Dow and DuPont seek to address Brussels’ antitrust concerns
Agrichemicals pair will offer to sell R&D capability to ease fears over $140bn merger
Dow Chemical and DuPont are on the verge of offering to sell research and development capability in response to Brussels’ antitrust concerns over the companies’ planned $140bn merger. The case, which will decide on Tuesday whether to approve the deal, has become a test of European competition regulators’ approach to industrial innovation.
The investigation is the first of three agrichemical megadeals, together worth nearly $250bn, that Margrethe Vestager, EU competition commissioner, will examine this year. Dow and DuPont are seeking to stop the merger being blocked, amid concerns from politicians and consumer groups.
Brussels’ objections to the deal have attracted particular scrutiny, because it marks the first time the commission has threatened to block a deal primarily based on concerns that it could cut innovation in a whole market. Previous antitrust cases have cited a narrower range of risks to product development in specific markets.
Raphaël De Coninck at Charles River Associates, the consultancy, said analysing the future impact of a merger on innovation across a whole market was “quite speculative”.
“We expect to see quite a lot of interest by the commission where innovation is an issue — the question is: ‘Will the commission set the bar too low for intervention?’” Mr De Coninck said. “With a type of concern about innovation in a rather general way, without being linked to clear specific projects, it is very difficult [for companies] to solve.”
Commission officials have already acknowledged breaking new ground in previous cases where they intervened because of concerns over future product innovation, including GE’s acquisition of Alstom’s power generation and transmission assets in 2015 and Novartis’ purchase of GSK’s oncology business the same year.
In both cases, Brussels required companies to sell parts of their businesses that developed products that might compete in future, to ensure both lines of research continued after the deal.
The commission’s objection to the Dow-Dupont deal goes one step further, looking more broadly at the risk to innovation in the whole crop protection market, estimated to be worth nearly €60bn annually.
In December, the commission outlined its evidence of a risk to the overall market, as well as some specific product market overlaps, in a more than 700-page statement of objections — one of the longest published by Brussels.
Options for Dow and DuPont range from rejecting the commission’s crop protection innovation concerns for lack of evidence through to fundamentally restructuring their merger plans.
Andrew Liveris, Dow chief executive, said in a recent earnings call that he was “confident that we can get to the right answer that satisfies [the commission’s] innovation remedy requests”, noting the companies would offer to sell “R&D capability of whatever we end up divesting”.
Mr Liveris said he believed US and Chinese authorities would “fall in” once European approval was obtained and that he expected the deal to close in the second quarter of 2017.
Dow and DuPont forecast $300m of annual R&D savings costs from the merger, but argue that efficiency gains will lead to more innovation after the deal and that ever growing resistance to current products requires constant product development.
Measuring innovation can be difficult. Matthew Phillips, of research group Phillips McDougall, said Dow and DuPont together accounted for just 6-8 per cent of agrochemical patents granted worldwide annually.
However, Diana Moss, president of the American Antitrust Institute, told a US Senate committee last year that the two companies accounted for 18 per cent of “genetic events” for corn, 21 per cent for soybeans and 28 per cent for cotton over more than two decades from 1991.
Dow and Dupont have gained $10bn in market value since the deal was announced in August.
European regulators will decide on the other two megamergers — ChemChina’s $44bn purchase of Syngenta and Bayer’s $66bn purchase of Monsanto — in turn.