Solved: Assignment 8-Bayer-Monsanto: the challenges of a Mega-merger
Adapted from “Bayer-Monsanto: the challenges of a Mega-merger. Case #9B17M182 and Teaching Note #8B17M182 Ivey Publishing In 2016, the German multinational Bayer AG and the U.S.-based Monsanto Company agreed to merge, potentially creating the world’s largest integrated pesticide and seeds company. The agrochemicals and pharmaceuticals industries have several attributes in common. Both have large markets and high growth potential. Both industries also have strong technological roots in chemistry and biology. Too, the R&D intensity is high in both industries. Monsanto, for example, spends over 10% of its revenues on R&D whereas the average pharmaceutical firms spends 13%. Both industries are also subject to strict government regulation. For example, safety reviews of new products are commonplace in pharmaceuticals while genetically modified organisms are forbidden in Europe. Nevertheless, there were some differences. For example, while the pharmaceutical industry is rather fragmented, agrochemicals was not - 6 companies controlled 2/3 of the seed business and 3/4 of the pesticide market. Moreover, the pharmaceutical industry is characterized by long product life cycles (e.g., 12 years) and heavy up-front investments in R&D to discover new products. To compound this risk, Bayer had a relatively limited portfolio in pharmaceuticals (15 products accounted for 80% of its 2015 pharmaceutical revenues).

- What weaknesses was Bayer trying to address via its diversification strategy?
- What opportunities in its environment (e.g., synergies created by merging with Monsanto) is Bayer trying to exploit via its diversification strategy? Is this a case of related or unrelated product/market diversification?
- Finally, according to the resource-based view, firms may differ in the amount of synergies they possess vis-a-vis target firms. Those with greater synergies may be able to profit more from the acquisition than their competitors. They may either (1) win the bid at a lower price, thereby earning above-normal profits, or (2) withdraw from the bidding if the target price becomes too high, allowing the winning bidder to earn below-normal profits.