By Ruth Bender | Graphics by Merrill Sherman
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 29, 2019).
BERLIN -- Bayer AG fought hard to take over Monsanto Co. Today,
the $63 billion gambit ranks as one of the worst corporate deals in
recent memory -- and is threatening the 156-year-old company's
future.
Ten days after Werner Baumann became chief executive of Bayer in
May 2016, he made a bid for Monsanto that was designed to turn the
inventor of aspirin into the world's biggest crop-science
business.
Within weeks of the acquisition closing in June 2018, Bayer lost
a lawsuit alleging Monsanto's Roundup herbicide causes cancer.
Another two defeats followed, landing Bayer with damage payments of
more than $190 million. More cases are coming: A total of 18,400
plaintiffs have filed suits.
Bayer is appealing and says Roundup is safe. But its shares have
dropped roughly 30% since the deal closed, making it one of the
worst corporate deals by lost share value so far, in the ballpark
of AOL's combination with Time Warner and Bank of America's
acquisition of Countrywide. Its market capitalization is now close
to what the company paid for Monsanto alone, meaning the value of
one entire company has almost entirely evaporated.
Shareholders withdrew confidence in Mr. Baumann at the last
general meeting, a first in postwar Germany.
How did it all go so wrong? These charts help tell the
story.
The idea
Mr. Baumann, who was Bayer's strategy chief before he became
CEO, had long set his eyes on Monsanto, people familiar with his
thinking said. A Bayer spokesman said Mr. Baumann wasn't available
to comment.
The U.S. company, he calculated, would turn Bayer's smaller
agrochemicals business into a market leader by combining its
pesticides with Monsanto's seeds and high-tech crops.
It would also save Bayer $1.2 billion a year in costs, help it
develop new products more quickly and generate cash. The world's
rapidly increasing population would assure growing sales, as per
capita farmland shrinks and farmers seek to raise productivity.
With patents on Bayer's two top-selling drugs -- blood thinner
Xarelto and eye treatment Eylea -- due to run out starting in 2023,
the Monsanto deal would cushion a possible drop in pharmaceutical
revenues. The extra heft would shield Bayer from unwanted suitors,
people familiar with the Monsanto plans said.
In 2015, Monsanto's pursuit of Swiss rival Syngenta AG had
sparked a frenzy of agrochemicals transactions, threatening to
leave Bayer marginalized. When the Syngenta deal fell through and
Monsanto's shares fell, Mr. Baumann made his move.
The deal
Mr. Baumann had been CEO for less than two weeks when he
surprised Monsanto executives with his offer during a visit to the
U.S. company's headquarters in St. Louis. He had the backing of
Chairman Werner Wenning, according to people familiar with the
matter.
After four months and several improved offers, and despite
skepticism from investors, Mr. Baumann secured Monsanto's
agreement.
By then, the deal had become the largest takeover by a German
company in the country's postwar history -- to be paid all in
cash.
With Monsanto on board, Mr. Baumann now had the tough task of
selling his idea to his own shareholders. Days before the first
offer, Mr. Baumann told reporters the company wouldn't radically
change under his tenure. Many investors had been pushing for a
pharma deal. One concern, also at Bayer's pharma unit, was the
amount of debt raised to fund the Monsanto deal. Some feared it
might crimp investment in the pharma side. Bayer has said the
Monsanto deal wouldn't hold back investments in other
divisions.
Mr. Baumann's plan to close the acquisition by late 2017 was
postponed due to scrutiny by European and U.S. antitrust
regulators. In 2017, Bayer issued a profit warning because of high
inventories at its own Brazilian crop science business and slower
sales for consumer health products in a competitive U.S.
market.
The meltdown
Bayer finally became Monsanto's official owner in June 2018, but
it wasn't immediately allowed to run the business; the Justice
Department had demanded the companies first sell some assets. Bayer
executives weren't involved as Monsanto's lawyers geared up for the
first Roundup trial.
The court ordered Monsanto to pay $289.2 million in damages on
Aug. 10, 2018. The size of the award, later reduced to $78.5
million, spooked markets and dismayed Bayer directors, according to
people close to the top executives. A sharp rise in the number of
new plaintiffs further clouded the outlook.
The aftermath
Bayer has defended the deal and proclaimed the safety of
Roundup. It announced a restructuring late last year in a bid to
boost profits, selling various assets and cutting 10% of its
workforce. People familiar with the company said the moves were
geared to boost investor confidence. Mr. Baumann said the plan was
independent of the Roundup legal woes. The share price continued to
fall.
At the company's general meeting in April, shareholders withdrew
confidence in Mr. Baumann in the first ever no-confidence vote in a
CEO of a company listed on Germany's main stock exchange. Mr.
Wenning said at the time he deeply regretted the vote but stressed
that the board stood behind Mr. Baumann. Bayer later hired an
additional legal adviser and boosted oversight of its legal issues,
bowing to pressure from investors.
With three verdicts issued against Bayer so far, analysts'
estimates of its total Roundup liability vary between EUR5 billion
and EUR25 billion ($5.5 billion and $27.7 billion).
Some jurisdictions already ban Roundup's active ingredient,
glyphosate, and lawmakers elsewhere have discussed implementing new
bans. Analysts and investors have raised questions about the true
value of the inherited Monsanto business. Some have speculated that
it would make sense for the company to break up.
In December, Mr. Baumann predicted a steady climb in sales and
profits through 2022 with the help of Monsanto.
Third-quarter results released in July showed unexpected
weakness in the crop-science business, which includes Monsanto, due
to extreme weather.
With Bayer succeeding in getting two more trial verdicts
substantially reduced and investors pinning their hopes on a fast
settlement, shares have come up from June's seven-year low. They're
currently down around 50% from their high of April 2015, when Bayer
was the most valuable German company.
Write to Ruth Bender at Ruth.Bender@wsj.com
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August 29, 2019 02:47 ET (06:47 GMT)
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