Bayer-Monsanto. A toxic merger?

by Philipp Requat (Requat Advisory Insight)

Although a legal battle over the health risks posed by the world’s most popular herbicide has weighed on Bayer’s share price, it’s too soon to write off the mega-fusion with Monsanto as a mistake

Bayer executives awoke to unwelcome news from California again last week when a U.S. federal jury ordered a subsidiary of the Leverkusen-based agrichemicals company to pay 80 million dollars in damages to one Edwin Hardeman.

Earlier, the San Francisco court had agreed with Hardeman that gardening with glyphosate-based ‘RoundUp’ had constituted a ‘substantial factor’ in the plaintiff’s development of blood cancer in an interim ruling. Bayer’s DAX-listed shares slipped by as much as 10 percent on the day as investors reacted gloomily to the prospect of a spiralling legal dispute. 

Bayer has become embroiled in controversy over the alleged health hazards posed by the RoundUp by proxy after swallowing its U.S. rival Monsanto - the original owner and developer of the wildly-successful weed-killer. Aside from the carcinogenic qualities of the product, the most sensitive issue at stake is whether Monsanto purposefully obscured information about its dangers. During the second phase of the trial, which concluded on Wednesday, Monsanto was found have acted negligently by failing to provide adequate warning to consumers. It was hence deemed liable for 5 million dollars in compensation and 75 million dollars in punitive charges.

In spite of Bayer’s insistence that the latest Hardeman ruling has no bearing on future disputes, the bellwether case could set a costly precedent for the subsidiary and its mother corporation. Thousands of other claimants in the U.S. who argue that their cancers were caused by exposure to RoundUp have filed lawsuits of their own and are currently awaiting trial.  

Monsanto has already lost one similar Californian trial on a district court level brought against it by a terminally-ill high school groundskeeper. Bayer immediately appealed the decision but only succeeded in lowering the damages payable to Dewayne ‘Lee’ Johnson from 289 million to 78 million. Notably, the appellate judge also re-affirmed Johnson’s claims that Monsanto ‘fought science’ with ghost-written scientific papers and attempted to discredit an international health agency which had declared glyphosate a cancer risk. By now, Bayer’s share price has shed around 25 billion dollars in value since the widely-publicized original ruling in favour of Johnson back in August.

It is too early to tell whether Bayer will actually have to stump up the 6 billion dollars in potential RoundUp-related exposure estimated by some analysts. Nevertheless, the vigorous and regular assertions by corporate spokespeople that there is no evidence for links between the herbicide and cancer, let alone corporate attempts to hide such a link from the public, highlight the financial and reputational threat perceived by Monsanto’s new owner. 

Ironically, for most of the past year, a glyphosate scandal as a by-product of the mega-fusion seemed like a relatively nice problem to have in Leverkusen. The largest foreign takeover to date in German history initially encountered significant resistance by international antitrust authorities. Amongst others, the company was forced by EU competition commissioner Margrethe Vestager to divest business units with combined revenue of 2.2 billion euros to domestic rival BASF to get the 63-billion-dollar deal over the line. 

Some questioned at the time whether the corporate tie-up was worth all the effort. Anton Hofreither, the leader of the Greens parliamentary faction in Germany, was particularly outspoken in warning that Bayer’s image in Europe could be tainted by local apprehension about the impact of glyphosate-based products on the environment and human health.  

Yet rejecting such criticism, Bayer CEO Werner Baumann has repeatedly expressed confidence that the merger will prove a cunning strategic gambit. While management was swift to announce that Monsanto’s brand name would disappear from store shelves, he clearly believes that the costs of the merger, including the negative press and legal headaches associated with RoundUp, will ultimately be outweighed by its benefits.

Given a wider trend of falling prices for seeds and chemicals and an ultra-low interest rate environment, even a chemicals behemoth like Bayer is not immune to pressure to consolidate in an industry undergoing deep-seated change. The specific choice of Monsanto as an acquisition target, sometimes depicted as the enfant terrible of the agrichemical scene, is largely due its strong portfolio of ‘digital farming’ products for crop protection. 

Bayer is betting that greater food insecurity caused by continued population growth and climate change in the near future will boost the value of innovative solutions to maximise agricultural yield. Aside from anticipated cost savings in the billions of euros from the merger with Monsanto, Baumann believes that his sprawling chemical-pharmaceutical firm will be handsomely rewarded for seizing an opportunity to become a specialised leader in the rapidly growing biotechnological field of data-fuelled precision farming.

Monsanto’s IT platform is currently considered to be the most sophisticated one in the agricultural world, with applications ranging from the use of drones to monitor crop health to a text-messaging system to alert farmers in Africa to the presence of elephants on their plots. The faith Bayer places in these products as a source of future profits is underscored by its willingness to sell the entirety of its own digital farming unit to BASF in order to secure regulatory approval for the merger.

The RoundUp trials are a PR debacle which have cut the honeymoon phase of the Bayer-Monsanto marriage abruptly short. In the bigger scheme of things, however, the 6 billion dollars which the nascent agrichemicals giant might have to set aside for cancer sufferers could one day look like a paltry sum. 

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