Dissecting Dow And DuPont Deal, Part 4: Concern Over Concentration

by Trefis Team
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All is not well with the proposed Dow (NYSE: DOW) and DuPont (NYSE: DD) deal. The impending merger is facing intense regulatory scrutiny in different countries, as well as opposition from farmers groups. The main concern is that if the merger is given the go ahead, it will increase the market power of suppliers in the already concentrated market for seed and agro-chemical products. We have analysed how the proposed merger will change the agri-industry dynamics using the Herfindahl-Hirschman Index (HHI). Based purely on this quantitative parameter, we find that the corn and soybean market is expected to see increased market power of suppliers of seeds following the proposed merger. Further, the crop-protection market will not be affected much. It is worth mentioning that the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) use HHI (among other different criteria) to measure the level of market concentration as a result of proposed merger.

(Read: Part 1. Dissecting Dow and DuPont Deal: Does The Merger Make Sense?  | Part 2.  Dissecting Dow and DuPont Deal: Are The Synergy Expectations Reasonable? Part3. Dissecting Dow And DuPont Deal: Why Merge And Split? )

Market Power Of Suppliers To Increase

DuPont and Dow are major players in markets for corn and soybean seeds. DuPont is the largest company in soybean segment, with a market share of over 33%. In corn seeds, it is second largest player (just behind Monsanto) with a market share of 34.5%. The combined market share of the two companies in corn and soybean seeds will be about 41% and 38%, respectively. Over the last five years, the market share of top 5 global companies has increased from about 86% to 89% in corn seeds and from about 73% to 79% in soybean seeds, indicating growing concentration.

The FTC and DOJ look at both the pre and post-merger HHI in case of horizontal merger. They classify an industry in the following three types on the level of concentration:

  • HHI < 1500: Unconcentrated market
  • HHI between 1500 and 2500: Moderately concentrated market
  • HHI > 2500: Highly concentrated market

We estimate the HHI for the corn seed market to be about 2700, which places it in the highly concentrated category in the framework above. The soybean seed segment, with an HHI of 2360, is categorized as moderately concentrated segment.  For the agro-chemical segment, the pre-merger HHI is about 1600.

Post-merger, the agencies look at the level of change in the HHI in tandem with the category in which the industry falls. In a moderately competitive market, an increase of more than 100 in the HHI raises concerns, while for a highly concentrated market, an increase of more than 200 in the HHI is presumed to enhance market power.

We estimate that the post-merger HHI for corn seed market will be about 3100, reflecting an increase of 400. For soybean seeds, we estimate a jump in the HHI of nearly 360, reaching 2700.  We do not believe there is any reason for concern in crop protection market. Based entirely on this quantitative measure of concentration, we find that market power of suppliers would increase significantly, which could influence global food supply. This is bound to attract greater scrutiny from regulatory authorities the world over. In a scenario like this, the regulators demand additional information and probe deeper. The recent suspension of deadline for the review of this merger by European Union’s anti-trust commission is a case in point. The onus now lies on DuPont and Dow to either prove that the merger will not distort industry dynamics or find some other way alleviate concerns over this excessive concentration, like the divestiture of some of their smaller agri-businesses.

 

Have more questions about DuPont? See the links below:

Have more questions about Dow Chemical Company? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Dow Chemical Company |  our complete analysis for DuPont Chemical Company
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