Regulators or Negotiators

One part of our portfolio focuses on Risk Arbitrage opportunities. Over the last year or so one has been tracking the Bayer-Monsanto merger & the response of regulators has been amusing. The table below shows how regulators have dealt with the issue so far.

I have detailed the timelines for 4 regulators. The others have responded in a similar fashion with China being the most efficient, not raising a red flag at any juncture & coming out with their conditional approval at a go. All anti trust/ competition regulators have been transformed into negotiators with no defined rule or parameters thus making the process arbitrary & fluid. In this case it has been a three step process :-

Step 1 - Say No & deepen the probe (probably to please the masses)
Step 2 - Extend the review timeline
Step 3 - Approve with some conditions of business transfer/asset sale

In this case Bayer has sold a few businesses to BASF, another strong player in all areas of agriculture thus not altering the competitive landscape. Infact BASF was chosen by Bayer showcasing the famous German camaraderie or bonhomie. Given the earlier mergers in this space, the world has 4 players controlling 80% of the inputs going into the agriculture industry.

The posturing by EU has been the most rigorous so far which is strange given the "region's player" is to benefit the most out of this. However with the media calling this "Merger made in hell" & aggravating public(read farmer) sentiments, the least a regulator could do was appear strict. They did that & unfortunately our trade laws leave only that much on the table for competition watchdogs. They have been forced to assume the role of negotiators & saying 'No' is not really an option.   

International economic bodies like OECD, UNCTAD & WTO have rendered regulators toothless. Infact OECD has prepared a framework "OECD Recommendation & Best practices on International Cooperation" which is based on the principal of Comity. Comity is a defining principle of international co-operation. It is the international legal principle whereby a country agrees to take other countries’ important interests into account while conducting its law enforcement activities, in return for their commitment to do the same. Thus in most cross border mergers, smaller markets & their regulators are almost sidelined & have to go along with the decisions of EU & US. Many of these practices have been continued with to maintain the 'illusion of control' but it would be ideal if a common forum of regulators is made & global mergers go through that.

In the present scenario we had Monsanto reacting strongly(+ve or -ve) to announcements by EU & US. The reactions to other regulators were mild. Given the low volumes in the acript these were a blessing in disguise for anyone looking to accumulate as uninformed hands succumbed to volatility & media soundbytes.

In India for global mergers there has been an interesting legislative change, the offer price is determined on the day the global development is announced & thereafter an interest of 10% is levied on the offer price till the Detailed Public Statement(DPS) is issued. Earlier it provided a window for investors to accumulate & drive up prices for the Indian arm as acceptance ratios were almost 100% for most MNC's thus misusing the formula driven methodology. While write in intent this does prevent price discovery for many of these gems as lack of volumes & low float lead to lower interest in many of these names.