It Ain’t Over ‘Till It’s Over: An International Lesson in Competitive Cooperation
5/23/2012 9:26:00 AM
Jeff Peterson, MBA ’88, VP of Strategic Development of Monsanto Company takes Johnson students through the complicated world of divestitures with an in-depth case study from his own experiences.
A presentation by Jeff Peterson, MBA ’88, VP of Strategic Development, Monsanto Company
On April 24, 2012, Jeff Peterson, VP of Strategic Development for Monsanto Company, took Johnson students through a divestiture case study in a talk entitled, “It Ain’t Over ‘Til It’s Over: An International Lesson in Competitive Cooperation.” Monsanto decided in 2008 to divest its sunflower seed business which was no longer deemed as strategic. The business was in a good competitive situation, had the largest global market share in its industry, and enjoyed a growth rate which was double the industry average. It was not a stand-alone business unit, however, and needed to be “carved out” of Monsanto.
The company employed a three round auction process, which attracted twelve initial bidders, both from the industry and the private equity community. Round one consisted of participants submitting a non-binding bid. Based on the bids, buyers were selected to participate in round two, when management would give presentations and buyers could perform due diligence via a data room. Buyers were then asked to submit binding bids. In round three, negotiations would begin in earnest, culminating in final bids and ultimately, an agreement of sale.
Jeff identified seven deal principles which were sought by Monsanto:
1. Certainty of close: Once committed, buyers would be compelled to close, almost no matter what.
2. Timing of close: Monsanto wanted the deal finalized by the end of their fiscal year.
3. Minimal risk of future litigation or disputes: If done right, the deal should not generate future disagreements.
4. No Biotech Intellectual Property or constraints or reach in on biotech Intellectual Property.
5. No constraints on future acquisitions/joint ventures/collaborations: A non-compete clause would need to leave flexibility for Monsanto to do future deals in which Sunflower was a minor component and not the target.
6. Maintenance of competitive value: There would not be a negative purchase price adjustment other then as a result of a normal working capital adjustment.
7. No additional risk to existing business: The carve-out could not hurt Monsanto’s core business.
The certainty of close requirement was deemed very important to Monsanto. Some buyers had no risk of getting the antitrust approvals in order to close but for others there was some risk in some markets. One of the final two buyers had some closing risks in some markets and to be on an even footing with the other potential buyer, needed to assume the antitrust risk. Both the Monsanto and the buyer felt this risk was small.
Jeff emphasized, that honesty needed to prevail in all negotiations. Because of a number of challenges throughout this negotiation, this requirement was particularly important to the final success.
Included in the sale were the following assets: facilities, property, equipment, intellectual property, and germplasm, which is defined as a collection of genetic resources for an organism. Essentially, the germplasm is a patented biotech lineage, which can be sold or licensed.
Through complex negotiations, a deal was reached with the lead buyer, Syngenta, which was also a competitor, and a closing date established. In keeping with the theme of the talk, however, this did not mean the deal was over. The deal needed Board of Directors approval and the next board meeting was three weeks away. CEO of Monsanto, Hugh Grant, indicated he wanted to wait for the board meeting instead of having a special call. During this period, other buyers would most likely disappear, and the selected buyer would thus be in a position to change the terms of the deal at the last minute. There was also a concern that Monsanto could negotiate with another buyer during this waiting period and try to get even better terms. Based on the personal rapport built between the negotiations teams of Monsanto and Syngenta, a balanced solution was found that allowed a delay but still had strong incentives to keep both parties committed to what they agreed.
Finally, the board approved the deal, and agreements for transitional services agreement and gross profit sharing were put in place. A closing date was also set. The buyer subsequently issued a press release, announcing the acquisition as enhancing their “dominance” in the marketplace. The choice of words later came back to haunt them after the deal was closed.
Again the theme of the talk re-appeared: it was not over yet. Just six days prior to closing, an unsuccessful buyer claimed that Monsanto did not own some of the germplasm. Instead, according to their unsubstantiated claim, the germplasm was in fact the property of the unsuccessful buyer. A mad scramble through old documentation could initially neither substantiate nor refute the claim. Monsanto correspondingly informed Syngenta that a key asset in the deal may need to be excluded, which could jeopardize the entire transaction. Again, through a dilemma sharing approach, a solution was crafted that allowed the closing to still take place while Monsanto worked both before and after closing to resolve this claim. Ultimately, documentation was found that indicated Monsanto indeed had a license for this particular germplasm, but past royalties were unpaid. Monsanto promptly brought the account current, and the issue was resolved with this license transferring to the new owner.
The business unit was successfully sold on the closing date.
But, it still was not over, and the “dominant” market position of Syngenta was called into question. The European Union would not approve the deal, unless Syngenta divested certain assets in Spain and Hungary. Thus, although Monsanto had been paid for the entire business, Syngenta was not able to hold onto some assets in two countries. The local businesses in Spain and Hungary were ultimately sold to a third party. Finally, no more surprises emerged, and the deal was over.
The lesson from this divestiture saga? “It Ain’t Over ‘Til It’s Over”.