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01 November 2007
Over eight years ago, chemical and agricultural powerhouse Monsanto agreed to acquire the United States' largest cottonseed grower, Delta & Pine Land, for whose germplasm Monsanto and rival biotech pioneers were developing genetically engineered traits such as herbicide tolerance and insect resistance. Monsanto failed to obtain antitrust clearance for the Delta transaction despite precipitously selling off its own competing cottonseed company (Stoneville) during the course of the US Department of Justice (DOJ) investigation. The DOJ apparently had vertical foreclosure concerns that were not addressed by the Stoneville sale and could not be remedied through a mutually acceptable consent decree. Consequently, Monsanto abandoned the Delta transaction.
Fast-forward to August 2006. After re-acquiring Stoneville, Monsanto again announced its intention to buy Delta and expressed its willingness to divest Stoneville a second time to take care of the obvious horizontal concentration problem at the cottonseed grower level. Some observers wondered whether a Republican-led Department of Justice that had shown little concern for vertical foreclosure issues would simply approve the merger based on a 'fix-it-first' divestiture of Stoneville and require no other structural or behavioural relief. The actual outcome contained some surprises of general antitrust significance.
On May 31 2007 the Antitrust Division did permit the merger. The Antitrust Division insisted that the Stoneville divestiture be accomplished through a formal consent decree rather than a fix-it-first sell-off. Of far greater significance, however, were the other novel features of the DOJ's consent decree - additional divestitures and licensing requirements - designed to ensure that Monsanto's biotech rivals are not foreclosed from bringing their genetically engineered traits to cottonseed growers and cotton farmers. The decree required that Monsanto:
Also noteworthy is the fact that the decree is focused on preserving competition to Monsanto from rival technologies that are not yet fully developed and approved by regulators, and that are unlikely to enter the commercial marketplace, even in the absence of the merger, for at least two years. Normally, the DOJ's merger enforcement efforts focus on preventing the elimination of existing competition, not preserving the opportunity for inchoate rivalry to become concrete years down the road.
For the aforementioned reasons, this settlement should be of broad interest to anyone proposing or opposing a pure vertical merger or a horizontal merger with vertical overtones, particularly in industries involving the development and licensing of proprietary technology.
As mentioned, Monsanto is a leading licensor to seed companies of genetically modified traits, such as herbicide tolerance and insect resistance, subject to patent and other proprietary rights. A trait is incorporated (and multiple traits are 'stacked') into specific seed 'lines' - the varieties of germplasm developed through selective breeding to improve quality, disease resistance, yield and climate suitability. In the mid-south and southeast United States, Delta's cottonseed germplasm is of such desirable quality that the company had, at the time of the decree, a dominant (79% and 87%, respectively) share of sales to farmers. Monsanto's own cottonseed company Stoneville was a distant second (17% and 8%, respectively).
Historically, Monsanto has been several years ahead of its biotech rivals in developing and obtaining regulatory approvals, and placing its genetic traits for cottonseed into commercial production, for which it obtains lucrative payments from farmers. Over 96% of all traited cottonseeds sold in the United States, including Delta's and Stoneville's, contain one or more Monsanto inventions (ie, its Roundup Ready herbicide tolerance trait, its Bollgard insect resistance trait and/or second-generation refinements of these traits). Prior to the Delta merger announcement, however, Delta was also cooperating with several of Monsanto's rivals to enable them to commercialize their traits in Delta elite germplasm. For several years, Monsanto rival Syngenta worked with Delta to incorporate Syngenta's VipCot insect resistance trait into lines of Delta cottonseeds that would be ready for marketing as traited seeds by around 2009. Similarly, in 2006 DuPont entered into a joint venture with Delta aimed at commercializing DuPont's Optimum GAT herbicide tolerance trait in Delta seeds beginning around 2010.
Because the merger eliminated head-to-head competition between Delta and Stoneville for cottonseed sales to farmers, and because in that downstream business entry barriers are high and post-merger concentration would be extremely high (well over 90%), the consent decree required Monsanto to divest Stoneville. The decree also mandated that Stoneville receive a licence for Monsanto's present and future cottonseed traits on reasonable terms as favourable as Delta had received from Monsanto prior to the merger. These divestiture and licensing remedies are standard fare, designed to reinstate horizontal competition in a form that will persist. The rest of the decree is unusual and precedent-setting.
The DOJ was concerned that Monsanto's downstream vertical integration with a cottonseed company as competitively significant as Delta would diminish opportunities for other trait developers to incorporate their innovations in the germplasm varieties most demanded by farmers. It would also lead to fewer choices and higher prices for traited cottonseed than would be the case were the merger not to take place. Monsanto's biotech rivals needed an alternative 'platform' or 'partner' to replace Delta. Given the many years and large investment it would take to establish a rival platform of elite cottonseed germplasm varieties, trait developers could not simply start their own cottonseed breeding companies from scratch. Nor could they buy or create joint ventures with small growers to create a competitively adequate alternative platform.
Rather than sue to enjoin the merger because of these vertical effects, the DOJ crafted a decree requiring additional divestitures and licensing provisions to help create an alternative platform formed around the divested Stoneville business:
The decree addressed several other vertical concerns. Prior to the merger, Delta served as a platform partner for inserting Syngenta's VipCot insect resistance trait into 43 elite Delta cottonseed germplasm varieties that would eventually be commercialized. Given that a Monsanto-owned Delta would have no incentive to foster competition against parent Monsanto's Bollgard traits, the merger would have the effect of blocking or at least delaying Syngenta's most promising route to market. Consequently, the decree obliged Monsanto to offer Syngenta, working alone or in conjunction with a partner of Syngenta's choice, the right to acquire and complete these 43 seed lines for commercialization, including stacking the VipCot trait and cross-breeding to develop additional lines.
Finally, the decree sought to ensure platform/partner opportunities for Monsanto's rival trait developers by requiring Monsanto to revise its licences for its widely used traits to allow stacking of non-Monsanto and Monsanto traits in the same seed line. Consequently, even if a seed grower wished to include popular Monsanto traits, it would not be barred from having certain rival traits incorporated into the same seeds.
The Monsanto/Delta decree demonstrates that the DOJ will consider vertical foreclosure effects in analyzing mergers and other arrangements and, in the right circumstances, may insist on unusually creative divestiture and licensing remedies as the price for antitrust clearance.
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