How Will Monsanto Improve Its Product Mix and Cost Structure?



Solid product synergy

Monsanto (MON) is the world’s largest agricultural seed player, with a total global market share of 26% in the global seed industry. Monsanto generated 68% sales from seeds and the remaining 32% from crop protection in 2014. On the other hand, Syngenta (SYT) is the world’s largest crop protection player, with a total global market share of 23%. In contrast to Monsanto, Syngenta reported 75% sales from crop protection and only 21% of total sales from seeds.

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If the deal materializes between these two companies, the combined company would have a balanced portfolio of seeds and crop protection, with a total revenue contribution of 44% from seeds and 54% from crop protection. Monsanto would become the world’s largest seed and crop protection player as a result.

Syngenta and Monsanto together would have a 35% market share of the global seeds industry and a 30% market share of the global pesticide industry. This would put them far ahead of the merged Dow Chemical (DOW) and DuPont (DD), or DowDuPont, standing at 21% and 16% in market share of seeds and pesticides, respectively.

Significant cost synergy

Monsanto and Syngenta are driven by their research and development (or R&D) activities. MON and SYT had total R&D expenditures of 11% and 9% of net sales in 2014, respectively. After the deal, Monsanto and Syngenta would combine their R&D capabilities to improve productivity and margins.

With a balanced product portfolio, the combined company would further increase its market share in global markets. Monsanto has crossed around 400 million acres of the core crops market out of the potential 3.5 billion acres worldwide. After the deal, Syngenta would add another 200 million acres to Monsanto’s reach. After the deal, the combined company is expected to generate significant product, cost, and growth synergies.

Investors can invest in chemical ETFs such as the Materials Select Sector SPDR (XLB) and the iShares US Basic Materials ETF (IYM) to get exposure to the chemical industry. These two ETFs track the performance of chemical companies. DOW makes the highest holdings in XLB while DD has the highest holdings in IYM.


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