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Agricultural industry with innovative offerings that increase its productivity

Background Information (applies to Milestones One through Three):
Bayer is a life science firm with a more than 150-year history and core competencies in the areas of healthcare and agriculture. With its innovative products, it contributes to finding solutions major challenges, such as a growing and aging world population requiring improved medical care and an adequate supply of food. Bayer addresses these issues by preventing, alleviating and treating diseases, and helping to provide a reliable supply of high-quality food, feed and plant-based raw materials. Bayer Pharmaceutical is Bayer‘s largest division in terms of total sales. This division focuses on researching, developing and marketing innovative medicines with a positive cost-benefit ratio primarily in the therapeutic areas of cardiology, oncology, gynecology, hematology and ophthalmology. To safeguard long-term growth, Bayer is currently seeking increase its investment in research and development. Besides expanding early research, Bayer is concentrating on the clinical development of active drug substance candidates in the therapeutic areas of cardiology, oncology, hematology and gynecology. In addition, it is selectively expanding and supplementing its development portfolio through licensing agreements and acquisitions. The Crop Science Division of Bayer, on the other hand, focuses on improvement in agricultural sustainability, crop yields and quality, as well as the leveraging of digitization to help make products safer (Bayer, 2016).

Bayer’s aim is to help shape the future of the agricultural industry with innovative offerings that increase its productivity, thus generating profitable and sustainable growth for Crop Science and its customers and enabling the production of sufficient food, animal feed and renewable raw materials for a growing world population despite the limited amount of available arable land. This strategy is complementary to its Animal Science Division, which produces animal feed products. Bayer Crop Science Division’s current strategy is to enhance its Crop Protection and Environmental Science portfolio, expand its Seeds business, and to lead the way in innovation and develop holistic solution (Bayer AG, 2016). For purposes of this discussion, assume that Bayer aims to build on its expertise in the integration of seed technology with chemical and biological crop protection.
For purposes of this project, assume that Bayer is seeking to acquire Monsanto Corporation. Monsanto, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Through its seeds, biotechnology-trait products, herbicides and precision agriculture tools, Monsanto (Monsanto, 2016) seeks to provide farmers with solutions that help improve productivity, reduce the costs of farming and produce better foods for consumers and better feed for animals. Monsanto has a worldwide distribution, sales and marketing organization for its agricultural-productivity products. In a growing number of locations throughout the world, it produces directly or contracts with third-party growers for corn seed, soybean, vegetable, cotton, canola and other seeds. The global market for its “Seeds and Genomics” segment is increasingly competitive. Both its row crops and its vegetable seed businesses compete with numerous multinational agrichemical and seed marketers globally, and with hundreds of smaller companies regionally.
Bayer’s proposal would pair Monsanto, the world’s largest seed company, with drug-maker Bayer’s growing seed and crop protection portfolio. Upon announcement of the possibility of such a bid, shares of St. Louis-based Monsanto (MON) rose by 8.7% (Kirchfield, et. al., 2016). Across 2015, immediately following announcement of a possible merger between the two firms, Bayer’s growing agribusiness division saw sales rise 9% to $11.8 billion, while its healthcare sales rose 19% to $26 billion, as market participants reacted to news of the possible merger. Overall, Bayer’s 2015 sales rose 12%, to $52.8 billion (Business Wire, 2014). On the other hand, Monsanto, which makes seeds (corn, cotton, fruits and other vegetables) and crop protection chemicals such as RoundUp, reported sales of $15 billion in its 2015 fiscal year. This was a 5% decline from the previous year (Daily Management Review, 2016). See Table 1, below, for an alternative view of these results.
Prompt:
In this project, you will assume that Bayer is considering a bid for United States seed company Monsanto (Snider, 2016). For purposes of this project, assume that you are Chief Financial Officer of Monsanto Corporation. Bayer’s proposal would pair Monsanto, the world’s largest seed company, with drug maker Bayer’s growing seed and crop protection portfolio. Upon

announcement of the possibility of such a bid, shares of St. Louis-based Monsanto (MON) rose by 8.7% (Kirchfield, et. al., 2016). Across 2015, immediately following announcement of a possible merger between the two firms, Bayer’s growing agribusiness division saw sales rise 9% to $11.8 billion, while its healthcare sales rose 19% to $26 billion. Overall, Bayer’s 2015 sales rose 12%, to $52.8 billion (Business Wire, 2014). On the other hand, Monsanto, which makes seeds (corn, cotton, fruits and other vegetables) and crop protection chemicals such as RoundUp, reported sales of $15 billion in its 2015 fiscal year. This was a 5% decline from the previous year (Daily Management Review, 2016). Assume that Monsanto is taxed (TC) at a rate of 35% and its cost of debt (RD) is 12%. See Table 1, below, for an alternative view of this data. In the context of Bayer’s proposal, assume that Bayer’s Beta is 1.24. For purposes of valuation of cash flows in the context of Bayer’s proposal, consider Monsanto’s discounted cash flow for only the upcoming 1 year of sales, and assume that Monsanto is expected to grow at a rate of 3% in the current year. Assume also that Monsanto’s current sales are projected to be $15,239,000, while its equity holdings are estimated to be $9,141,333 and its debt is $12,359,333. Assume that Monsanto’s Profit Margins and Total Asset Turnover are unchanged from 2015 levels. EBIT, depreciation, capital spending, and the change in net working capital will grow at the same rate as sales, which is expected to grow at a rate of 3% across this year, while capital investment will remain stable
As an alternative proposal means of increasing shareholder value, as Chief Financial Officer of Monsanto, you have also been asked to evaluate a management proposal to expand Monsanto’s existing operations to pesticide production, yielding an increase in sales of $3,950,000. In the context of this alternative proposal, assume that there is no excess capacity, and the increase in fixed asset needs would be equal to 70% of this increase in sales, while cost of sales would run 20% of sales, using a percentage of sales approach. Also assume that Monsanto issues dividends at a rate of 1.98% of net sales, and thus the firm’s retention ratio is 98.2%. Assume that Monsanto’s current total level of sales is $15,239,000, while the division involved in this project is expected to yield sales of $2,950,000 in the current year. Assume that the proposed project has a risk and weighted average cost of capital similar to that of Monsanto, and a firm beta similar to that of Monsanto.
Upon receipt of Bayer’s proposal, your company’s Board of Directors has directed you, as Chief Financial Officer of Monsanto Corporation, to review key statistics and other information and report to the Board on the following:

  1. Taking account of background information and other information supplied here, determine whether to accept or reject this proposal for $62B. For purposes of this analysis, consider discounted adjusted cash flow for only the current year, in which the firm is anticipated to grow at a rate of 3%. Evaluate each of the following:

a. From given information (Table 7 will aid you in making these calculations, and has been provided for this purpose):
i. Ascertain Monsanto’s weighted average cost of capital (WACC) and use this along with the firm’s growth rate to determine the discounted value of adjusted cash flows. Employ the discounted value of adjusted cash flows to determine how this offer compares to the present value of the firm’s adjusted cash flow (CFA*), using the firm’s WACC.
ii. Explain the importance that this has for the firm, and for shareholders, noting that this is an issue which you have not covered in previous Milestones – and thus you will use this additional measure alongside measures prepared in Milestone One, as you complete Milestone Three. Use information from all assigned readings to support your analyses.
b. Justify your decision to accept or reject this offer using additional evidence drawn from ratio analysis, financial statement analysis, or time and trend analysis, refining your Milestone One analyses as applicable, given information covered in subsequent modules, and given current sales, equity and debt information included here.

  1. With respect to the firm’s alternative proposal, determine:
    a. The extent to which Monsanto will have to take on additional debt, given that it wishes to retain its current dividend ratio and does not wish to sell additional equities.
    b. Calculate the firm’s sustainable growth rate and internal growth rate and use these measures to analyze a decision to accept this alternative proposal. Use these measures and concepts covered in assigned readings including EFN, DuPont Identity and leverage, Modules One through Eight, to explain the importance of these measures to shareholder interests.
    Use evidence and assigned readings covered to this point to support your determinations. Present your analysis in a 4–6 page double-spaced document using 12 pt. Times New Roman font. Use APA formatting.
    Compose your work in a .doc or .docx file type using a word processor (such as Microsoft Word, etc.) and save it frequently to your computer. For those assignments that are not written essays and require uploading images or PowerPoint slides, please follow uploading guidelines provided by your instructor.

Sample Solution

There are other contingency theories that provide a more continuum based approach such as Redding’s theory of leadership and management, however Fielder’s description of how situational factors affect the leadership style required for the situation is extremely useful in understanding the fundamentals of leadership (Pettinger, 2007). Chelladurai in his Multi Dimensional Model of Leadership, expands on much of Fiedler’s theory but in a continuum based approach, in which the leader can adapt their leadership style to fit the situation (Chelladurai and Madella, 2006). Chelladurai’s theory is taken from sports psychology but can be applied to an organisational scenario. It provides a much more empirical categorisation of task structure, clearly differentiating a plethora of situations that require certain leadership styles for success. Chealldurai found three characteristics that affect the leadership style required for a situation, called antecedents, they mainly expand upon Fiedler’s situational factors and leader – member relations and ultimately affect how a leader should behave towards a situation. The first are situational characteristics, the environment in which the leader must perform, the second are leader characteristics, the experience, personal qualities and skills of the leader, and the third are member characteristics, the motivation, skill and experience levels of group members (Chelladurai and Madella, 2006). The situational characteristics and member characteristics have a required behaviour to ensure maximum group performance, they also have a preferred behaviour to ensure the satisfaction of group members, if the leaders actual behaviour matches both the required behaviour and preferred behaviour of the situation the consequence is maximum group performance and satisfaction. However, if the group are not performing and achieving goals or are not satisfied or both, then the leader is able to amend their actual behaviour to improve this. Leaders able to monitor performance and satisfaction, and understand what is required to amend the situation will achieve optimum group performance in Chelladurai’s model. The one limitation of Chealldurai’s model is that it assumes the leader is in a position of complete positional power over the group, and can implement any leadership style of their choosing without constraints. Positional power is the authority and influence a leader has over a group, if the leader has positional power, they will be able to implement the leadership style they best see fit for the situation. Positional power cannot be measured or quantified, making it highly ambiguous and hard for a leader to understand whether they have it or how then can gain it. It becomes the responsibility of the organisation to have policies in place to provide leaders with some positional power, usually by establishing a clear hierarchal structure. By establishing a hierarchy, the leader is perceived by the group to be able to make demands and expect compliance from them giving the leader legitimate power (French and Raven, 1959). Secondly, by providing the leader with the ability to reward compliance and punish non compliance from the group, the leader has reward and coercive power (French and
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