Bayer's BIG Buyout

But more important than “bragging rights” to the world’s largest agrochemical company, the high-profile acquisition has raised questions about the long-term impact ongoing consolidation will have on the structural pest control industry, particularly the termite market where Bayer’s Premise and Aventis’ Termidor have been involved in an epic battle for the liquid termiticide market in the wake of Dow AgroSciences’ decision to “voluntarily cancel” most in-and-around-the-home uses of Dursban in the United States, including its use as a full-barrier termiticide treatment in existing structures.

“That’s the question everyone is asking,” said one well-known product distributor attending the recent NPMA Convention in New Orleans. “Will Bayer be allowed to keep both termiticides in their product portfolio? At this point, no one knows the answer to that question, but whatever is ultimately decided is going to have a significant impact on the competitive landscape.”

A BRIEF HISTORY. Rumors about the potential sale of Aventis CropScience, including its specialty chemicals business that boasts such high-profile products as Termidor, Suspend and DeltaDust, began circulating late last year when word broke that the French-German conglomerate was interested in selling its agrochemicals unit. In November of 2000, Aventis announced its intention to divest Aventis CropScience by the end of 2001 in order to focus on its pharmaceutical business, continuing an industry trend that has seen many of the world’s largest chemical companies split their slow-growing agrochemical holdings from their highly profitable pharmaceutical business. The company considered an initial public stock offering (IPO), but eventually decided to sell the business outright, sending sale proposals to three U.S. firms – Monsanto, DuPont and Dow – as well as to Bayer and BASF.

In July, The Wall Street Journal reported that Bayer was in “exclusive talks” with Aventis after edging out two other bidders, BASF and Dow. Analysts expected a final deal to be announced in September but negotiations ran into some last- minute snags, resulting in a delay until October. When the purchase was announced on October 2nd, Bayer’s Chief Executive Dr. Manfred Schneider said, “Acquiring Aventis CropScience will make us a world leader in crop science and substantially boost Bayer’s earning power. This acquisition again evidences our strategy of investing for the long term in core businesses and growth markets.”

The acquisition, the largest in Bayer’s history, will result in the formation of an independent business unit called Bayer CropScience. “We are convinced that this is the best way to integrate the two businesses and that this will best meet market demands and competitive challenges,” Schneider said. The new company will be headed by Dr. Jochen Wulff, who previously served as general manager of Bayer’s Crop Protection Business Group. The rest of the management team is expected to be named shortly as the integration process continues.

“Bayer and Aventis are a very good fit, especially in the United States where Aventis CropScience has a complementary product line,” added Dr. Helmut Schramm, vice-president of Bayer Garden & Professional Care, Kansas City, Mo. “For me the most important benefit is the critical mass we will have as a result of the acquisition, which will allow us to spend more money on research and development and develop additional solutions for pest management professionals.”    

Until the deal is approved by the FTC and other relevant regulatory agencies throughout the world, the two companies will continue to operate as separate legal entities. They will not be allowed to share customer information, sales data or strategic business plans. Nonetheless, “the clock is ticking on integration,” according to Schramm, who earned his Ph.D. in plant pathology from the Technical University of Munich/Weihenstephan. “The integration planning has already started. It is in the best interest of both companies to conduct a rapid and smooth integration process,” he said. “The integration teams will be made up of representatives from both organizations. We’re interested in combining the best people and the best of our individual corporate cultures to create a world-class organization.”

While some job cuts are inevitable as a result of the acquisition, how many positions will be eliminated remains to be seen. Bayer employs 8,000 people worldwide, while Aventis CropScience boasts a workforce of 15,000 people in 120 different countries. It has been widely reported that approximately 4,000 positions likely will be eliminated worldwide as a result of the acquisition, representing a 15%-18% reduction in the company’s combined workforce.

A MARKET IMPACT. A bigger question than the personnel implications of the acquisition is its impact on the pest control industry’s product mix, particularly as it relates to the termite market, where Bayer’s Premise and Aventis’ Termidor go head-to-head in the highly lucrative liquid termiticide market. In an attempt to determine how the buyout will likely impact the termite market, PCT magazine interviewed a number of individuals familiar with the merger and acquisition process, many of whom requested anonymity due to the sensitive nature of the topic. “The FTC will be talking to a lot of people, including distributors, industry analysts and representatives of major pest control companies,” said one longtime industry observer. “They’ll be taking a close look at individual market segments such as  agriculture, general pest control, public health and termite control.”

“The question is how is the FTC going to determine market share?” said Don Claus, director of FMC’s Specialty Products Business in Philadelphia, Pa.

Will the FTC determine market share more broadly (i.e., baits vs. liquids) or more narrowly (repellent vs. non-repellent termi-ticides)? Will they add consumer products to the mix, thereby further reducing market share figures? What about specific “classes” of chemistry — pyrethroids, organophosphates, borates? Will they take into account any new termite control technology that is on the horizon, such as BASF’s chlorfenapyr? 

What complicates the situation even further  is that no one is quite sure how the FTC will determine Dursban TC’s future market share and those of its competitors as uses of the popular product are further reduced and perhaps ultimately eliminated by December 31, 2005, per Dow’s agreement with the EPA. “That will be difficult to predict, so that’s an important question on everyone’s mind,” according to FMC’s Claus.

“The FTC is also going to be looking at the potential impact of the sale on pricing,” observes a prominent industry consultant. “They’ll be asking the question, ‘Is the consumer likely to be harmed by the acquisition?’” If the answer is yes, Bayer may be required to divest some of its products. “At the end of the day I think Bayer will be allowed to keep both products, but I don’t know for sure,” the consultant said. “I’m watching this with as much interest as you are.” 

The FTC already has held several high-level meetings with both Bayer and Aventis, and begun contacting distributors and leading pest control companies throughout the United States to determine if Bayer will need to divest any of the insecticides in its product portfolio.

John Bolanos, vice-president of Vopak, the industry’s largest product distributor, said he was interviewed by two FTC attorneys and a business analyst for about 90 minutes in mid-October. “They asked basic questions about the marketplace such as the differences between post- and pre-treatments, the size of the market, and other basic, fundamental stuff. They seemed to be looking at the termite market in totality rather than just non-repellent termite technology,” he said.

“Obviously, the individual manufacturers will put their spin on the likely impact of the buyout, so the FTC will triangulate that information with what they learn from the distributors and pest management professionals they interview before making an ultimate determination,” said an industry insider familiar with the process.

“Bayer will argue there are numerous options in the marketplace, including a number of liquid termiticides  and baits. They may also use the high-price, low-price argument to make their case.”

Although no one knows for sure what the FTC will ultimately decide, Bayer is confident they’ll be able to retain both termiticides in their product portfolio. “We are interested in all parts of the business and have consultants and lawyers specializing in acquisitions to help us through the process,” Schramm said. “It’s premature for us to speculate on what divestments may or may not be required, but our intention is to retain all products.”

Regardless of the outcome, distributors say larger macro-economic issues are driving the trend toward consolidation at the manufacturer level and PCOs will simply have to go along for the ride. “There are enough things to worry about that you can do something about,” observes Lon Records, president of Target Specialty Products, Santa Fe Springs, Calif. “Why worry about the things you can’t do anything about? It’s like worrying about the weather.”

“Consolidation allows more R&D for our industry because manufacturers have a broader base of sales to spread the R&D expenses over,” Vopak’s Bolanos says, “so in the long term it will allow the industry to have more products. The market will ultimately sort it out. I’m more concerned about the effects of the buyout from a human standpoint. There are a lot of good people in both organizations.”

The transaction is expected to close during the first quarter of 2002.

The author is publisher of PCT magazine.