DuPont's purchase of Pioneer validates big bet Monsanto made on seed companies
By Robert Steyer
Of the St Louis Post-Dispatch
Posted: Sunday, March 21, 1999 | 3:48 a.m.
Remember the childhood game of musical chairs, when your
classmates walked cautiously in a circle as the music played, then
scrambled to find a chair when the music stopped? The person
who didn't grab a chair was out of the game.
In the game of crop biotechnology musical chairs, DuPont Co.
grabbed many of the chairs last week, except for the ones
occupied by Monsanto Co. and a handful of multinational
companies.
By offering to purchase 80 percent of Pioneer Hi-Bred International
Inc., the world's biggest seed company, DuPont firmly established
itself in the life sciences arena -- where food, farm products, drugs
and biotechnology intersect. It also hastened the consolidation of
the seed industry.
"This was a watershed event," said Sano Shimoda, president of the
agribusiness research firm BioScience Securities Inc. in Orinda,
Calif. "Pioneer was always fiercely independent. It suggests they
put their egos in the back room and said, 'This is what's necessary
to move things to the next level.'"
DuPont's bid sent a clear message to its peers.
"The number of independent seed companies is getting scarce,"
said G. Patrick Dunkerley, an agribusiness analyst for Securities
Corp. of Iowa, in Des Moines. "You have to ante up by purchasing a
big seed company now, or you're not in the game."
If regulators approve the DuPont-Pioneer deal, three companies --
DuPont, Monsanto and Novartis -- will control two-thirds of the
North American seed corn market and 45 percent of the soybean
seed market.
DuPont offered a hefty $7.7 billion. It bought 20 percent of Pioneer
two years ago for $1.7 billion, creating a research alliance and
seed-trait joint venture as well.
Analysts don't expect anyone to make a higher bid. Monsanto, the
most aggressive seed-company buyer, doesn't have the money.
European life sciences giants are busy merging with each other,
and they don't appear willing or able to top DuPont's offer.
Monsanto set the standard for buying, often at big premiums over
the stock prices and/or revenue of seed companies. For example, it
spent $1 billion in 1997 for Holden's Foundation Seed Co., which
had $75 million in revenue.
Holden's gave Monsanto about one-third of the market for the seed
that is sold to commercial growers. Monsanto also acquired DeKalb
Genetics Corp. last year, giving it both foundation seed and a big
distribution network for commercial seed.
DuPont is using the same strategy with Pioneer. "This was a
validation of Monsanto's strategy," Dunkerley said. "If this deal
closes, DuPont and Monsanto are in the catbird seat."
DuPont has a stronger financial foundation than Monsanto, which
leveraged itself to the eyeballs to make four big acquisitions last
year. Three deals have closed. Monsanto's bid for Delta & Pine
Land Co., the world's biggest cotton seed company, has been
under review by the Justice Department for 10 months.
Monsanto's spending spree and its failed merger attempt with
American Home Products Corp. prompted some speculation that
DuPont was talking to Monsanto about a merger.
Both companies refused to comment, but a DuPont-Monsanto
combination has been a frequent topic of Wall Street speculation in
recent years. Agribusiness experts say a merger that would have
raised antitrust concerns when DuPont owned 20 percent of
Pioneer will shout antitrust warnings if DuPont owns all of Pioneer.
"I don't think DuPont would have jeopardized its relationship with
Pioneer for a merger with Monsanto," Shimoda said. "It would have
been very difficult to unwind that relationship. However, in this
business, you learn never to say 'never.'"
Analysts say the pressure now is on other big companies that
want to expand their farm product-seed-biotech businesses.
"They would have to buy a lot of little seed companies, or they
won't have the critical mass of Monsanto and DuPont," said
Dunkerley, adding that one of the giants might chase after
Monsanto. "If you don't own seed companies, you don't have the
flexibility to get seeds with your technology into the market quickly."
Shimoda added that small seed companies will probably be
swallowed up in the industry's consolidation.
With Monsanto and DuPont at the top, and Switzerland's Novartis
firmly in third place, Shimoda said perhaps only one other company
will emerge to challenge the Big Three. Possibilities include Dow
Chemical, Britain's Zeneca, France's Rhone Poulenc and Germany's
Hoechst AG.
All have farm products and seeds, all conduct crop biotech
research and all, except Dow, produce pharmaceuticals.
All have been rumored as buyers of, or partners with, Monsanto.
And all have been involved in the types of deals that prompt
Shimoda to remark about the "strange bedfellows" in agribusiness.
Novartis, which has had legal fights with Monsanto, also licenses
Monsanto's insect-fighting corn technology. Monsanto's weapon
against the European corn borer has performed so well that
Novartis is phasing out sales of seed using its existing corn borer
technology.
Zeneca, which has traded lawsuits with Monsanto, said last week
that both companies were dropping the suits. As a result, Zeneca
can license its Touchdown herbicide for use on seeds using
Monsanto's Roundup Ready herbicide-tolerant technology. Roundup
and Touchdown are similar weedkillers and fierce competitors.
Zeneca is in the final stages of merging with Astra, a big Swedish
pharmaceutical company. Meanwhile, Hoechst is merging with
Rhone Poulenc. Hoechst also has a crop products joint venture with
Germany's Schering AG.
Dow, which had been buying pieces of Mycogen over the years,
recently bought the rest of the San Diego-based biotechnology
company, which is a cornerstone of Dow's agriculture business.
Analysts don't discount the prospect of a large, wealthy company
that lacks a farm biotech presence trying to buy its way into the
seed business. Companies like American Home Products or the
German conglomerate Bayer AG fit in this group.
"These companies realize they can't do everything," Shimoda said.
"They will battle each other in some areas and be buddies in others.
You can expect to see some very creative relationships as long as
they focus on business and not carry all the baggage of history and
egos."
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