The Softer Side of an Emerging ‘GMO Monster’

SMITH BRAIN TRUST — Bayer announced plans in May 2016 for a buyout of Monsanto, and critics did not wait long before blasting the proposed megadeal. MarketWatch called it bad news for anyone who grows or eats food. CNN saw a “nightmare for America.” And CBS News warned of a “GMO monster” that would combine plant, pet and people products within the world’s largest agribusiness. Monsanto rejected the initial bid and a follow-up offer, but the firms stayed at the negotiation table and announced an enhanced $66 billion agreement on Sept. 14. The deal represents the latest in a new wave of mergers and acquisitions reshaping the agricultural biotechnology industry. Other announced deals include ChemChina’s acquisition of Syngenta and Dow’s merger with DuPont.

Mahka Moeen, a PhD alumna at the University of Maryland’s Robert H. Smith School of Business, wrote her dissertation on the industry and offers a historical perspective that might calm some of the fears. While the implications for farmers and grocery shoppers remain unclear, Moeen’s research shows how mergers and acquisitions have created surprising winners in the past. “This is not the first time that agricultural biotechnology has seen waves of M&A,” says Moeen, an assistant professor at the University of North Carolina’s Kenan-Flagler Business School. “Something similar has happened during two past periods.”

First wave

People often see acquiring companies like bullies who drive away smaller players and then charge monopoly prices when customers have nowhere else to go. Some of that type of industry consolidation occurred during the first M&A wave in the late 1980s and early 1990s, but Moeen traces most of the activity to the declining chemical industry. “It had nothing to do with their agricultural biotechnology divisions,” she says.

This was when companies such as Ciba-Geigy and Sandoz merged to form Novartis. And Astra and Zeneca merged to form AstraZeneca. Later, all four companies merged within the agricultural biotechnology industry to form Syngenta. “Chemistry knowledge had been declining for years, and there were not many new technological opportunities,” Moeen says. “Just like in any other declining industry, firms rushed to become more efficient and remove redundancies in their resource portfolios through mergers and acquisitions.”

Second wave

Moeen and Smith School professor Rajshree Agarwal, director of the Ed Snider Center for Enterprise and Markets and a Cato adjunct scholar, found different forces at play during the second M&A wave in the late 1990s. Their paper, forthcoming in Strategic Management Journal, shows how mergers, acquisitions and licensing agreements created access to knowledge from diverse sources during industry incubation — the period between a key scientific breakthrough in 1977 and the first instances of its commercialization nearly 20 years later.

“This wave was largely motivated by the desire to gain access to complementary elements of knowledge,” Moeen says. “It was not about achieving monopoly power by removing competitors. Rather, these acquisitions were considered critical in firms’ commercialization efforts. By acquiring conventional seed breeders and university spinoffs, firms such as Monsanto and Dow filled the gaps in their knowledge portfolios.”

Moeen and Agarwal tracked the early investing firms in the industry, and found that 85 percent of them never commercialized anything. “Firms like Syngenta, Monsanto and DuPont dominated the commercialization process in our study,” Agarwal says. “However, despite lack of product commercialization, other groups of investing firms such as university spinoffs and conventional seed breeders still found payoffs.”

Rather than getting pushed aside, nearly half of noncommercializing firms discovered new paths to profit through either licensing their technologies and being acquired. “This is the beauty of it,” Moeen says. “These acquisitions provided the opportunity for firms with no prospect of product commercialization to sell their businesses. Not only did these firms capture economic value, but also their knowledge was retained and integrated within the nascent industry.”

Current wave

Moeen says the industry’s third wave of mergers and acquisitions will likely represent a mixture of the first two. “On the one hand, this deal is a competitive response to the announced acquisitions involving DuPont, Dow and Syngenta,” she says. “On the other hand, Monsanto and Bayer have a lot to offer to each other, and their combined knowledge portfolio will open many new opportunities for them — and their customers.”

Learn more
“Incubation of an Industry: Heterogeneous Knowledge Bases and Modes of Value Capture,” by Mahka Moeen and Rajshree Agarwal, forthcoming in Strategic Management Journal.