Bayer's deliberations when evaluating Monsanto acquisition

Dow Jones reports: 

 

When Werner Baumann, as a senior executive at Bayer AG, was mulling a plan to acquire Monsanto, the idea so troubled Bayer's chief executive at the time that he didn't want to be associated with it, according to people familiar with the matter. 

 

Nearly three years later, the concern appears prescient. 

 

Bayer went on to buy Monsanto once Mr. Baumann became CEO in 2016, with the $63-billion acquisition closing earlier this year. But as the fusing of the two businesses proceeds, the deal that was meant to turn the inventor of Aspirin into the No. 1 provider of crop seeds and pesticides has become one of Bayer's biggest problems. 

 

Earlier this month, Bayer said some 9,300 plaintiffs were suing it for damages, alleging that Monsanto's Roundup weedkillers had given them cancer. In August, a U.S. jury in the first such case to go to trial found in favor of the plaintiff. Bayer has lost some $30 billion in market capitalization since then. 

 

Supporters of the deal inside and outside the company say these are short-term setbacks that don't diminish its strategic merits and that Bayer has successfully fought tough litigation in the past.

 

But investors fear Mr. Baumann's gamble has saddled the German company with a hard-to-quantify exposure that will hang over the business for many months. They also worry that the proceedings will steal management's focus at a time when sales of Bayer's over-the counter drugs are slipping and the company is feeling pressure to boost its pipeline of new drugs. 

 

Bayer has rejected the Roundup complaints as meritless, arguing there are hundreds of scientific studies that demonstrate glyphosate, the compound contained in the weedkillers, is safe to use. But Mr. Baumann said this month the lawsuits would occupy the company beyond 2021 as they work their way through the courts. 

 

"Bayer's reputation with investors has been diminished," said Markus Mayer, an analyst with Baader Bank. "The market doesn't know how this story will end, no one wants to get in right now." 

 

Bayer had eyed St. Louis-based Monsanto for years. In late 2015, when he was strategy chief, Mr. Baumann began sketching the outlines of a takeover with the backing of Chairman Werner Wenning. Monsanto's shares, after trading at levels beyond Bayer's means, had become affordable, having tanked that year due to both the U.S. company's unsuccessful pursuit of Swiss rival Syngenta and a global slump in commodity prices. 

 

One obstacle to overcome: Bayer's chief executive. 

 

Though on his way out as a bid for Monsanto was crystallizing in the spring of 2016, Marijn Dekkers had misgivings about the combination after having boosted the company's presence in health-care, people familiar with his thinking said. 

 

The Dutch-born manager, who in 2010 became the first outsider to run Bayer, viewed Mr. Baumann's plan as fraught with risks, from the all-cash financing and the challenge of integrating two companies with very different cultures, to the reputational challenges springing from Monsanto's controversial image, the people said. The U.S. company was a longstanding target of environmentalists, taking issue with the chemicals and genetically modified seeds it produces. 

 

Then there was the matter of the Roundup litigation. 

 

In 2015, a unit of the World Health Organization had classified glyphosate as having the potential to cause cancer, a decision that triggered a first round of lawsuits targeting Monsanto's flagship product. 

 

Mr. Dekkers at the time was preparing to move on to food giant Unilever PLC. Protective of his record at Bayer, having made it Germany's largest listed company by market value, he asked that the Monsanto plan be kept under wraps until his departure, according to people close to him. 

 

Asked about disagreements between Messrs. Baumann and Dekkers, a Bayer spokesman referred to a 2017 interview with a German magazine in which Mr. Baumann said the decision to explore a takeover of Monsanto had been made unanimously. Bayer declined to make Mr. Baumann available for an interview. 

 

People familiar with the matter said Bayer's management board held official discussions about the Monsanto bid only after Mr. Dekkers was gone. 

 

Mr. Baumann has the support of Mr. Wenning, the Bayer chairman. The two men, whom colleagues often refer to as "big and small Werner," took similar career paths as Bayer insiders and have a close relationship. Mr. Baumann at one time worked as an aide to Mr. Wenning, and he took a job at Bayer's health-care unit in 2002, the year Mr. Wenning was named global CEO. It was a turbulent time for the company, which had to withdraw its blockbuster Baycol cholesterol drug after it was found to cause severe muscle weakness and even death. 

 

The drug's withdrawal hit Bayer's profit and share price hard, but Mr. Wenning took steps that got the company back on its feet. People who know them said adversity hardened the men's bond to the company. 

 

Mr. Baumann's Monsanto plan was neither impulsive nor reckless, people familiar with the company said, and it fit into a broader consolidation of the agriculture sector. Some Bayer leaders feared the company itself might become a takeover target if it didn't get bigger, some of the people said. 

 

For months, executives, external advisers, lawyers and scientists had analyzed the possible downsides, including legal and reputational dangers. Challenges to glyphosate were an essential part of the due diligence, some of the people said. 

 

Mr. Baumann's calculation was that the risks were limited and manageable, people familiar with the company said. With a history defending itself in U.S. mass tort cases, Bayer considered itself well-equipped to take on lawsuits against Roundup. 

 

Days after taking over as CEO in May 2016, Mr. Baumann launched an offer for Monsanto. Investors weren't pleased. Some long-term shareholders expressed outrage publicly at not having been approached prior to the offer. They were concerned about the large amount of debt needed to finance the purchase and skeptical about the promised synergies. 

 

Mr. Baumann spent weeks assuaging those concerns, but Bayer's troubles mounted after the August jury verdict in San Francisco. It is appealing the verdict after a judge last month affirmed that Monsanto had acted with malice, but reduced the jury award to the plaintiff to $78.5 million from $289 million. 

 

Bayer says the verdict is a single judgment that isn't binding for other cases due to go to trial. This month, a judge in California granted an expedited trial for a couple suffering from cancer and scheduled it for March 2019, prompting shares to fall again. 

 

"What is crucial now is for Bayer to deliver in all areas," said Markus Manns, a fund manager at Union Investment, which holds roughly 1% in Bayer. "They have to fix problems in the pharmaceutical and consumer health businesses, deliver on promised synergies with Monsanto and turn around image problems there."