Monday, September 7, 2015

The Great Lie: Syngenta’s Rejection of Monsanto’s Bid

Hostile takeovers are a struggle by competing management groups over the control of the target’s assets. It involves a valuation dispute over which group has the best strategy yielding the highest value. The target’s management and investors frequently have different agendas. Management seeks job preservation; while shareholders want value. Consequently, the usual management response to an unsolicited bid, when supported by a compliant board, is to say no. The “no” characterizes the bid as undervalued and inadequate.  Of course, sometimes this is just a “play hard” tactic to negotiate a better price. More often than not it is just no especially when management lacks a substantial ownership in the target and has little to gain from the takeover.

Syngenta’s  rejection of Monsanto’s twice revised unsolicited $47B takeover is a prime example of management self interest trumping shareholder desires. Monsanto’s offer represented a 45% premium to Syngenta’s pre bid share price. Also, it included a $3B breakup fee (about 10% of Syngenta market cap) should the deal not receive anti-trust approval  (a real concern) within 18 months. When Monsanto finally gave up and withdrew its offer Syngenta’s shares dropped 18% while Monsanto’s rose 8.5%. Syngenta, facing angry shareholders subsequently announced a $2B share repurchase funded thru a combination of asset sales and debt.

Legally, it is very difficult to overcome the inadequate offer defense. All management and the board need to do is to get a report from a credible independent third party, for a fee of course, that places a higher value on the standalone target than the offer. Shareholders are then left with trying to replace the board and ultimately management at either the next shareholders meeting or a special meeting.
Now let’s look at some reasons why Syngenta’s management should be challenged:

1)     Fact versus belief: Monsanto’s offer is a fact while management’s value estimate is a belief. The belief seems a stretch give the size of improvements needed to equal the upfront 45% premium.
2)     Why now? Why hasn’t Syngenta achieved the improvements already? If a new team is involved why should they be any different than prior management?
3)     Why haven’t investors (the market) bought into the plan as reflected in a higher stock price? Are investors stupid or may be Syngenta’s investor relations group hasn’t explained it well enough? Alternatively, management’s plan may not represent the highest value for investors.
4)     Commitment: Where is management’s commitment i.e. betting their jobs on achieving the plan? Shouldn’t they post the plan’s metrics and timing and agree to fall on their sword if they fail to achieve it?
5)     Time Value and risk: Monsanto’s offer is now while management’s plan is to be achieved in the future and is subject to execution risk.

In my view, this case represents a brazen agency conflict between management and shareholders. As one investor put it-management needs to be reminded that shareholders and not management own the company. Hopefully management will be so reminded at the next shareholder meeting. 


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