Dow-DuPont Merger Probe Hinges on Innovation Concerns
January 17 2017 - 8:59AM
Dow Jones News
By Natalia Drozdiak and Jacob Bunge
New agricultural technologies to boost yields are at the center
of European antitrust authorities' probe into Dow Chemical Co.'s
merger with DuPont Co.
Regulators have zeroed in on innovation competition as a concern
the companies need to address before winning approval for their
planned merger, according to people familiar with the matter.
The European Commission, the bloc's antitrust watchdog, sent Dow
and DuPont in December a roughly 800-page statement of objections,
focusing on the impact on the agricultural industry of losing a
robust player with important research capabilities, the people
say.
The companies are making progress toward remedies that would
assuage the EU's concerns, according to both EU and company
representatives.
"We believe the merger is pro-competitive and will deliver
greater innovation and choice for customers and consumers," said a
Dow spokeswoman, adding that the companies "continue to work
constructively" with the EU and other regulators.
The companies defended their merger before commission officials
at a closed-door hearing on Jan. 9. Also present were other
industry participants, including rival German chemicals group, BASF
SE, which has expressed interest in snapping up some of the
companies' divested assets.
But time is running out to resolve the EU's concerns outlined in
the charge-sheet, which counts among one of the longest drafted by
the commission.
The EU has until the end of February to rule on the merger,
which it is weighing alongside other deals in the industry,
including between China National Chemical Corp. and Syngenta AG and
Bayer AG and Monsanto Co.
Dow and DuPont were the first of the group to announce their
deal, in December 2015. The merger would unite the two giants, with
a combined market capitalization of roughly $122 billion, before
splitting into three separate companies.
The commission signaled its concerns about reduced innovation in
crop protection when it opened its in-depth probe in the Dow-duPont
merger in August. In particular, it pointed to the markets for
herbicides for crops including cereals, beets and oilseed rape, as
well as insecticides for chewing insects.
"The transaction would lead to the elimination of one of the few
companies able to develop and launch new active ingredients," the
commission said at the time.
Dow, DuPont and competitors together spend billions of dollars
annually to develop crops that can survive weed-killing sprays and
secrete bug-repelling proteins, along with more-powerful sprays to
combat farm pests and data-crunching software to improve farm
management.
Dow and DuPont executives say they expect to reduce research and
development spending by around $300 million, as part of a plan to
trim $3 billion in costs by combining. However, the merger would
also help bring new products to market faster by combining Dow's
biotechnology abilities with DuPont's deep library of corn and
soybean genetics, they say.
Disputes with regulators over innovation can sometimes be harder
for merging companies to resolve than commercial overlaps, where
companies can divest business units that directly compete,
antitrust lawyers say.
"It comes down to a question of a company's motivation to do
something," Lisl Dunlop, co-chair of antitrust practice for Manatt,
Phelps & Phillips LLP, said. Ms. Dunlop said she wasn't
involved in any of the mentioned agricultural deals.
When scrutinizing issues of innovation, antitrust enforcers look
at companies' incentives to license out new technologies, such as
gene-editing methods and how these would change if the competitive
ranks shrink. In previous merger reviews, the EU has required
companies to sell off the European rights to products in their
development pipeline.
Dow and DuPont have both invested in microbe-based products that
can help crops better absorb nutrients and fend off bugs, as well
as techniques for editing plant genes, which could deliver
higher-yielding crops and other benefits for farmers.
Innovation competition is an increasingly important factor in
antitrust reviews, lawyers say. It was also an issue in the EU's
review of Halliburton Co.'s $35 billion planned merger with Baker
Hughes Inc., which the parties called off last May, largely because
of the failure to overcome regulatory challenges.
Write to Natalia Drozdiak at natalia.drozdiak@wsj.com and Jacob
Bunge at jacob.bunge@wsj.com
(END) Dow Jones Newswires
January 17, 2017 08:44 ET (13:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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