Monsanto Merger Migraine: Safe Or Not, Roundup Is Toxic for Bayer

German multinational Bayer underestimated the risks of acquiring Monsanto. Now, the company is desperately seeking to contain the damage by selling business divisions and cutting jobs. So far, though, none of these moves have helped.

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In Werner Baumann’s world, the truth is one-dimensional, as he likes to put it, based on facts and scientific findings, studies and expert opinions. That’s why the head of Germany’s Bayer Group has no doubts about the safety of glyphosate. He says he would acquire Monsanto, the American manufacturer of the controversial crop herbicide at any time, “without any ifs, ands or buts.”

But the world outside Bayer Group views things differently. A large segment of the public considers glyphosate to be toxic and Monsanto itself to be the epitome of evil. Thousands of farmers with cancer have filed lawsuits against Monsanto’s new owner, and investors now view Bayer shares as high-risk stocks they don’t want to include in their portfolios. This has made the past year one of the most difficult in Bayer Group’s 155-year history. The new year could prove to be even more turbulent, and it’s possible the situation could grow even more perilous for the company.

“Life is always life-threatening,” says Baumann. “In both the corporate and private spheres, we make decisions that entail risks every day.” But of course, “all reputation issues and risks were actively identified and assessed” in the course of the Monsanto acquisition.

It is now clear, however, that the company clearly underestimated them. Bayer’s supervisory board unanimously approved the $63 billion acquisition, the most expensive in German business history.

Shedding Market Capitalization

Bayer has shed more than 30 billion euros from its market capitalization since the acquisition in the summer of 2018, largely because Monsanto lost one of the first lawsuits against it relating to glyphosate. Bayer executives have been almost desperate in their attempts to reassure shareholders: The company is cutting huge numbers of jobs, selling off parts of the company and has even announced the repurchase of its own shares — a step usually taken by companies swimming in money that are unsure how to invest it. So far, though, none of these measures have had the desired effect.

And what happens if other plaintiffs prevail and the company is not able to appeal those decisions, as it can still do in the first lawsuit? Will the stock then become a pawn for speculators and the corporation the target of an attack by activists who plan to break Bayer up because the individual parts could be worth more than the whole?

It would spell the end of a company that is an intrinsic part of Germany and its business history.

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Bayer executives and board members who were responsible for the acquisition must now be second-guessing themseves, wondering if perhaps they weren’t careful enough. And whether they underestimated the legal and reputational risks the acquisition would bring with it. Not to mention whether they allowed themselves to be blinded by the actual and supposed synergy effects.

The man who was partly responsible for Bayer’s restructuring for more than a decade and a half has a giant office in the company’s time-honored former administrative offices in Leverkusen. Werner Wenning served as chairman of the executive board from 2002 to 2010 and he has headed the supervisory board since 2012. During that period, Bayer spun off its chemicals and plastics divisions and floated them on the stock market. Wenning also pushed for the acquisition of Monsanto.

Déjà-Vu for Bayer

Wenning, a serious-looking 72-year-old, is sitting a massive leather armchair, a large pot of tea bearing his signature in front of him. He is at pains to exude calm. “I’ve already experienced so much,” he says, adding that the current crisis has triggered a bit of “déjà-vu,” reminding him as it does of the cerivastatin (Lipobay) crisis in the early 2000s, his first major test as newly installed CEO. The cholesterol-lowering drug had to be withdrawn from the market in 2001 because of its severe side effects and Bayer faced lawsuits from thousands of people affected. For a time, Bayer’s share price plummeted to around 10 euros, and the company’s banks refused to renew its credit lines.

Graphic: Bayer's declining stock price

DER SPIEGEL

Graphic: Bayer’s declining stock price

And yet the situation today is quite different, says Wenning. He paints a picture of a perfectly healthy “life science” company whose pillars include nutrition (crop science) and health, with a very solid balance sheet and a strategy that few analysts would question.

He cannot understand why critics compare the Monsanto takeover with the DaimlerChrysler case, a prime example of a merger that failed because of the delusions underlying it. “We didn’t buy just any competitor,” says Wenning. “We bought the best agricultural company in order to become the leader in this growth market.”

But it is also a company whose image could hardly be worse. Monsanto’s herbicide Roundup, whose active ingredient is glyphosate, is suspected of causing cancer and the company’s business model is also controversial: Monsanto genetically engineers seeds that are resistant to glyphosate, allowing U.S. farmers to use the herbicide abundantly in their vast fields. Given that Monsanto requires customers to purchase an annual license for its seeds, there have also been accusations the company makes farmers dependent.

Upheaval and Consolidation

It was Wenning who, in the third quarter of 2015, instructed the executive board to examine all options for possible partnerships and acquisitions. At the time, the agricultural industry was in the midst of a major upheaval that saw many companies exploring opportunities. It was clear that a few large producers would ultimately dominate the market. “The question was: How are we going to deal with the consolidation in the agricultural market,” Wenning explains.

In the end, Syngenta merged with Chemchina and Dow Chemical with Dupont. Executives at Bayer felt forced to act. “At one point, Monsanto considered merging the two agricultural businesses under Monsanto’s leadership,” Wenning adds. “Our board of directors turned the tables.”

But there’s also another take on the Monsanto acquisition, according to which Baumann’s predecessor, Netherlands-born Marjin Dekkers, examined a possible takeover of Monsanto and rejected it as too risky. At the time, Pfizer reportedly considered acquiring Bayer’s pharmaceutical business in the event of Monsanto taking over the Leverkusen-based company’s Crop Science division.

Wenning and Baumann say there was never any talk of an acquisition by Pfizer. They also deny that Dekkers was against the Monsanto purchase. They say that his surprise departure from the company in April 2016 had nothing to do with the planned takeover. Dekkers has declined to comment on the matter.

On May 10, 2016, Baumann, who had just been appointed CEO by his long-time mentor Wenning, flew to St. Louis and made an offer to buy Monsanto to CEO Hugh Grant. The two agreed to a deal in September.

A Strategy Backfires

But Wenning’s and Baumann’s strategy backfired. After the release of a study by the International Agency for Research on Cancer (IARC), a subsidiary of the World Health Organization (WHO), concluding that glyphosate could possibly be carcinogenic, American attorneys began gathering plaintiffs for a suit against Monsanto. There are close to 10,000 plaintiffs in the class-action lawsuit today.

A verdict, which is still subject to appeal, came on Aug. 10, 2018, awarding $39 million in damages to janitor Dewayne “Lee” Johnson and ordering Monsanto to pay a further $250 million fine. Johnson had blamed his cancer on Monsanto’s Roundup product. A second court affirmed Monsanto’s guilt but reduced the punitive damages to $39 million.

When Baumann appeared before financial analysts and investors in London at the beginning of December during the company’s Capital Markets Day, the otherwise sober manager came across rather plaintive. “Your disappointment is our disappointment,” said the Bayer CEO, adding that he wasn’t at all pleased with the stock’s performance.

Baumann, though, tried to dismiss the most important factor in the decline in Bayer’s share price — namely the ongoing legal disputes with alleged glyphosate victims — with a single sentence. The lawsuits, he said, are baseless and that the company would fight them resolutely.

But neither his optimism nor the measures he declared the company would take were enough to mollify investors. Even shareholders understand that strategies and financial metrics that look solid on paper cannot guarantee that a company will have success.

‘Bayer Clearly Underestimated the Risks’

“In light of demographic developments, it may make sense in the long term to invest in crop science,” says Ingo Speich, head of sustainability and engagement at Union Investment. “But Bayer bought the black sheep of the industry and clearly underestimated the litigation and reputational risks.”

In addition to economic criteria, fund managers like Speich also consider the way companies treat the environment, their respect for human rights and social criteria when making their investments. If there is even a suspicion that a company is willing to hazard the consequences of increased health risks for its customers, such investors react sensitively. Reputational risks are a key factor in making their investment decisions. “Our sustainability funds, through which we invest around 42 billion euros, have sold all their shares in Bayer,” says Speich.

Around 23 trillion euros are invested worldwide each year based on sustainability criteria. It’s a fast-growing market and Bayer has now been cut off from that money flow for the time being. Bayer has also been dropped from the Dow Jones Sustainability Index, a stock market barometer that takes sustainability criteria into account.

The rating agency ISS-oekom, which screens companies for sustainability on behalf of investors and asset managers, had already given Bayer a critical assessment even before its Monsanto acquisition. Now, the share of sales generated with problematic agricultural products is continuing to grow, says Kristina Rüter, the agency’s head of methodology. She’s critical of Bayer executives’ handling of those products in general, but particularly of the Roundup lawsuits. “Bayer does little that goes beyond denying the health risks,” she argues.

Bayer’s reputation has also suffered among more conventional investors, who are critical of the fact that Baumann, Wenning and other executives wanted to push through the Monsanto deal at any cost. “The shareholders weren’t even asked,” says Christian Strenger, an expert in good corporate governance and a member of the supervisory board of the fund company DWS. “The shareholders went to bed with pharma and woke up with agrochemicals.” The result, he says, has been devastating, adding that today, Bayer is only worth as much as it paid for Monsanto.

Strenger criticizes Bayer’s management for having relied too heavily on statements made by a Monsanto management that was very keen to sell, especially when it came to the legal risks. CEO Grant is said to have made $130 million through the company’s sale.

A Symbol of Unbridled Greed

What Bayer also overlooked, or underestimated, is that Monsanto and its herbicide have long been viewed with a significant degree of distaste. In the eyes of many, particularly in France and Germany, Monsanto is the seen as the embodiment of a misguided form of agriculture: contaminated and genetically modified food, monocultures and waning biodiversity.

But Bayer doesn’t seem to want to acknowledge that societal acceptance is important for companies today. “You can’t refrain from making a certain decision just because some segments of the population are critical of it,” says Helmut Schramm.

Schramm is head of Bayer’s German agricultural business. The executive, who holds a doctorate in agricultural science, is a typical Bayer employee — he’s been with the company for 30 years, including many spent abroad in Turkey, England and the United States. In pure business terms, he sees the acquisition of Monsanto as a logical step. It offers Bayer, which has its roots in chemistry, access to a new universe of knowledge and biotechnology. “Together, we’re more innovative,” he says. Schramm says he considers glyphosate to be “less toxic than baking powder.”

He’s convinced that there can be no agriculture without chemistry. He argues that organic agriculture doesn’t necessarily deliver better products and that, in fact, it results yields that are up to 50 percent lower. “How are you going to feed the world with that?”

Ralf Bilke, who is responsible for agricultural policy at BUND, the German chapter of Friends of the Earth in Düsseldorf, considers that to be an immoral position. He says the causes of hunger are completely different, including natural disasters, wars and poverty. Bilke argues that food supplies are particularly safe in places where small-scale farming structures dominate and not mass agriculture, with its high use of pesticides and herbicides.

Despite all the studies and government approvals, Bayer critics like Bilke do not believe in glyphosate’s safety.

He notes that Bayer was only recently forced to admit that it wasn’t hundreds of studies that prove that glyphosate isn’t carcinogenic, but rather just 50. Besides, he claims, the approval procedures are influenced by the companies. In Germany, for example, he claims that the Federal Institute for Risk Assessment adopted passages directly from Monsanto’s papers in its own statement.

But Bilke is also aware that glyphosate’s ease of use and convenience make it attractive for farmers. Not to mention the fact that it is inexpensive.

Claus Comberg is something like a model farmer for Bayer. A man who has seen the world and even worked in the United States, he has been operating an agricultural business together with his son near Düsseldorf for the past several years. He cultivates wheat, rapeseed, barley and sugar beet on around 300 hectares (740 acres) of land. He doesn’t have any livestock. “It’s a nice job,” says Comberg, adding that he and his son can easily take care of the farm on their own.

That is because the style of agriculture employed by Comberg has little connection with the traditional ideas of sowing, harvesting and maintaining fields and meadows. His pride and joy is a collection of farming machinery worth millions. It includes a fully automatic combine harvester controlled by computer and GPS that rolls out of the hall and into the fields on its own, going about its work autonomously. Or tractors with oversized special tires that compact the soil as little as possible. They pull sprayers that, with the aid of micro-adjusted metering devices, only apply the amount of fertilizer and pesticides that the plants actually need. Chemical soil analysis is conducted to determine that amount.

A ‘Dangerous Dependency’

Comberg says that profitable farming isn’t possible in the region without costly machinery, automation and the use of adapted seeds. He says the costs are too high, the areas are too small and the prices are too low. As such, he says, there’s no other choice than to use herbicides like glyphosate.

But even Comberg has a clear position when it comes to the seeds Monsanto produces. “I won’t use genetically modified seeds on my farm.” He says the combination of modified seeds and herbicides designed specifically for them creates a “dangerous dependency on a few major corporations” for farmers. In the United States and Latin America, he says, prices, quantities and agricultural methods used by farmers are virtually dictated by large corporations, with farmers often have little choice because their soils are depleted and there are few remaining seeds that will even grow there. “That’s not the kind of farming I could imagine doing,” says Comberg.

The situation at Bayer has left shareholders angry, broad swaths of the population either skeptical or hostile in their attitudes toward the company and farmers uncertain. Bayer CEO Baumann says he wants to “actively engage in dialogue with all interest groups — those who are supportive and those who are critical.” He says that “only through transparency and openness will we be able to build the trust we need in the long term.”

Bayer Confident It Will Prevail

He knows it’s going to be a tough ride. But he also sees himself as the victim of a political campaign. He says that some NGOs deliberately sought out nutrition as an issue for activism because it provides a good way of generating donations. These organizations, he argues, enjoy high credibility among the populace because they pretend to represent the interests of normal people. He also thinks they’re wrong. “We always place the highest priority on the safety of our products.”

The Bayer CEO is confident the company will successfully challenge the lawsuits in the U.S. The company’s pharmaceutical division has experience with such class action lawsuits and will now apply that expertise in the glyphosate litigation. The Johnson case had been handled by a Monsanto legal department that was relatively inexperienced in such matters.

The next two proceedings are to be conducted in February and March, followed by three or four more in the first half of the year and a handful in the second half. That’s around 10 of 10,000, but Bayer says it will go through all the appeals processes if it has to. “We’re in this for the long run,” says Baumann. In the worst-case scenario, the company could be facing years of negative headlines and billions in potential damages.

Graphic: Bayer's Units

DER SPIEGEL

Graphic: Bayer’s Units

If Baumann’s plan to reduce costs, increase profitability and keep litigation costs down pays off, Bayer’s share price could recover in the medium term. But if it doesn’t? Then “the probability increases that activist investors buy shares in the company and push for it to be broken up,” says Wimal Kapadia of Bernstein Research.

In recent weeks, rumors have been circulating that hedge fund Elliott has bought Bayer shares in order to force the company’s split-up. Elliott isn’t commenting, and Wenning and Baumann both assure that no representative of the activist investor has contacted them so far.

‘Splitting the Company Would Be Risky’

Such a plan would hardly be realistic at the moment anyway. “The integration of Monsanto is complex and splitting the company up at the same time would be risky,” says Kapadia. Even just the question of how the high debts should be distributed between the two units is a delicate one. Besides, there’s another hurdle that makes hostile takeovers in Germany especially difficult: the country’s co-determination rules.

In this case, they’re personified by Oliver Zühlke of Bayer. He studied as a chemical technician and has been with the company since 1985. Today, he’s the chairman of the company’s general works council, which represents employees, and the deputy chair of the supervisory board.

Even the decision to cut 12,000 jobs, a tenth of all employees, was agreed to unanimously by the supervisory board. “That’s very Bayer-like,” says Zühlke. He says the decision was the result of lengthy negotiations and that, ultimately, a solution was found that corresponded with the company’s long-standing “Bayer culture.”

Management assured the works council it would refrain from laying off any employees in Germany through the end of 2025. “People don’t have to be afraid because they are being treated responsibly,” says Zühlke.

He says he considers the threat of lawsuits and the decline in the share price to be temporary phenomena, and that he still considers the takeover of Monsanto to have been the right decision. “If Bayer hadn’t acted,” Zühlke says, “Bayer Crop Science might now be headquartered in the United States.”

Nor, he says, is he afraid of activist shareholders. They would only have a chance where bodies such as the executive and supervisory boards were at odds with each other, he says. In those companies, he notes, they could land seats on the supervisory board and begin doing their destructive work. “That’s out of the question at Bayer,” Zühlke says.

The ranks at the company are still firmly closed. Splitting up the company “would destroy both drivers of value and value,” says supervisory board Chairman Wenning. “Now we have to start fighting again.”

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