With the benefit of hindsight, Bayer (BAYGn.DE) paying $62 billion to buy Monsanto a decade ago was a good deal. For everyone but Bayer, at least. In the process of underestimating well-flagged legal risks that wound up destroying massive value for its shareholders, the German pharmaceutical and chemicals giant rewrote due diligence playbooks that should be helping companies worldwide avoid similar pitfalls.
It didn't take Nostradamus to prophesy an M&A disaster. When news of Bayer's takeover plans first surfaced in May 2016, Breakingviews wrote a series of columns questioning the financial logic while flagging multiple concerns about swallowing the U.S. seed producer. The company's own shareholders also made their skepticism clear, lopping off some $15 billion in market value, roughly the same amount as the premium being offered to owners of Monsanto stock. Bayer CEO Werner Baumann nevertheless assured them that Monsanto would "flourish as part of one of the most respected and trusted companies in the world."
Two months after Bayer completed the biggest acquisition in its 163-year history, the first verdict landed. Fast forward to today, and Bayer is worth less than what it spent to buy Monsanto. All the value accrues instead to other acquirers in high-risk industries where litigation can run wild.
Monsanto signaled Baumann’s big Bayer debut. He unveiled the all-cash bid less than a month after becoming CEO. Despite the suspicions, there was also plenty of appeal. Combining the two businesses offered Baumann a chance to create an agricultural titan, flogging Monsanto’s modified crop seeds and farming technology alongside its own pesticides. The target also looked reasonably priced by one measure. Before Bayer's interest broke into the open, Monsanto was trading at a little more than 17 times forward earnings, one of its lowest multiples since the depths of the financial crisis.
It turns out there was good reason for the depressed valuation. A year ahead of the deal announcement, the World Health Organization's cancer research arm deemed glyphosate, the active ingredient in Roundup, as “probably carcinogenic.” This classification would have been a cue to start drafting lawsuits against Monsanto’s crown jewel. In 2018, a California jury soon ruled in favor of a school groundskeeper who had alleged that the product caused his cancer, and ordered the company to pay $289 million in damages, later reduced to $21 million. It would be the first problematic case of many.
Bayer has argued it could never have foreseen the surge in litigation. A special audit in 2020 confirmed that the company's due diligence procedures for M&A transactions were appropriate, a spokesperson told Breakingviews. It also points to countless regulators that believe Roundup is safe. The U.S. Environmental Protection Agency said glyphosate is "not likely to be carcinogenic to humans." The European Food Safety Authority and the European Chemicals Agency reached the same conclusion, renewing the chemical's approval and finding no justification for a ban.
It wasn't enough to shield Bayer, which already had paid more than $10 billion to settle legal claims. As of February, the German group said its litigation provisions are nearing $14 billion.
There are ways, however, that Bayer could have diluted some of the deal's most poisonous elements. Given that potential medical concerns were already circulating, Baumann would have been justified in trying to negotiate a lower price. Enlisting advice from top U.S. law firms specializing in mass torts to work through worst-case scenarios also might have flagged the extent of the risk. There was plenty of precedent for doing so.
The legal bill for BP's Deepwater Horizon spill more than tripled to $65 billion after a court linked restitution to the British energy giant's revenue. Big Tobacco agreed to a roughly $200 billion U.S. settlement in 1998 to resolve runaway litigation. What distinguishes Bayer's woes from these, and other, similarly large legal bills is that they resulted from a corporate takeover.
Baumann could have sought extra financial protection. Bayer is headquartered in Germany, home to industry titans Allianz and Munich Re, either of which might have steered him toward buying adverse-development coverage, a top-up on existing liability insurance designed precisely for runaway legal troubles. It would have been pricey, perhaps even requiring a consortium of underwriters to piece together the policy, with a fee that one broker estimated at an extra 15% to 20% of the baseline coverage. It also probably would not have absorbed Bayer's total litigation expense either.
Enlisting actuaries would have provided other ancillary benefits. For example, green-visored math and statistics whizzes might have worked out the size of a potential threat based on the number of Roundup customers. Moreover, mock trials could have helped illustrate how sympathetic cancer patients are to juries and the negative public perceptions of chemical producers such as Monsanto.
Paradoxically, without Monsanto, Bayer's business would have stagnated. Since 2018, net sales of the crop science division have increased on average by nearly 2%, a better performance than the pharmaceuticals unit where growth has been flat. If the litigation risk had been offset or Baumann had paid less, the deal might have been spared its prominent spot in the M&A Hall of Shame.
If they're smart, dealmakers far and wide will have seen Bayer's plaque and be using it as an opportunity to avoid securing one of their own. Any company whose products touch millions of lives, such as food vendors Danone, Kraft Heinz and Nestle, as well as drugmakers, auto-parts manufacturers and others are vulnerable to crippling litigation. Bayer learned the hard way that when buying a business can both feed the world and fill a courtroom, there's always more merger due diligence to be done. Everyone else at least now has an updated checklist.
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