When German pharmaceuticals giant Bayer announced today that Monsanto had agreed to be acquired for $128 a share in an all-cash deal valued at $66 billion (including the assumption of about $9 billion in debt), it ended a nearly four-month-long saga that began in May when Bayer CEO Werner Baumann launched an unsolicited bid for the St. Louis, Missouri–based seed maker. For Baumann, who was just two weeks into the job when he made the original takeover offer, the deal represents a huge demographic bet on the world’s growing population — and the need to feed it. But seeds are likely not the only thing that Bayer is after.
Buying Monsanto gives Bayer direct access to the burgeoning field of genetic engineering, which the seed producer — despite some controversy — is harnessing to meet the exponentially growing demand for food as the world’s population is expected to grow to 9 billion by 2050. Monsanto makes the case that its methods of developing new seed traits help protect farmers’ yields and allow them to produce more. Together, Monsanto and Bayer will supply 36 percent of corn seed in the U.S. and 28 percent of pesticides sold worldwide, according to a Morgan Stanley analysis.
With Monsanto, Bayer also gains access to a huge amount of genetic data, and several new data analysis tools, which could be even more valuable when it comes to finding new ways to feed all of those people.
“That’s the underappreciated part of this deal,” says Catherine Wood, CEO and CIO of ARK Investment Management, a New York–based registered investment adviser. “When you sequence a human genome or when you sequence a seed, what you get out of it is big data. [Pharmaceutical and agriculture] companies are going to have to become big data companies if they want to be competitive.”
The genetic engineering market is expected to grow to more than $3.5 billion by 2019, according to research firm MarketsandMarkets. The industry has gained nearly 50 percent over the past three years, according to the Kensho Genetic Engineering Index, which measures the sector by following a collection of publicly traded pharmaceutical, biotech and agriculture companies like Monsanto. The index also includes Swiss agribusiness giant Syngenta and Santa Monica, California–based drugmaker Kite Pharma.
Genetic engineering has been contentious, especially among consumers who worry that the introduction of genes from one organism into another could have dangerous health effects. Though there isn’t scientific evidence that this is true, the perception is something every company in the sector needs to grapple with. Recent innovations in gene editing, for example, have enabled companies like Monsanto to change the existing DNA of an organism to make it more resilient without the fear factor of traditional genetic modification (such as introducing new DNA).
“Although controversy surrounds firms producing genetically modified seeds and the business practices they employ, reported statistics show that marker-assisted breeding has nearly doubled the rate of yield gain when compared to traditional breeding techniques alone,” says John van Moyland, co-head of financial products at Kensho. “In a world of exponential population growth and diminishing natural resources, this is important.”
Brian Sterz, an investment adviser at Miracle Mile Advisors in Los Angeles, says companies playing in the genetic engineering sector are well positioned to exploit the potential food shortage, especially in emerging markets — where populations are increasing fastest and the need for efficient food production is greatest. “Monsanto is probably the best pure play to take advantage of that,” he adds.
Follow Kaitlin Ugolik on Twitter at @kaitlinugolik.