Basics of the transaction
As discussed previously in this series, Bayer AG sent a bear hug letter to Monsanto (MON) publicly stating its intent to purchase the company for $122 per share in cash. Monsanto’s Board of Directors is currently studying the proposal in accordance with its fiduciary duty.
Hostile deals generally follow a similar pattern. Company A (the buyer) privately contacts Company B (the target) and expresses interest in buying the company. Typically, the Board of Directors examines the bid, retains investment bankers, and begins negotiations. If negotiations move forward in a fruitful manner, the companies typically come to an agreement and make a joint announcement. If the target resists, the buyer does what Bayer did: make a public announcement. The intent is to get the target company’s shareholders on board with the deal and push management to go along.
The most likely next step will be for Monsanto to reject Bayer’s proposal. If $122 were the right price, the companies would have made a joint announcement about a deal. Monsanto will claim the offer undervalues the company, which will put the ball back in Bayer’s court. Bayer will undoubtedly expect this, and the fact that Bayer didn’t characterize its price as “full, fair, or final” indicates it has room to move. If this plays out as a garden-variety hostile deal, Bayer will come back with a “full and fair” increased offer, which Monsanto will reject. Bayer will then come back with a final offer, which Monsanto will accept, and we’ll have a friendly deal.
Note that Monsanto doesn’t have much in the way of takeover defenses. It doesn’t appear to have a staggered Board of Directors, and it doesn’t have a shareholder rights policy (a poison pill). That said, it probably isn’t necessary in this instance. Bayer will need to get Hart-Scott-Rodino antitrust approval to actually buy the company, and that will take a while.
Other merger arbitrage resources
Other important merger spreads include the merger between Cigna Corporation (CI) and Anthem (ANTM), which is set to close at the end of 2016. Another large chemical merger is between DuPont (DD) and Dow Chemical (DOW). For a primer on risk arbitrage investing, read Merger Arbitrage Must-Knows: A Key Guide for Investors.
Investors who are interested in trading in the agriculture sector can look at the VanEck Vectors Agribusiness ETF (MOO).