The Next Battleground: Gene-Editing & Food Products

The vigorous pushback that GMO (genetically modified) or genetically engineered ingredients in our food supply have received is a topic that I have covered here on Frank’s Forum as well as for other news websites for about four years.

My position regarding this issue is well documented as being against the use of genetically modified organisms or genetically engineered ingredients in our food. I have also detailed the problems inherently built into our food supply chain with genetically modified seeds. This scenario has fostered conditions where it is very difficult in the agricultural realities of today to avoid GMOs or genetic engineering in certain staple crops: corn, soybean, wheat, and sugar beet.

In those cases, I am a staunch proponent of the need for clear labeling practices for food production companies to notify the consumer of whether or not the item in question is made with genetically modified/engineered ingredients. I believe in the movement and the slogan fostered by another group, we have “a right to know if it is GMO”.

I was researching a set of different resources last week in the library for a GMO related piece, and I stumbled upon some research on genetic editing, or gene-editing, used in crops. This particular data set was on a study using genetic editing in corn for commercial use and not for human consumption.

The process of gene-editing inserts desired traits into the genetic pathways of crops and livestock. This trend is alarming to some, and intriguing to others; it certainly presents an ethical set of questions.
The intent, according to some published reports, is for gene-editing to be used in the human food supply in the future. The large corporate players in the industry have already made statements to the media indicating that their expectation is for gene-editing to be integrated into food production.

This raises some very important ethical questions about the alteration of the DNA of food which is grown in the earth. It raises serious questions about the line of division between man and God.

The process of genetic editing in food is also generating a new oracle within certain circles as “GMO 2.0” ; an inference to this scientific method being simply a continuation or new version of GMO ingredients in food. The use of the CRISPR method allows large chemical companies such as Dow/DuPont the capability to splice the genetic makeup of the food source.

The agricultural science and seed suppliers have become increasingly enmeshed over the course of the last two to three years due to mergers and acquisitions activity. The repercussions of that activity translate to molding scientific advances into what could be marketed to generate profits. This is a dangerous trend particularly when it is connected to the food supply.

These same agricultural/chemical giants: Dow/DuPont, Monsanto, Syngenta, Bayer, and others are “softening the ground” (all irony aside) with campaigns designed to almost condition the consumer to accept genetically edited products. They seek to avoid the public backlash that GMOs and products with genetically engineered ingredients have faced within the marketplace.

The key to that campaign objective is to position the genetic editing as more closely related to science and the scientific makeup of the crop or produce involved. The splice at the DNA level is going to be marketed as “more natural” than the process of GMO – which has an overwhelmingly negative public perception surrounding it.

This method of direct to consumer marketing is certainly nothing new, and is an increasingly common trend in marketing. The obstacles that face the agricultural titans mentioned earlier is that the public has access to so much information now than it did twenty or thirty years ago when the genetic engineering experiments began.

The other fact that is neglected in all of this, is that the process of CRISPR and genetic editing still modifies the DNA and the chemical structure of the crop in question. The process still alters what God created with something that mankind engineered. The questions will persist that if they are moving toward genetic editing to clone a “super crop” – where does it end?

The inevitable and controversial topic of cloning will take a renewed position within the national dialogue in America. The question of human cloning will be soon to follow. The debate will again be brought to the surface and the concept of genetic editing will have higher stakes than just the food supply.

In the end analysis, the responsibility shifts back to us to educate ourselves on the concept of genetic editing, and there are numerous sources of information on this subject. The central question will remain: should man be involved in the alteration of the DNA of something that was created long before we had any technology available? Should mankind use science to change what God created?

Those answers will not be concluded easily but those are the issues we will confront in the months ahead. The battle lines are drawn: which side wiil you be on?

European Union Votes To Ban GMO Crops

The majority of countries in the European Union voted to ban crops made with two different types of genetically modified maize on Monday. However, the measure failed passage because the countries that voted against the measure did not represent 65% of the population of the EU, a requirement to defeat this proposal from moving further in the legal process.

The crops in question as part of this measure were the Pioneer brand and another from Syngenta. The EU has been consistent in their resistance to genetically modified food and to crops utilizing genetically engineered seeds for both human and agriculture use such as to feed livestock.

The rules regarding these particular proposals seem to work against the union itself from a political and policy point of view because even if a majority of the countries vote against a specific policy, in this case being GMO seeds/crops, the motion can still carry if the more populated member countries vote in favor of it.

It would stand to reason that the citizens of the smaller or less populated countries would certainly have some frustration or anger over that voting mechanism within the structure of the E.U. at this point. The European mindset toward rejecting genetically engineered or modified food ingredients has been consistent over the course of the past several years, and they have been far more successful than the anti-GMO lobbying efforts have been in the United States.

Moreover, that is not meant to be an indictment on the anti-GMO movement in the U.S., because in my view, they have been tireless in their efforts toward further transparency in food product labeling and ingredient disclosure. The movement has even gained some victories in the past 18 months or so, in the declarations on the labels for food products from major manufacturers of nationally distributed brands.

The anti-GMO movement has been successful on the state level in gaining new legislative action regarding the use of genetically engineered products in a variety of applications from food production to agricultural use. The growth of new brands that are organic and non-GMO and their subsequent success in the marketplace is evidence of a growing trend in America away from processed and modified food to more natural and healthier food choices.

However, despite the policy victories and despite the change in the consciousness of the general American consumer, the new Administration in Washington threatens to rescind some of those legislative changes regarding the ingredients in food products. This includes the policy enacted by the previous Presidential Administration requiring food companies to disclose if the product contains any genetically engineered ingredients.

In my prior article about Campbell Soup Company and their decision to disclose those ingredients prior to the change which would make that disclosure mandatory, the stock market and shareholders alike had some trepidation on how it would affect sales at the company. The disclosure has resonated with the consumer especially in the case of their soup products, where there was some shock value to the presence of genetically engineered ingredients.

In the current context of GMOs in the food industry, there are some factions that feel that a rollback of the disclosure policy would damage the overall movement for the non-GMO interests. Then, there are others who maintain that the consumer now knows which companies and products contain GM ingredients, and will likely avoid them in their future purchase patterns. The other fact remains that once a purchase pattern is changed, most consumers do not revert back to a prior pattern for product selection.
In the context of the current situation in Europe, all of this comes within the backdrop of some major shifting and consolidation activity within the agricultural seed and crop protection industries. The largest players in those industry segments: Monsanto, Dow, DuPont, and Syngenta are all the subject of merger and acquisition activity at this point.

Monsanto is in the process of being potentially purchased by German corporate titan, Bayer. Dow and DuPont are in the process of merging together to form one goliath sized company and that merger just went before some E.U. regulators and is in regulatory review in the United States as well. DuPont is in the process of selling off some business units to FMC at this time to meet regulatory approval.

Syngenta is in the review process of being acquired by a Chinese corporation, which has left some within the Western economies feeling uneasy for a variety of reasons. The potential for the Chinese to gain access to specific technologies and processes that could impact the “playing field” in that industry segment is one issue. The concerns over quality control and product assurance/ product safety when it comes to the reputation of Chinese companies for bending the rules on certain protocols is an anxious proposition when it comes to the products used to grow food.

The European Union as a governing body must be facing pressure from an economic standpoint to start utilizing more genetically modified products from a cost efficiency point of view as well as a crop protection standpoint. The lobby from the corporations involved must be significant as well or else these types of proposals would not even be under consideration.

The EU currently uses GMO products but only certain types of products are approved for each type of main staple crop. The food produced from those crops is subject to very strict testing and regulations. The political movement by the union in recent years is to provide the member states with more latitude to determine how they will regulate GMO crops.

This current vote on EU crops represents the first new GMO crop products to be considered in almost twenty years. The measure, when or if it is passed, will only affect nine countries and some regions in Belgium and England. The other 19 members of the EU have banned GMO crops from being grown within their borders.

The future of genetically modified crops in the EU is going to be interesting especially given the backdrop of the major consolidation activity within the seed and agricultural/crop protection industries currently. Those companies will get even larger and more influential, and the resistance from the citizens and governments in the members states of the EU will have to ramp up their defenses to continue to resist the policies from being altered.

Follow Up: Dow – DuPont Merger Outlook Upgraded

The latest news on the now 12 month saga that is the Dow – DuPont merger proposal is that both stocks have been upgraded from “Hold” to “Buy”. The upgraded status from Jefferies is being reported by CNBC and Barron’s among other financial news outlets, and it is due to the outlook for the merger looking more promising.

The ratings staff at Jefferies places the new odds at “90%” that the year-long quest for the mega-merger of these two chemical giants will gain approval. The rationale behind this upgrade, according to their ratings report which was quoted by CNBC is that the increased stock market activity and economic growth has created conditions where the EPS (Earnings Per Share) for chemical companies will not be tied to just traditional metrics.

The changes in the economy also have combined to create favorable industry conditions in the chemical space. The regulatory bodies involved apparently maintain that this merger will not inhibit growth and competition in their specific industry segments.

This is the backdrop for the next round of regulatory proceedings, and if this merger is ultimately approved, it amounts to a whole new slate of issues for the farmer, the consumer, and the protection of our environmental resources

The detractors to this merger are still the farmers, some agricultural groups, and environmental groups. These factions all have legitimate claims to skepticism when it comes to an over $120 billion dollar merger that will further consolidate the seed industry for crops into fewer hands.

This merger, if approved, strikes fear into the environmental advocacy groups because of the prevalence of pesticides, herbicides, and other chemical agents that the combined Dow-DuPont will market more aggressively and more cost effectively to the farming and agricultural products areas.

The combined Dow-DuPont along with chemical giant Monsanto would control the majority of the seed industry used for crops for food and other staple crops such as corn, used for alternative energy sources. The stakes for the farming industry, which is dwindling because it is harder to maintain profitability, and is still dominated by family owned farms, are enormous. These two companies could set pricing and put enormous cost pressures on farms.

The proposed merger of these two chemical titans has been tied up in the European Union by their regulators, and at one point the outlook was bleak that it would move forward. The EU regulators were told by Dow-DuPont that they would sell some of their assets to clear up the concerns over anti-trust issues that the oversight board had regarding the merger.

In February, Dow-DuPont discussed with the EU board a plan to sell off some assets in DuPont’s crop protection brand portfolio and Dow’s acid copolymers and ionomers business holdings, this is from CBS Market Watch. In earlier work I have done on this specific merger, I had mentioned the selling off of business assets or brands as the best pathway to work with anti-trust, anti-monopoly concerns held by regulators in both the EU and the United States.

The US regulators, provided that the assets are sold, seem apparently through this upgrade and the reports today to be willing to move ahead with approving this merger. The changes potentially on the horizon in Congress with regard to business regulations and the strength of the overall business climate seem to have opened the opportunity for Dow-DuPont to get this done.

The concerns of the farmer, the consumer, and the environmental advocates have definite merit because any merger this large is going to have an impact on all of those areas: the food supply, costs of food and other products, increased pesticide/ GMO use, as well as potentially huge negative environmental consequences.

Honeybees & Zika: The Spray That Saves Humans Kills Bees

The mainstream news cycle has featured the stories related to the Zika virus for a few months now. In the past two weeks a couple of those stories gained some rather significant importance in the overall context of the costs of fighting the spread of the virus.

The first was in South Carolina where government officials from both the state and county levels failed to warn the local beekeeping communities regarding a massive spraying they were carrying out to prevent the spread of Zika. The result was that those chemicals sprayed to kill the mosquitoes that potentially carry the Zika virus also killed about 1 million bees.

I have written previously on the importance of the honeybee to our domestic food supply and about the epidemic of entire colonies of bees dying in America. The honeybee population could ill afford a situation such as the one which took place in South Carolina.

Due to the fact that we are a reactionary society, the government there (and in other states) have stated that they will introduce protocols to give advanced notice to beekeepers in the future regarding the scheduling of these massive chemical spraying projects.
That change does not reverse the damage already done by the spraying in South Carolina for many beekeepers who lost their livelihood, and for the farming community there which is looking at lost crop yields. The lost yields are due to the honeybees being unable to pollinate because of the massive depletion in their numbers.

The lost crop yields translates into higher costs for the consumer on certain food products. The chemicals being sprayed may save humans from the greater risk of contracting the Zika virus, but it will come at a cost to the food supply. That is certainly a consequence that must be curtailed in the future.

The second story in the news cycle with an impact on this situation is the announced merger of two petrochemical giants, Bayer and Monsanto, which is going to have a profound effect on the honeybee population. This merged conglomerate will produce increased amounts of herbicides and pesticides which the honeybees will ingest during the course of pollination which can cause the death of the entire colony.

The impact of the widespread use of chemical agents such as Roundup has a detrimental impact on the honeybee population, and this merger will increase the availability of this and other products of similar agricultural use.

In fact, a study was just released which concluded that American farmers had increased their usage of this product by more than 20% from the prior years examined. The rationale is mainly from the resistance that some weeds had established when treated by other products. This will have detrimental consequences to the American food supply, as the main ingredient, glyphosate has been linked to all sorts of health issues in humans and animals alike.

In addition, the use of the Roundup product by the average consumer for lawn care has led to active lawsuits against Monsanto regarding the potential link to the spraying of the product and Non-Hodgkins lymphoma.

Some research has also indicated that insects which fed on the leaves of corn stalks sprayed with this product have died in large numbers. The merger of the two companies will only increase the marketing efforts around this and other products which will cause harm to humans.

The data behind many of these studies is both revealing and troubling at the same time. I encourage all of you to take a closer look at the impact of pesticides and other petrochemical products, GMOs, and other agricultural products which will have an impact on you and your family.

The use of these products also merits increased consideration because we need to protect the population of honeybees, or our food supply will face a crisis level situation.

I understand the need to protect the population from the potential spread of the Zika virus, but all of these chemicals and their consequences and effects should be examined more closely as well. It certainly bears close observation as the regulators make a determination on this merger and the federal government weighs the GMO labeling laws in the coming months.

Bayer Beware: The Monsanto – Bayer Merger

I write often about mergers and corporate takeovers here on Frank’s Forum so the opportunity to offer some commentary on the largest merger of the year was an opportunity I could not miss.

In between research and drafting of other pieces I have in the pipeline, and a final draft submitted for editorial review, I was reading the mainstream coverage of this gigantic transaction on Forbes and CNN Money among others.

I am not sure what I am more surprised about: the fact that Bayer made a third attempt which was more outrageous than the first two attempts to get this deal done, or that I knew that this merger deal was going to be announced before the end of the 2016 calendar year.

I thought the Dow and DuPont proposed deal was huge and scary (which it still is) especially given the implications for the seed market. However, this move by Bayer is also very large and bold with the valuation they put on Monsanto stock ($128 per share) and the clause if the deal does not meet regulatory approval (Bayer would pay Monsanto $2 billion). All of these factors and many more make this deal the most influential merger of the year.

The total valuation when this deal is broken down means that Bayer put a value on Monsanto of $66 billion. The deal, if approved, would do two things right away: have a huge impact on the U.S. seed market where Monsanto is the top player in that marketplace and dramatically expand Bayer’s North American footprint.

American Dream or Nightmare?

The value to Bayer is undoubtedly the opportunity to enter the North American market in a top strategic position and expand upon that through other product areas and industry segments in the future. Bayer is much more recognizable in Europe and Asia than in any other areas of the world, so growth into an essential and largely untapped marketplace for some of their products was the main impetus.

In the case of Monsanto, which has been dealing with an endless onslaught of negative publicity regarding their products and GMOs, the deal makes a lot of sense when you consider that the Dow-DuPont merger looks like it is gaining traction toward approval by regulators throughout the world. That deal did hit a snag in Europe recently, but if you are Monsanto, you proceed thinking it will eventually get done and they will be a tough combined duo to compete against.

The premarket trading of Monsanto stock, as noted by CNN Money, was $104 per share and that sort of gap between that number and the merger valuation of $128, in my time of covering M&A activity usually means that Wall Street is anticipating this deal to not be approved through regulatory channels.

Bayer is thought of in America as the company that makes aspirin and Claritin, but the reality is that they are a major player in other parts of the world in petrochemicals and agricultural chemical products. They have a position in the agricultural seeds marketplace in other regions of the world as well, and from that perspective this deal makes sense.

Why Monsanto?

Although I had a strong feeling that this outcome was going to take place with regard to this merger, I still keep coming back to the question: why would Bayer want to purchase Monsanto? I understand that Bayer swung and missed at a deal for Syngenta, another major American seed manufacturer (which is in the process of being purchased by a Chinese company, ChemChina).

Monsanto has so much baggage with the P.R. nightmare over the perception of their products in the marketplace, the potential links to their products and certain cancers, and the inevitable GMO questions. It is also no secret that I hold Monsanto responsible for putting greed ahead of the health and wellbeing of people. I have read enough data and reviewed enough clinical trials to understand the effect of pesticides and herbicides on both humans and wildlife to know that my opinion of Monsanto is not very favorable, to put it diplomatically.

Bayer top executives may have felt that the Monsanto acquisition was the best pathway to getting the market share they desired in the product areas where they have synergy in order to compete with Dow-DuPont in both the North American market and the global marketplace.

Heavy Scrutiny

This deal, make no mistake about it, will be scrutinized heavily by the political powers at play here; other online news sources are already running separate stories about that aspect of this proposed merger. Bloomberg featured a story on the merger’s impact on the cottonseed industry which if the two companies joined forces they would control a staggering 70% of the market. What further complicates the deregulation of this particular market is that Monsanto sold a piece of their cottonseed business portfolio to Bayer recently to make another acquisition themselves. I am not sure who would be to purchase assets from either company in order to satisfy regulators.

The overall picture for Bayer and Monsanto joining forces is made even further complicated because they will have limited pathways to sell off assets overall because Dow-DuPont and the ChemChina deal I mentioned earlier puts all of those companies in a holding pattern as well. Those companies are not going to be undertaking any large transactions while under regulatory review themselves.

A merged Bayer and Monsanto would control an alarming amount of agricultural products and products directly related to our food supply. They would have enormous influence and power over the pricing that all of those markets are set within. In addition, they would be able to exert enormous price pressure, which could translate to cost increases that are passed along to the consumer.

The potential combined behemoth would also have a tremendous impact on the global environment through an increased number of synergies in the pesticide, herbicide, and other agro-chemical products which will have negative effects on the soil, water, and wildlife.

The potential merger of Bayer and Monsanto is, in short, bad for the consumer, bad for the environment, bad for ingredient suppliers, and bad for farmers. I hope that the analysts on Wall Street are right, and that this merger fails to meet regulatory approval.

It is a proposal with tremendous consequences on a multitude of levels which could have a detrimental impact to our society. This proposal represents greed and the unbridled pursuit of power. I am very concerned over the outcome, and I hope I have proven to all of you that you should feel the same.

Tainted: Academies of Science GMO Report

The report issued today from the Academies of Science which essentially stated that GMOs in our food supply are safe for humans to consume came under fire by several consumer advocacy groups. The media coverage of the report can easily be found, and in fact, USA Today did fair and balanced overviews of both sides of this argument.

The focus of this commentary on my own blog here is to not delve into the specifics of the report from this organization, but rather to focus on the facts and implications that still remain in the “great GMO debate” in America. Most of you know as readers of my prior work on the topic of GMOs that I am very strongly anti-GMO. That stance has been honed by researching tons of scientific studies and empirical data from trusted sources and reading accounts of the effects of herbicides such as Roundup and their impact on the soil and crops in our country over a period of roughly 20 years.

Despite what this report released today states, GMOs are not safe for humans to consume, products such as herbicides and pesticides have caused all sorts of illnesses in children and adults. The use of genetically engineered seeds and other products in our agricultural production processes has a direct correlation to increased incidences of gastrointestinal, autoimmune, cancers, and other diseases.

Several other consumer advocacy groups and others involved in the food industry agree with my view on this report and on this situation. The reason: the Academies of Science report is tainted, it is skewed because the scientists and other members of the organization are linked with the large biotech companies and the agricultural production giants such as Monsanto. This effectively caused one group, Food & Water Watch (which is a respected consumer advocacy group) to call the results “watered down”.

This is not the first time, nor will it be the last, that the biotech and big agricultural giants like Dow Chemical and Monsanto got involved to directly or indirectly influence a report or a legislative measure when it comes to GMOs. I have written numerous articles over the past few years on this same subject with political donations being linked to high powered politicians who then change the course of a particular bill so that it is favorable to the big business interests involved.

This should come as no surprise to anyone in the audience because the genetic engineering of food has always at the core been inherently about pure greed. The ability to grow more product or make the food last longer so that stores had less perishable or expired inventory has been the catalyst behind a “make it GMO or bust” mentality.

The evidence of that is clear in the U.S. according to reports published in USA Today, Yahoo! News, and other trusted sources the following numbers for 2015 are staggering with regard to the prevalent nature of genetically engineered produce in our food supply. I have listed below the percentage of each crop that is genetically engineered:
Sugar beets = 99%
Soybeans = 94%
Cotton = 94%
Feed corn = 92%

I have written previously about the pervasive and persistent nature of the GMO problem in the U.S. based on these numbers above. It has created conditions where now the staple products are genetically modified and the soil has been degraded to a point where it is not capable of growing non-GMO produce. The other issue which is just as troubling is that the seed used in so many crops are genetically modified and two main companies – Dow and Monsanto control a huge market share in the seed business for our food supply.

The amount of feed corn that is genetically modified is also a tremendous problem because it has a direct impact on so many areas of agriculture which impacts the food that is provided to many of our sources of animal protein. In turn that creates a scenario where it is very difficult to avoid GMO containing products in your given daily food intake.

In any case, despite your view on the situation, God created all that we have been given here on Earth, every living thing, the soil, the seeds, the water, and the Sun. Then mankind came along and decided that they knew better than God and they decided to alter what God created in the name of enhanced profit margins. There are many other people and groups out there that also agree with this component of my argument against GMOs.

The incidences of increased levels of autoimmune diseases such as celiac, Parkinson’s disease, dementia, certain types of cancers, and other gastrointestinal diseases all jumped up in the past 20 years since man decided that they would alter the crops and the seeds and the soil with chemical ingredients and herbicides.

I cannot emphasize enough that the ties to the Academies of Science and the biotech and agricultural products suppliers casts a huge cloud of suspicion over the validity of the report issued today. It certainly was a far cry from an independent analysis on this issue.

National Geographic put together a really informative and well done piece on the effect of Roundup brand herbicide on the crops and the soil in the American farming system. The results, and the amount that we do not know about such a widely used chemical are alarming.

The final subtopic I will touch on with regard to this issue is the labeling of GMO product which is a debate that I have covered vigorously over the past few years as well. The consumer groups today stated that the majority of Americans still believe strongly that they have the right to know if the food they are consuming is GMO containing. That fight over labeling standards and a national protocol for labeling food products is not going away with this announcement today.

The basic premise being that even if a group states that GMOs are safe, the majority of people, whether they believe those ingredients are bad or unhealthy or not, still maintain that they should know whether the product they are going to purchase contains genetically engineered components.

The fact that so many of the staple food crops that I referenced earlier in this piece are genetically engineered creates a potentially very negative situation for certain large food producing companies such as Nestle and ConAgra just to name two. The consumer will most definitely think twice about buying a can of soup with genetically modified soy in the ingredients.

The federal government has to get involved with a standard protocol because each individual state cannot have their own separate ways of declaring GMOs on labeling for grocery products, it will become a complete nightmare for interstate commerce.

In the end, the report today did nothing to quell the debate over GMOs in the food we eat, instead it stoked the fire. This debate will continue because there is a mountain of evidence to refute what this report claimed today. The trend toward healthy and fresh/ organic eating habits in the American consumer will not change because of this report today. The distrust of the government, the disdain for lobbyists, and the general skepticism towards large corporations will continue in America, and in fact was emboldened by this report today. I urge you to educate yourself on this topic because it can have a dramatic impact on your health and that of the rest of your family. This report cannot change that fact.

Creating A Duopoly: The Dow – DuPont Merger

The $130 billion mega-merger announced late last week between Dow and DuPont is just the latest agreement in what has become an environment of increasing consolidation across all industrial and commercial markets. This deal is unique because once the merger takes effect then the companies plan to split into three separate publicly traded companies.

 

The rationale behind the three-way split is for tax efficiency purposes and will take nearly 24 months to complete just one phase of this complex transaction, which some on Wall Street believe will invite further regulatory scrutiny. In fact, regulators have been hitting the pause button on several merger deals in recent weeks. The most high profile being the Staples merger with Office Depot which is being blocked currently by the FTC (Federal Trade Commission) creating a saga where most recently the Staples-Office Depot legal team has filed a countersuit which is expected to be heard in federal court in March 2016.

 

Those who track and analyze M&A activity are bracing for another contentious scenario with the proposed merger between Dow and DuPont, two of the oldest and largest American companies in the chemical and agricultural products industries. The obvious prevailing theory being that if the FTC is giving Staples a huge amount of pushback over their proposed merger in the office supply industry, just imagine the type of scrutiny they could enact on the largest merger deal ever in the chemical space.

 

The Importance of EBITDA

 

The CEOs of both companies, Dow and DuPont respectively, were on all the financial cable network shows last week trying to get their corporate PR version of why the merger should move ahead in an attempt to set the narrative before the FTC and other regulators provide the public with their version.

 

In particular they were pressed by the financial media as to the rationale behind the merger followed by the split into three companies. The concerns are due to the regulatory process involved in that type of complicated transaction as well as the sheer amount of time required to complete the entire transition into three distinct and publicly traded companies.

 

Both CEOs explained that the most tax efficient method was to complete the transaction in this manner. In their view this protocol could actually reduce overall regulatory scrutiny and anti-trust concerns because the mega conglomeration would essentially be split into three parts.

 

The concerns from the side of the average stock holder, big investor, or the Wall Street firms analyzing this deal hinge on what this type of transaction will mean for earnings growth. This measurement of performance is always paramount, but takes on added significance if this deal gets cold water thrown on it by the FTC or other ant-trust regulatory bodies.

 

In order to address some of that potential reticence the two CEOs from both of these iconic American corporations discussed the importance of EBITDA to this overall transaction. I interpreted this emphasis to be driven by the strong value of the US Dollar which has stripped away the revenues for giant companies such as Dow and DuPont, so shifting the focus to EBITDA is being done to demonstrate the cash flow overall for the combined entity prior to the 3 way split.
In my own view, I would caution investors on that rationale because EBITDA can be manipulated in a variety of ways to present an unrepresentative picture of the financial health of any given business. I am in no way insinuating that this is the case with Dow-DuPont, no evidence of that exists at this point, but as a general rule of thumb I would tread lightly and not use that one measurement to determine the overall viability of a company.

 

Moreover, the bigger issue for this proposed Dow – DuPont entity is twofold:

  1. The flattening curve in the commodities pricing market
  2. The potential creation of a “duopoly” in the seed industry

 

The decreasing demand for agricultural products is also an issue here but the commodities markets that both companies have large stakes within have been beset by falling prices.

 

The creation of a “duopoly” has been mentioned in other media reports regarding this mega-merger. The eventual 3 way split into three companies would result in an agricultural products entity that would combine Dow and DuPont’s seed and crop protection product lines.

 

The major anti-trust “red flag” would result because in that scenario Dow-DuPont and Monsanto, just two companies would control a huge portion of that industry segment. They would be able to set pricing and enact inventory controls that could have enormous consequences to farming and access to commodity products and the food supply. That could be the cause of significant regulatory concern especially if the public is informed and expresses those concerns to their elected representatives in Washington.

 

Three Way Split

 

The three way split of the company, provided the merger is approved by the summer of 2016, should take place according to the reports anywhere from 18 to 24 months from that point. The three companies proposed in this merger announcement are:

  1. Agriculture Company – see above explanation
  2. Material Science – combines product lines from material sciences and performance plastics divisions and performance materials/chemicals
  3. Specialty Products Company – nutrition, health, industrial bioscience, safety, and communications product lines merged for this company to form

 

This merger is seen as necessary for the ultimate survival of both companies between the commodity market issues I raised earlier to the strengthening of the US Dollar, the unpredictability of agricultural product sales, and falling crop prices; Dow and DuPont were individually facing some difficult hurdles to their future growth.

 

DuPont was rumored to have been mulling a variety of staff reduction plans in order to slash costs due to the negative impact of market conditions on their business units. Meanwhile, Dow was said to be reviewing the repositioning of some of their product lines in the marketplace as well as exploring other options in the event that the proposal to merge with DuPont was met with resistance.

 

Final Analysis

 

In my view, as one who has reported on mergers and acquisitions across many industry types and for a few large news organizations, this particular transaction will face some significant regulatory hurdles on the path to approval. The rationale behind that reality exists on a multitude of levels, from the obvious (the sheer size of the two conglomerates involved) to the subtle (the impact on the commodities markets for certain agricultural products).

 

The most pressing issue involved is the potential for a duopoly in the seed business with the potential merged Dow-DuPont and Monsanto. The consolidation of market share of any single industry into the hands of two corporations is usually, but in no way an absolute, death knell for M&A activity on this scale.

 

In recent history some exceptions to this rule have been made but the seed business is a different scenario and it will be viewed in that regard during the regulatory process. It may not necessarily scuttle the deal, but a revision to how that proposed merged business unit will operate will likely be the resolution. The sale of current Dow or DuPont brands or business units to other competitors is also a likely outcome in order to usher the merger through the regulatory approval process.

 

In addition, it is important to note that this merger, if approved, will not completely insulate the current staff head count. The financial news media has reported that job cuts from various divisions of both companies will come in order to position “the books” from an accounting perspective and enhance the profitability of this acquisition.

 

It is also my opinion that the merger into a one company followed by the 3 way split into multiple publicly traded entities could likely derail this merger from the way it was intended. The complexities involved in the transaction coupled with the longer period of regulatory review needed for this deal to process successfully are factors in forming my opinion in this regard. That is not to say that will not eventually happen (with this much money involved that seems unlikely) but the manner in which the companies are split may change, and the market conditions will dictate how that will all eventually come to fruition.

 

In the end analysis, this announcement of the proposed merger of Dow and DuPont, two enormous and iconic American corporations, is just the beginning of a lengthy process toward a potential merger. In the interim, we will read and see reports detailing tax efficiency, earnings, commodity pricing, market conditions and a myriad of other terms detailing the road either to consummation or perdition for this merger. It is a sad, stark reminder that even the big fish are not immune to the rough waters of a constantly changing global economy.

 

 

Between The Lines: GMOs and Food Labeling

The announcement today that Congress is considering a bill introduced by Representative Mike Pompeo of Kansas which would nullify the laws in place on the state level regarding the disclosure of GMO ingredients in food products is troubling.

 

My rationale for this viewpoint is different than others in this matter because I still maintain that a federal standard for food labeling is the only practical solution to this issue moving forward. The problem I have with the bill introduced today called the Safe and Accurate Food Labeling Act is that it would remove any mandated disclosure of GMO ingredients in our food products.

 

Mr. Pompeo made remarks today to the media that GMO products are safe and healthy for the consumer, and that is why he maintains that the separate labeling disclosure is not needed. Some experts within both the scientific and environmental protection communities would respectfully disagree with this notion made by the congressman from Kansas earlier today.

 

In fairness to both sides of this issue, scientific study data has demonstrated evidence of potential health problems in both animals and humans with regard to GMO ingredients. The environmental groups are concerned about the chemicals used in the process of growing genetically engineered food ingredients. The Monsanto product Roundup is just one of a number of chemicals used in GM farming that have created issues such as weed resistance.

 

Mountain of Data

 

The scientific data is mounting regarding the negative effects of GMO containing ingredients in food products. One study has linked GMOs in food to 18 million diagnosed celiac disease patients.

 

Another study shows that the before mentioned Roundup product is classified as a “xenoestrogen” which simulates the effect of real estrogen in the human body. The increased levels of this hormone is linked to a higher risk for cancer, infertility, and thyroid conditions.

 

Moreover, the higher levels of estrogen and glyphosate in genetically altered soybeans has been linked to increased cases of breast cancer.

 

Genetically modified foods have been shown to lower crop yields and increase overall pesticide use per a study published in the Journal of Food and Chemical Toxicology. This study and others brought about the push for action in California and Washington state, which I covered in a previous article, where ballot initiatives regarding the use of GMOs fell short of gaining approval by very small margins respectively.

 

In each state, Monsanto, the Grocery Manufacturers Association, and a consortium of large food manufacturers spent millions of dollars on advertising campaigns to defeat these measures.

 

The Future

 

The future of the GMO labeling debate took a step in Congress where the food companies could volunteer to disclose the presence of GMOs in their products. The current backlash against GMOs in our food have caused the American public to look negatively upon those products which contain modified ingredients.

In that light, what food company would voluntarily choose to disclose GMOs in their products? They know that it will effectively decrease the sales of the product, so they will choose to not provide that information, which eliminates any substance from this proposed Congressional bill.

 

Currently, 27 states have proposed legislation regarding the disclosure of GMO containing ingredients in food products. I have stated before that the state-by-state approach will not work, it will cause chaos in our food supply system, and disrupt interstate commerce.

 

The federal system has to provide a universal food labeling solution to this GMO dilemma. The evidence is clear that these products are not good for the health and safety of humans or animals. The solution provided needs to promote a mandatory declaration of any GMO containing ingredients.

 

The sheer cost of the treatment of Americans from various illnesses potentially linked to GMO containing products is reason enough for us to try to resolve this matter.

 

In my view, it should be a fundamental right for us, as Americans, to make an informed choice with regard to GMOs in our food. I hope our government will trust us to do so and provide us the mechanism in which we can determine our own food consumption choices in the future.

 

It is clear, this debate regarding GMOs, regardless of recent Congressional activity, is far from being resolved.

 

(Background information and statistics courtesy of Reuters, CBS News, Journal of Food and Chemical Toxicology, Institute for Responsible Technology, and Global Research.org)