The Justice Department’s May 29 conditional approval of the Bayer AG-Monsanto Co. merger rests on a potentially risky bet: selling $9 billion in assets to ensure competition in future product innovation and development.
The merger is conditioned on BASF SE, a German chemical company, acquiring Bayer’s divested assets, including seed treatment patents and herbicides products, a requirement that the DOJ believes will maintain innovation through competition. 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,” Makan Delrahim, DOJ assistant attorney general for the antitrust division, said during a May 29 press conference.
There’s no guarantee that this sort of divestiture will foster future innovation, antitrust lawyers said. “Economics doesn’t give us the answer with respect to innovation, it can go up with more concentration, as well as go down,” George Cary, former deputy director of the Federal Trade Commission’s competition bureau, said at an American Bar Association conference last month. “Past market shares don’t determine the outcome.”
The Bayer-Monsanto merger divestment is the largest in U.S. history, and that in and of itself is a “big warning sign,” Chris Sagers, an antitrust professor at Cleveland-Marshall College of Law, told Bloomberg Law. “I’ve come to think that if an agency finds itself needing really big divestitures to make a deal legal, then the deal probably is just too dangerous to approve,” he said.
It’s a concern shared by some current antitrust enforcers, too. The more a merger relies on innovation, the more likely it can’t be remedied through asset sell-offs and other types of divestment, Patrica Brink, director of civil enforcement for the DOJ’s antitrust division, said at the same conference.
Preserving competition and innovation in agricultural seeds and related products was a key concern for DOJ regulators reviewing Bayer-Monsanto’s proposed $66 billion merger. The government initially concluded that the merged entity would “significantly harm competition across a broad range of agriculture products,” possibly increase prices for consumers and farmers, and stifle innovation.
Ultimately, however, the DOJ concluded that extensive structural remedies, including the divestment of certain Bayer patents, research and development facilities, and pipeline products scheduled to hit the market soon, provide enough of a counterbalance to allow the merger to go through.
Merger divestitures haven’t always worked as planned. The FTC required Albertsons and Safeway Inc. to divest 168 stores and sell most of their assets to Haggen Holdings LLC, an operator of chain grocery stores based in Washington.
That same year, Haggen went bankrupt and Albertsons purchased Haggen’s assets. Similarly, the FTC in 2012 approved the merger between rental car companies Hertz Corp. and Dollar Thrifty, contingent upon Hertz selling its Advantage Rent a Car assets to Macquarie Capital Inc., an investment bank. Advantage filed for bankruptcy in 2013, but it was eventually acquired by a Canadian private-equity firm in 2014.
It is likely that BASF, the acquirer of Bayer’s assets, will be able to hold up its end of the bargain as it is a successfully managed company, Sagers said. But “the government just isn’t good at designing markets prospectively,” he added.
Time will tell if the DOJ’s remedy actually works, Seth Bloom, former general counsel of the U.S. Senate Antitrust Subcommittee, told Bloomberg Law. “But there has been a problem in the past with structural remedies,” he said.
For the most part, companies want to continually innovate to stay competitive and relevant, Cary said. “Even with fewer players in the marketplace, the incentive for innovation is pretty strong,” he said.
But there is still inherent risk in betting that remedies fashioned by antitrust enforcers will ensure innovation. “The remedy raises significant issues of execution risk,” Diana Moss, president of the American Antitrust Institute, said in a press release May 29. Under the proposed remedy, BASF is expected to fully restore competition in an area in which it is not experienced, she said, making the Bayer-Monsanto remedy a “tall order.”
Brink, who worked on the Bayer-Monsanto deal with the DOJ, has been critical of remedies that require extensive asset sell-offs. “It is difficult to craft the remedy and divestiture and have faith that you are getting the correct assets to replace the competition,” she said last month. It’s “very hard to have comfort in a piecemeal fashion.”