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What the ChemChina - Syngenta deal means

The proposed acquisition of Syngenta at $43 billion is the big one that ChemChina has been waiting for during the past 10 years or so.

I first approached ChemChina back in 2006 to interest them into making a couple of “smallish” (in comparison to the deal size that is on the table today) acquisitions in the large and lucrative U.S. agricultural chemical market.

My proposal back then was for them to acquire a distribution company along with one that holds product registrations of generic pesticides in the USA. I named this project and proposal as a “Twin-Pack Acquisition.” It made sense to me as ChemChina is a group of state-owned companies and plants making generic pesticides after all. Such a Twin-Pack acquisition would open up a conduit to this market rather quickly and efficiently.

ChemChina did not bite. They were adamant that they wanted to make a major acquisition in the agricultural chemical industry worth just over $40 billion back then and the target had to be a R&D-focused company. Money was no object with an arsenal of $10 billion which seems to have ballooned four times and more, judging from the proposed cash price of $43 billion on offer now for Syngenta.

What are the potential implications should this impending deal between ChemChina and Syngenta move ahead and close?

  • To ChemChina and China itself:

In one swoop, and overnight, ChemChina would finally own significant and cutting-edge technologies in the synthesis and development of new agricultural chemistry, genetic modification (GM) of crop seeds and the development of biological pesticides whose markets are growing rapidly in advanced agricultural regions such as the EU, USA and Japan.

China has been dabbling with synthesis and development of new and novel agricultural chemistry through Shenyang Pesticide Research Institute (now owned by Sinochem, a sister state-owned company of ChemChina) for many years, but the barriers to entry are so enormous that it would be extremely difficult for them to succeed. It takes over $250 million of investment over a period of 7 to 10 years to put one out into the market.

In the GM seeds arena, the barriers to entry are even more insurmountable—not from patent standpoints or lack of technological prowess, but simply due to the blockage of essential conduits to the market for any new genes or seed traits discovered. Over two decades ago, all seed companies with popular branded seeds (in which the new genes need to be inserted) have been acquired by a handful of current global GM seed players, including Syngenta of course.

 In the development and marketing of the rapidly growing biological pesticide arena, both China and India are dabbling in this field as well, but none of them have the capabilities to get any of them registered in the highly-regulated advanced agricultural regions mentioned. The investments and time frame may be smaller than what is needed in registering a newly synthesized agricultural chemical, but they are still very significant barriers in terms of the data needed by regulatory authorities.

  • To the Chinese GM seed regulatory body:

They will no doubt relax their rules and start to accept GM crop seeds in a bigger way, though not necessarily favoring the Syngenta portfolio.

  •  To Syngenta management and employees:

I am sure ChemChina does not have the capabilities to make any changes nor do they have any desire to do so, post-acquisition. Unlike any major western-owned agricultural chemical companies staffed by very experienced and globally-trained professionals, ChemChina is not, except for some international managers acquired through their 60% equity stake in Adama (formerly Makhteshiem Agan), the Israeli generic agricultural chemical producer.

ChemChina’s post-acquisition management strategy is more akin to Japanese ones where the day-to-day and strategic management is left to the existing management teams and employees of the acquired target companies.

  • To Syngenta shareholders:

ChemChina is offering cash, unlike the earlier aborted deal offered by Monsanto which involved cash and shares.

In light of the fact that there are severe financial penalties involved if the ChemChina/Syngenta negotiations are called off by either side, it is unlikely that another suitor will step in to make a better offer whilst negotiations are ongoing. However, if the current deal is not taken up, Syngenta will need to not only find a better value or deal but also quickly strategize and face the impending new and much-strengthened competitor created by the ongoing merger of Dow and DuPont.

  • To agricultural chemical and seeds dealers and the farmers:

There are no foreseen immediate changes in the supply chain. ChemChina’s 60%-owned Adama will no doubt continue to do what it has been doing — marketing generic pesticides — though some are in direct competition against Syngenta’s own portfolio of patent-expired chemicals. Over time, they may work out some symbiotic relationships between the two entities no doubt.

Will there be a drop in support from farmers in the light of the change in ownership and control of Syngenta, from a western-owned entity to a Chinese state-owned entity? Most, if not all farmers, will make decisions based on economics and product feature and benefits and not based on nationalism. The past many years of a successful Japanese (Marubeni) ownership of a major agricultural chemical and seed distributor, Helena, in the USA has clearly demonstrated that.

  • To the Indian and Chinese generic agricultural chemical producers:

As mentioned earlier, ChemChina operates generic agricultural chemical plants in China that supply through Adama as well as through other global distributors and product registration holders. Its fellow Chinese competitors, numbering about 2,000 all over China, will face tougher competition going forward as ChemChina not only has the Adama global network of customers but the Syngenta ones as well.

To the Indian generic agricultural chemical producers, which have had a good run in the global markets due to their investments in data generation needed to comply with regulatory agencies throughout the world, as well as their better command of the English language, the new ChemChina will ensure the erosion of these Indian comparative advantages.

  • To the remaining global agricultural chemical and GM seed players:

They will have to start putting their thinking caps on quickly to deal with the merged entities of Dow-DuPont and the truly globalized ChemChina. These two events are unprecedented in the agricultural chemical and seed industry. It will be a mammoth change in the global business landscape for all the players in the crop inputs and food production industries.

Will the regulatory agencies in the USA and the EU (where Syngenta is based) overseeing the ChemChina-Syngenta deal scuttle it?

It is hard to say at this stage but it certainly is a lot less likely compared to the earlier aborted Monsanto offer to acquire Syngenta. Monsanto and Syngenta have many business areas where they overlap and hence would face a lot more scrutiny, and hurdles.


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