no one knows what the future looks like,” he says. “A chemical company may be looking ahead and be concerned that further restrictions on chemical use may be coming.” He points to political and societal changes. In Germany, for example, as the government considered approving the Bayer and Monsanto merger, a ban on glyphosate landed on table as a bargaining tool as part of a coalition government political compromise. “Companies may be looking to have larger diversified portfolios; in case one area is challenged they still have a strong product line in another area,” he says.
The benefit of mergers to farmers will largely be determined by wait and see, says Fulton. “Several smaller companies can mean more competition and more competitive pricing, but at the same time each may not have the resources to invest in product development. On the other hand, fewer larger companies may mean reduced competition, but then the larger companies have more money to invest in R & D.”
Fulton says ag company mergers are creating companies with large portfolios of crop protection products, as well as large portfolios in seed divisions. Depending on how the wind blows, he sees the seed divisions as being quite resilient.
“On one hand with these mergers it appears the companies are investing in the notion of high input agriculture,” he says. “Perhaps the big unanswered question is ‘what is the future of agriculture?’ If the trend continues toward high input agriculture then they are well positioned with diversified portfolios.
“Even if the trend someday swings toward lower input agriculture, then with only two or three larger players in the industry they all have a better chance. If the demand for chemicals declines they still have a strong seed portfolio. They are positioning themselves to take a gamble on the question ‘where is agriculture headed?’”