(PHOTO: STANISLAV DORONENKO / WIKIMEDIA.ORG)

The race to corporate mega-mergers in the chemicals industry, and particularly in the agricultural and seed industry, is the result of pressure from financial investors. Years of low interest rates since the financial crisis have made corporate borrowing cheap and easy. The onset of low agricultural commodity prices and faltering economic growth in emerging economies has weakened demand for commercial seeds and crop protection chemicals, making it harder for agribusiness firms to generate high returns. Mergers between big giants boost margins and accelerate shareholders’ value creation, but with fewer players in the industry innovation may suffer and prices increase both on the grower and consumer sides.

Late last year Dow and DuPont, the world’s second and eight largest chemical producers in terms of sales, announced that their respective boards of directors unanimously approved an agreement under which the companies would combine in an all-stock merger of equals. Both companies share prices each increased by nearly 12% in one day.

Although Dow and DuPont already have a history of working together in products such as synthetic rubber and fluoropolymer elastomer, the new entity, entitled DowDuPont, would create focused leading businesses in agriculture, material science and specialty products and would subsequently spin into three independent and publicly traded companies within 24 months at the latest, following the closing of the merger, at the latest, subject to regulatory and board approval.

DowDuPont would have a combined market capitalization of USD 130 billion. The transaction would generate approximately USD 3 billion in cost synergies, with 100% of the run-rate cost synergies achieved within the first two years of operations along with additional upside of USD 1 billion from growth synergies.

The two companies did not disclose estimates for tax savings, but they are expected to far exceed the American companies’ target of USD 3 billion of annual cost savings.

Hammered out under pressure from activist investors, the merger is designed to boost investors’ returns by combining the competing businesses as well as to respond to the sharp falls in the prices of many chemicals by focusing on higher-tech niches where competition is more limited. But doubts have since grown as to how much this rationalization would help the resulting firm cope with the pressures the industry is under.

Dow and DuPont may, though, be too optimistic in forecasting such results in cost savings by 2018, as they may incur significant restructuring costs. If the resulting three specialist companies do not shift into higher-value-added products, the risk is that any increased profits from economies of scale would be lost to the competition, as rivals also strengthen through mergers, say ChemChina-Syngenta and Bayer-Monsanto.

One of the main reasons chemical companies find mergers so attractive is that growth in their industry has been plummeting in recent years, and it is even expected to continue slowing in major markets, thus a merger is a faster way of shedding volatile commodity businesses, boosting margins and generating growth.

Particularly in the global agricultural business, pressure to scrutinize the impact of rapid consolidation is mounting. The recent deals in the global agrochemical and seed industry, driven by financial motivations, are for many observers a threat to farmers, prices and the environment according to observers. The merger is not yet a done deal.

The profound upheaval, with a spate of mergers and attempted mergers, is raising concerns about the effects of corporate consolidation on the future of the food system, such as stifled competition, reduced innovation and increased prices. These concerns merit close consideration, but there is more at stake.

Brussels has launched an in-depth investigation into whether the merger between the two US chemicals giants would lead to higher prices, reduce innovation and limit competition for supplies crucial to Europe’s farmers, whose livelihoods depend on access to seeds and crop protection at competitive prices.

Seed and chemical industries are highly concentrated. In 2013, the top six firms controlled 75% of the agrochemical market, 63% of the commercial seed market and more than 75% of all private sector research in seeds and pesticides, numbers that are set to rise in the near future after the industry is consolidated.

Consolidation in the agribusiness industry may concentrate political power as giant firms lobby governments to shape the rules of the food system in ways that support industry interests. Small-scale farmers feed around 70% of the world’s population, and do so mainly with seeds saved from one harvest to the next rather than commercially purchased seeds. Changes in government policies that favor big corporations for more large-scale industrial agriculture may directly threaten small farmers’ livelihoods.

Further spread of the industrial agricultural model is also likely to have significant ecological effects. Large-scale, chemical-based monoculture farming is recognized as a major contributor to both climate change and biodiversity loss, problems that pose significant threats to long-term food security.

A short-term financial boost for a few large investors may hardly be justification for allowing the mega-mergers, if they put at stake farmer livelihoods, the environment and long-term food security at risk for all of us.

References: DowDuPont, 2016; Reuters, 2015; The Economist, 2016; Advantage Business Media, 2016; Financial Times, 2016; The Guardian, 2016.