Dow, DuPont deal dogged by ‘big picture’ issue in EU

First published by MLex 23 November 2016. By Dafydd Nelson.

Veteran dealmakers Dow Chemical and DuPont are accustomed to addressing narrow concerns that a merger could harm competition in markets for specific rival goods.

But EU case handlers have raised a much slipperier question about the US agrochemical makers’ planned $130 billion fusion: Might it hamper innovation “as a whole” when it comes to crop-protection products?

Clues to solving this sort of wide-ranging issue can be found in an EU review of a deal involving Teva Pharmaceutical and Botox maker Allergan.

The Dow-DuPont deal is expected to draw official objections from European Commission officials before the year is out. Their concern: Combining two of the world’s biggest agrochemical players could slow the pace of innovation in the entire crop-protection industry.

Earlier this year, a commission analysis of the Teva-Allergan deal explored this kind of overarching concern, calling it a “big picture” issue.

EU case handlers concluded that Teva’s purchase of Allergan’s generic drugs business raised a question that went far beyond specific product overlaps. They grew concerned that combining two major producers of generic medicines would reduce competition in entire countries. They found, for example, that Teva and Allergan were the only two companies selling generic drugs directly to UK pharmacies.

For Dow and DuPont, the big picture issue is different, but the outcome of the Teva-Allergan review could offer a foretaste of what awaits the agrochemical makers: Commission officials cleared Teva’s purchase only after the Israeli company agreed to sell a broad package of drugs — including many non-overlapping products.

Innovation evidence

In opening an in-depth investigation into the agrochemical deal, EU competition chief Margrethe Vestager noted that both Dow and DuPont have “a strong track record of bringing innovative crop protection and seeds products to the market.”

But assessing the impact of mergers and acquisitions on the speed of product development is no easy task. Dow and DuPont might argue that the EU watchdog faces a particularly stiff burden in providing hard evidence that their merger would lessen innovation.

Combining research and development spending budgets could actually yield better products, some would argue. But that’s not how commission officials see it.

They might argue that innovation thrives on competition between companies. Putting rival researchers under one corporate roof and pooling their funds doesn’t achieve the same effect, they might say.

Asset sales?

Michigan-based Dow and Delaware-based DuPont can argue that their R&D spending, even combined, would still lag behind that of some European rivals, including BASF, Bayer and Syngenta.

That argument might go down well with the administration of incoming President Donald Trump. But the EU’s response to Teva’s deal with Allergan shows that European competition officials can exact a high price when they conclude that a deal threatens to upend the competitive landscape of an entire industry.

This suggests that the US agrochemical makers might need to sell assets that go beyond specific overlaps to overcome EU objections. The commission would probably want the companies to sell a set of operations that could stand alone as a viable business. In an industry as complicated as agrochemicals, that might prove a tall order.

The commission currently has until Feb. 28 to rule on the transaction. Shares in both Dow and DuPont trade on the New York Stock Exchange.

The commission’s case file number for the review is M.7932.