Published on Jun 01, 2018
In conditionally clearing Bayer’s $66 billion acquisition of agrochemical rival Monsanto, DOJ endorsed a settlement that deviates somewhat from its commitment to accept only straightforward and self-executing structural remedies. But in addressing the proposed deal, antitrust division chief Makan Delrahim bent policy prescriptions to the facts at hand, which didn’t fit neatly in boxes he used previously to describe the division’s preferences.
Although commentators have compared the Bayer/Monsanto deal to Haliburton/Baker Hughes—a merger DOJ concluded was too big to fix—this view fails to take into account distinguishing features that ultimately made the agrochem tie-up acceptable to the antitrust division front office. Still, Delrahim is taking a big political risk after criticizing prior DOJ settlements such as Comcast/NBCU and LiveNation/TicketMaster as overly complex.
The far-reaching settlement, announced on May 29, may be viewed as at odds with the antitrust division chief’s commitment to limiting the division’s role as a regulator. By clearing the deal with structural remedies that require significant DOJ oversight, he opens himself up to criticisms that he failed to practice what he preached should the arrangements for competition and continuity collapse.
The settlement requires Bayer to sell assets to preserve head-to-head competition, eliminate risk of Bayer foreclosing rivals from competing and ensure that the divestiture buyer has the resources it needs to be a successful competitor. It also involves the transfer of $9 billion worth of assets to agrochemical company BASF and will require monitoring by DOJ as new business units created by divestitures receive time-limited support from a powerful rival.
Delrahim may blanch at that aspect of the settlement package. Nonetheless, DOJ concluded that it succeeds overall in restoring competition to pre-merger levels. And in other key respects, the settlement is consistent with Delrahim’s criticism of prior settlements. By addressing vertical concerns with structural relief, the settlement makes good on Delrahim’s pledge to reduce the division’s reliance on behavioral remedies.
In-Depth: Consent Decree Conditions
Halliburton/Baker Hughes parallels and “too big to fix.” In its April 2016 complaint to block Halliburton’s proposed acquisition of Baker Hughes, DOJ described the companies’ proposed divestiture solution as “among the most complex and riskiest remedies ever contemplated in an antitrust case.”
The Halliburton fix, DOJ said, “would separate business lines and divide facilities, intellectual property, research and development.” Opponents to agrochemical consolidation argue that the same characterization applies to the Bayer/Monsanto remedy.
DOJ appears to have gone to great lengths to prevent similar issues from arising in Bayer/Monsanto. Its remedy, however, is not without risk of failure. Although BASF is acquiring entire business units for digital agriculture and certain row crop seeds and traits, a number of other assets Bayer is divesting are pieces of existing business or contain carve-outs. For example, because it was impossible to disentangle seed treatment patents, the DOJ consent order requires Bayer to provide to BASF a perpetual royalty free license for certain patents.
There are also similarities—albeit limited—between proposed divestiture buyers in Bayer/Monsanto and Halliburton/Baker Hughes. In both cases, merging parties pitched divestiture to a company active in an adjacent space as a means to inject new competition in the market. Primarily a chemical company, BASF lacks expertise in seeds. Although the seed businesses that Bayer is committed to sell to BASF includes R&D and other resources intended to create a viable competitor, risk of failure remains.
In Halliburton/Baker Hughes, DOJ viewed the risk as too great to look past. Any divestiture buyer—whether General Electric or another bidder—would have both lacked key oilfield services business lines, and been dependent on the merged firm for services crucial to its business for years after the transaction closed. According to DOJ’s complaint, “the proposed remedy would create a divestiture business that lacks assets in important segments of oilfield services that each of the Big Three possess today, such as fracking, onshore cementing and onshore fluids.”
At the time, DOJ used Halliburton/Baker Hughes as a cautionary tale to illustrate that some deals may be unfixable: “There’s a tendency sometimes to think no matter how extensive the anticompetitive effects of the transaction might be, that if a big enough remedy is offered, an agreement can be reached with the enforcement agencies to allow the deal to proceed. That simply is not true,” then-Deputy Assistant Attorney General David Gelfand said during a May 2, 2016 conference call.
“The question is not whether a proposed remedy is extensive and involves a large price tag, the issue is whether the proposed remedy addresses the competitive problems with the transaction,” Gelfand added on the call, which announced the division’s decision to challenge the oilfield services tie-up.
With divestitures valued at $9 billion and a remedy that touches most of Bayer and Monsanto’s businesses, the agrochem settlement is both extensive and involves a large price tag. Beyond that, however, DOJ’s move to conditionally clear the merger indicates that the division’s antitrust enforcers are confident that the remedy addresses the deal’s competitive problems.
Supply, transition services requirements consistent with prior settlements; demonstrate limitations on DOJ objective of removing monitoring obligations. In conjunction with the sale of several of its herbicides and seed treatment products, the consent order requires Bayer to supply BASF for a two-year period, which may be extended for two to four additional years (depending on the product) with DOJ approval.
Additionally, Bayer has agreed to provide distribution and technology support to BASF for a one- to two-year period (depending on nature of support), which may be extended for one additional year with DOJ approval. For at least several years Bayer and BASF won’t operate as arms-length competitors.
Bayer’s obligation is consistent with other recent large-scale divestitures. In settlements, enforcement agencies generally protect the supply of goods or services during the transition of divested assets, imposing limits on the duration of a company’s reliance on its competitor as the dependent relationship interferes with the functioning of competitive markets.
Two relatively recent DOJ settlements provide a basis to compare how the department dealt with ensuring transitional support until a divestiture buyer could stand on its own as a competitor. Those settlements, however, were signed by Obama appointees, who did not take the current administration’s vehement stance against monitoring consummated transactions.
In AB InBev’s 2013 acquisition of Grupo Modelo, DOJ required the merged company to sell Modelo’s newest, most technologically advanced brewery along with associated assets to Modelo’s joint venture partner Constellation Brands. AB InBev was required to supply Constellation for a period of up to three years, with the option of extending the agreement for up to an additional two years upon DOJ’s approval. Unlike Constellation, which acquired a standalone business and a single, straightforward supply agreement, BASF is acquiring a variety of assets, each of which requires its own supply agreement.
In clearing the Dow/DuPont merger last year, DOJ required the companies to divest some of DuPont’s herbicide and insecticide products. DOJ allowed for a one-year agreement for DowDuPont to provide formulation services to the divestiture buyer that would improve the effectiveness of the purchased crop-protection lines. The agreement could be extended for an additional two years. Dow/DuPont’s supply agreement was more limited in both time and scope than the Bayer agreements.
Addressing vertical problems with structural fix is in line with Delrahim’s philosophy. One piece of the Monsanto remedy that is consistent with Delrahim’s enforcement vision is the sale of Bayer’s seed treatment business.
Although Monsanto does not have seed treatment products currently on the market, DOJ was concerned that Monsanto’s strong position in corn and soybean seeds combined with Bayer’s dominance in seed treatments for both crops would enable the merged firm to raise seed rivals’ costs or even withhold supply of necessary seed treatment.
Delrahim has harshly criticized behavioral fixes to vertical agreements and his actions since becoming chief of the antitrust division reflect determination to reduce conduct remedies. The highest-profile example, of course, is DOJ’s recent challenge to the AT&T/Time Warner merger, a transaction the division contends is fixable only through significant divestitures.
Prior antitrust division chiefs may have considered a behavioral fix to the seed treatment issue, particularly given the relative size of the seed treatment business to the overall asset package being sold to BASF. Current DOJ leadership, however, seized the opportunity to further cement its vow to limit conduct remedies and the enforcement burden they impose on the agency.