STUTTGART, Germany -- Syngenta's decision to accept a takeover bid by China National Chemical took the European agrochemical industry by surprise. After all, the Swiss company, one of the world's largest agribusinesses, had rebuffed acquisition attempts by U.S. rival Monsanto.
What made the Chinese state-owned chemical company, known as ChemChina, a more appealing suitor? Syngenta CEO John Ramsay offered one explanation when he announced the deal on Wednesday. The move, he said, will open up growth opportunities in China and other emerging economies. The Chinese agrochemical market is enormous: The country is the world's No. 1 rice producer and No. 2 corn grower, behind the U.S. Syngenta possesses competitive technology for rice gene analysis.
Another factor was likely an industrywide surge in research-and-development costs, due to the tightening of safety standards around the globe. ChemChina agreed to pay more than $43 billion. The deal will help Syngenta, already known for its focus on research and high-value-added products, to ramp up its R&D outlays further.
Beijing, too, is stepping up efforts to ensure food safety and may be backing ChemChina's massive investment -- the largest foreign acquisition by a Chinese company. The government is struggling to check the widespread use of low-quality chemicals in farming, a pressing concern among consumers, especially urbanites.
The ChemChina-Syngenta deal has created a stir in Zurich, Switzerland's financial center. Many investors see it as a watershed for the country's manufacturing sector.
Swiss industries typically focus on high quality, value-added products to stay competitive despite high labor costs. And with its strong intellectual property safeguards, Switzerland offers an ideal business environment for research-driven companies like Syngenta.
In 2015, agrochemcials accounted for three-quarters of Syngenta's $13.4 billion in sales. The company's operating profit margin is an impressive 13% and it spends 10% of its sales on R&D, particularly in the field of genetic engineering. In 2014, it was the world's 100th-biggest R&D spender, shelling out 1.17 billion euros ($1.31 billion) on its laboratory operations, according to the European Union.
Even for a company with that kind of muscle, expanding in China poses major challenges. One is the country's poor record of protecting intellectual property. Another is the pervasiveness of cheap agrochemicals. Yet Syngenta was under intense pressure from the stock market to make a bold strategic move. Its rejection of Monsanto's courtship, which started in mid-2014, turned off investors.
When reports of Monsanto's initial bid emerged in 2014, Syngenta Chief Operating Officer Davor Pisk brushed them aside as speculation. The Swiss company was still growing in emerging countries, he said, and was capable of going it alone. But with investors hoping for industry consolidation, Syngenta's anti-takeover stance triggered sell-offs of its shares.
Syngenta's management tried to placate investors with share buybacks, and by selling noncore seed businesses. But these steps did little to lift the company's stock. Only when rumors of ChemChina's interest started circulating in November 2015 did the Swiss company's shares begin to rebound.
There is another reason why Syngenta preferred ChemChina to Monsanto, even though the Swiss company partners with its American counterpart on certain products.
At Wednesday's news conference, Syngenta Chairman Michel Demare said a merger with Monsanto would have required his company to spin off and sell some businesses in order to win the approval of antitrust regulators. That, he suggested, could have destroyed Syngenta's corporate culture.
Syngenta was established in 2000 through a merger of the agribusinesses of Novartis and AstraZeneca. Its roots go back to storied European chemical companies including Geigy, founded in 1758. It does not want to abandon that heritage, and management thinks that under ChemChina, it will not have to.
Syngenta can become part of the Chinese group without losing its corporate identity, Demare said. He expressed confidence that authorities will sign off on the deal.
Demare echoed remarks by Marco Tronchetti Provera, CEO of Pirelli. ChemChina bought the Italian high-end tire manufacturer last year.
Tronchetti said Pirelli will team up with ChemChina only on tires for industrial use. The Italian company will retain control over its products for consumers, he said, adding that he would keep his post until 2023.
These European executives see being acquired by ChemChina as a win-win deal: They can hang onto the reins while getting big doses of capital.
At Syngenta's headquarters complex in Basel, a new building is under construction to make room for the company's expansion. This project, like others, will now be financed by a company in Beijing. But it is too early to tell whether things will play out the way Demare -- and Tronchetti -- expect.
The Syngenta deal has also raised questions about how China might use the company's genetic engineering know-how.
What is clear is that acquisitive Chinese companies are changing their strategies. After years of snapping up European makers of general-purpose products, they are now targeting high-value intellectual property.