Bayer and Monsanto

Last evening I saw Bayer made an “unsolicited” bid for Monsanto.  People should understand how Bayer can afford to swallow up a company like Monsanto.

Bayer has a market cap of $73.6B.  Turns out selling aspirin is a good business!  Obviously, Bayer is more than just an aspirin company.  It’s a massive pharmaceutical, drug, chemical company based in Germany.

Monsanto’s market cap is $43B.  They are in the agricultural seed and chemical business.  It turns out, everyone eats.  There are more “everyone’s” in the world every day so it looks like Monsanto will stay in business no matter what happens.

I checked Ycharts and from their data Monsanto has a little over $1B in cash on it’s balance sheet.  If you have been following the financial news for the last several years, you will remember that corporations are holding lots and lots of cash on their balance sheets.

One of the dangers of holding cash is you receive unsolicited takeover offers.   Cash on your balance sheet is applied to the purchase price of the company, reducing it.

The other reason Bayer can bid for Monsanto is corporate tax arbitrage.  Since Bayer is in Europe, it can arbitrage the tax rate it pays against the extremely confiscatory rates Monsanto pays to further cheapen the actual buyout price.

CFOs are no different than anyone else.  They respond to economic incentives and all demand curves have negative slope. The reason US companies are not aggressively expanding US operations is because when the CFO does the math it doesn’t make any sense.

There are strategic reasons that you will read about for the deal.  But there is only one over riding reason that this deal is being done.  US Dividend and Corporate Tax Policy.

The United States double taxes dividends companies pay to shareholders.  When shareholders file their tax returns, they are triple taxed.  This is an economic DISincentive to pay dividends.  It’s one reason you see CFOs do a lot of share buybacks.  Share buybacks are pretty meaningless to investors and just goose up earnings per share numbers.  That’s good for annual reports and management option pools.

US Corporate tax policy is stopping US corporations from investing in production.  We hear about the billions of dollars in overseas banks that corporations have squirreled away.  The reason they do it is because of the massive penalty they pay to bring the dollars back. The US government holds up corporations.

That costs the US jobs and GDP growth.  Our corporate tax policy sucks. Until it changes, more US companies will be bought by foreign companies-and move many operations overseas.