Markman Capital Insight

GMO Mo-Mo

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Monsanto (MON) officially got a marriage proposal two weeks ago. How sweet. The suitor was a well connected German with deep pockets and impressive pedigree. Monsanto’s assessment was harsh: Incomplete and inadequate, its execs said.

It’s not like others haven’t had their eye on Monsanto. The agrichemical business has been rife with mergers recently. Dow Chemical (DOW) and Dupont (DD) tied the knot. ChemChina even managed to convince Syngenta about the benefits of a longer-term partnership. Yet, Monsanto is still playing hard to get.

Some background. The company managed to build an empire around ideas that seemed ludicrous, if not unethical, years ago. The very notion that humans should change the genetic structure of the food we grow just to increase crop yields was beyond the pale. Even now, many European countries are unwilling to even have that debate despite the fact many studies show genetically modified organisms, or GMOs, are perfectly fine to eat.

However, it is the latest study -- completed by the influential National Academies of Sciences, Engineering and Medicine -- that may have tempted the German health sciences conglomerate Bayer to come calling for Monsanto.

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That report was exhaustive and pushes acceptance of GMOs toward the mainstream, even in Europe where such foods have had no traction. Bayer’s all cash $62 billion proposal thus may be a steal at or near the very bottom of the agricultural cycle. Crop prices are low. Farm incomes are at their lowest level since 2002, so money is scarce, even for fancy seeds that are supposed to grow big crops regardless of weather conditions.

Yet everyone knows this is a cyclical sector. Eventually, prices will rise and incomes will follow. If Bayer can exercise its influence in Germany to push the European Union even a touch toward GMOs, the leveraged payoff would be substantial.

There are some risks to Bayer. A Monsanto acquisition would push its product mix away from pharmaceuticals and more toward agriculture. In fact, almost 50% of Bayer’s business would be rooted in the deeply cyclical sector. That prospect has some conservative Bayer investors openly balking at the deal. Which, by the way, would be biggest all cash German proposal since Daimler came calling for Chrysler, a deal both would rather forget.

Although Monsanto is still playing hard to get, it is still playing. We’re about to see just how much Bayer wants this relationship. As a result, there is probably more room for MON to advance.

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About Jon Markman:  A pioneer in the development of stock-rating systems and screening software, Jon Markman is co-inventor on two Microsoft patents and author of the bestselling books The New Day Trader Advantage, Swing Trading and Online Investing, as well as the annotated edition of Reminiscences of a Stock Operator.  He was portfolio manager and senior investment strategist at a multi-strategy hedge fund from 2002 to 2005; managing editor and columnist at CNBC on MSN Money from 1997 to 2002; and an editor, investments columnist and investigative reporter at the Los Angeles Times from 1984 to 1997.

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