On May 29, 2018, the DOJ approved Bayer’s acquisition of Monsanto with a $9 billion asset divestiture.
In September 2016, Bayer agreed to acquire Monsanto. Bayer and Monsanto overlapped in the research, development, and marketing of seeds, crop protection chemicals, and related agricultural products. The principal areas of competitive concern related to the seeds business. The seeds and crop protection businesses are highly concentrated in the United States so from the get go Bayer knew that it needed to propose a comprehensive and complex remedy to resolve the antitrust concerns.
Complicated Remedy to Resolve Horizontal, Vertical and Innovation Concerns
To remedy horizontal, vertical, and innovation concerns, the DOJ required the divestiture of assets to BASF, along with supporting transition services and supply arrangements. While BASF is active in the agribusiness industry through its crop protection chemicals business, prior to the acquisition of the divested assets it had no seed business. With the acquisition, it will enter into the seeds business in competition with the merged Bayer/Monsanto.
On October 13, 2017, Bayer signed an agreement to sell a package of assets to BASF for approximately $7 billion. The assets to be sold include Bayer’s global glufosinate-ammonium business and the related LibertyLink™ technology for herbicide tolerance, essentially all of the company’s field crop seeds businesses, as well as respective research and development capabilities. The seeds businesses originally offered included the global cottonseed business (excluding India and South Africa), the North American and European canola seed businesses and the soybean seed business. The transaction included the transfer of relevant intellectual property and facilities, as well as more than 1,800 employees primarily in the United States, Germany, Brazil, Canada and Belgium. As part of the agreement, BASF committed to maintain all permanent positions, under similar conditions, for at least three years after closing of the transaction.
The initial divestiture of assets and technology to BASF appeared to be designed to create a stronger participant in any integrated seed/trait/chemical platform market so it appeared to address most of the concerns that the Bayer/Monsanto deal would enhance the combined firm’s incentive and ability to integrate traits, seeds, and chemicals into proprietary systems closed to competition. The DOJ, however, did not accept Bayer’s proposed remedy and negotiated hard to require that even more assets to be divested.
DOJ Allows Divestiture of Assets Instead of Requiring a Divestiture of a Business
To ensure that the BASF would be a viable competitor going forward, the DOJ sought a divestiture of a complete business to resolve the antitrust concerns. Indeed, the divestiture of a stand alone business is preferable to a divestiture of assets especially when the divestiture buyer is entering into a new business. Here, Bayer offered a great deal of assets including employees but could not offer a separate stand alone business. Typically, the Antitrust Division would have serious concerns about the adequacy of asset carveouts, which are “inherently suspect,” but here the DOJ finally accepted a less than desirable divestiture package.
DOJ Requires Divestitures of Additional Assets Not Related to Overlaps
Because neither Bayer nor Monsanto had a single standalone business unit to divest, the DOJ accepted a broad divestiture of assets. In its efforts to design something close to a complete and viable business, the DOJ required the merging parties to not only divest overlapping assets but non-overlapping assets that were deemed essential complements for the divested, overlapping businesses. In structuring the divestitures, the DOJ worked with Bayer and BASF to understand BASF’s current business profile. In that effort, the DOJ required assets to be included in the divestiture that BASF might not have needed if BASF had an existing seeds business.
DOJ Requires Divestitures to Remedy Innovation and Vertical Concerns
Besides horizontal concerns, the DOJ wanted to remedy innovation and vertical concerns raised by the combination. To address those concerns, the DOJ required divestitures of Bayer seed treatment patents, research and development (R&D) facilities and assets, pipeline products, and herbicides to BASF. The DOJ believes the divested assets will maintain innovation. The DOJ also required divestitures of wheat related R&D assets even though there was no U.S. overlap between Bayer and Monsanto in wheat. Bayer had been pursuing significant wheat-related research for the purpose of expanding its overall seeds and traits portfolio so the DOJ believed that BASF should have it. Because the potentially resulting innovations could be applied across a number of crops in addition to the seed assets being divested, the DOJ required a divesture of wheat related R&D to “increase the incentive [of BASF] to innovate” by giving BASF all of the tools that Bayer has in running its business. In other words, the DOJ took steps to address R&D harms by requiring a broader array of R&D divestitures. The DOJ’s goal was to design a structural remedy and preserve the merged firm’s and BASF’s incentives to innovate going forward. Indeed, the head of the DOJ, Makan Delrahim, stated that the acquisition of these assets enables “BASF to continue Bayer’s legacy of innovation, while preserving the innovation incentives of the combined Bayer/Monsanto company.
DOJ Requires Provisions that Will Make It Easier to Enforce the Decree
In addition to the structural remedies, the DOJ included a few provisions in the consent decree that increase the burden on the merging parties, as well as on the divestiture buyer, but make the settlement agreement easier to enforce and more likely to succeed. First, the consent decree gives BASF the ability, within one year after closing, to identify additional assets it deems reasonably necessary to operate the divested assets in a competitive manner, and the DOJ can require Bayer to sell those assets to BASF. By allowing BASF to request additional assets, the DOJ is really protecting the long-term viability of BASF as a competitor. Second, BASF was made a party to the consent decree for purposes of the divestiture to ensure that competition is sufficiently preserved. Frankly, this should have been done in past merger settlements, but for some reason, the DOJ has failed to do so in prior cases even where the DOJ was concerned that a divestiture might not be effective. Third, the DOJ included a “preponderance of the evidence” standard, which is a lower standard than the “clear and convincing evidence” standard that the DOJ has been held to in the past. These provisions place the burden on the merging parties and the divestiture buyer to ensure that the remedies they are proposing will have a more meaningful opportunity to be successful.
The DOJ’s remedy demonstrates that the DOJ will require structural remedies to resolve horizontal, vertical, and innovation concerns. The remedy also shows that the DOJ is willing to negotiate a complicated fix even when no standalone business exists. In situations where the DOJ is not requiring a divestiture of a business unit, it may require divestitures of assets that extend beyond overlapping product areas to ensure the viability of the divestiture buyer. Besides requiring divestitures of complementary products, the DOJ may require R&D divestitures that are not directly related to any specific horizontal potential or innovation competition overlap. In addition, merging parties must contemplate that the DOJ may require a number of provisions designed to increase the effectiveness and enforceability of its consent decrees. This remedy shows that the DOJ will spend time trying to understand the divestiture buyer, the relationship between separate assets of the merging parties, and how these factors can affect the scope of asset divestitures that the DOJ might require in lieu of requiring a divestiture of a business. Here, the DOJ is making an effort to design a decree that can be effectively enforced by putting the burden on the merging parties as well as the divestiture buyer while attempting to provide the divestiture buyer with everything that it may need in terms of assets to be a viable competitor going forward. Negotiating asset divestitures to an anticompetitive merger is never easy, but the DOJ is showing that it will go out of its way to protect the divestiture buyer.
Here, we will have to take a wait and see approach to see if the largest asset divestiture in history will be successful. While structural remedies are preferred over behavioral remedies, structural remedies in other industries have failed especially in situations like this where the antitrust agencies did not require a divestiture of a standalone business. The FTC, for example, had several black eyes from failed asset divestitures in Hertz/Dollar Thrifty, Safeway/Albertsons, and Dollar Tree/Family Dollar. Divestitures of a standalone business should generally be preferred over asset divestitures. Unlike the failed divestitures at the FTC, BASF is a strong competitor in the ag chemicals business so it appears to be a more legitimate buyer of assets. For all the farmers that rely on a concentrated industry for its seeds and chemical protection products, we sure hope that BASF can make this asset divestiture work. But, there is no guarantee that such a large and complicated divestiture of overlapping and complementary assets along with complementary R&D assets can be successfully cobbled together to maintain competition and foster future innovation. It is now up to BASF to make it work. There is a lot of execution risk with such a large divestiture, and some will ask if the divestiture of so many assets is required to resolve competition and innovation concerns, should the deal be approved at all?
Preserving actual and innovation competition in agricultural seeds and herbicides is vitally important to all crop farmers. The DOJ itself says it initially concluded that the merged entity would “significantly harm competition across a broad range of agriculture products,” and result in increased prices for consumers and farmers, as well as stifle innovation. In a situation like this, farmers and consumers are the ones taking the risk and asking if this merger was too big to fix OR whether the deal should have simply been blocked?