Bayer-Monsanto deal ill-advised

Bayer has offered $62 billion (55.5 billion euros) for Monsanto, one of the most-hated firms in the entire world, known mostly for selling controversial products including genetically modified seeds, herbicides and pesticides. In contrast, Bayer, based in Leverkusen in western Germany, is widely seen as a respectable, unadventurous firm specialized mostly in pharmaceuticals. Have Bayer's senior executives somehow persuaded themselves that no reputational damage will accrue to their firm if they take over Monsanto?

Environmental activists showed - not for the first time, and not for the last - what they think of Monsanto last Saturday in 250 cities around the world. There were demonstrations against the company in over 40 countries, ranging from Mexico and Argentina, Canada and the USA, the Netherlands, Croatia, and Switzerland, all the way to China. The protesters aired their concerns with banners, placards, and calls to ban the herbicide "RoundUp," whose active ingredient - glyphosate - is under suspicion of possibly being cancer-causing, though the evidence remains ambiguous and controversial.

Monsanto is also well-known for the harshness of its behavior toward farmers who don't obey the company's directives on the use of its genetically modified seeds. The company is a leader in genetic engineering of crop plants, and has its own public relations department celebrate Monsanto as a leader in the fight against world hunger. But in reality, Monsanto mercilessly persecutes farmers - no matter how needy they may be - with legal actions alleging patent infractions when they have the temerity to set aside part of their harvest as seeds for the next planting season, rather than buying new seed from Monsanto.

Monsanto is brutally strong in the seed business, but it has little to offer in the agrochemicals sphere other than glyphosate, whose patent protection has long since run out, and which faces regulatory challenges due to concerns over its possible toxicity. However, whilst Bayer is strong in agrochemicals, it's weak in two key areas in which Monsanto is strong: Seed sales, and North America. That's the rationale for the merger between the two companies, and it's why Bayer's PR department enthusiastically proclaims that "the acquisition of Monsanto would be a compelling opportunity to create a global agriculture leader, while reinforcing Bayer as a Life Science company with a deepened position in a long-term growth industry."

Three bets against the deal

Folks: if I owned any Bayer shares, I would sell them immediately. There are at least three reasons to think that this deal will go thoroughly wrong. First, the executives in Leverkusen appear to be underestimating the reputational downside of taking over Monsanto, a company which is seen, rightly or wrongly, as quasi-demonic in character by millions of people around the world.

Second, Bayer is at risk of financial overstretch with this acquisition. The plan is for Bayer to put up a fourth of the purchase price in cash, raised in part by selling new shares. That suggests existing shareholders are facing a substantial dilution of their ownership stakes. The rest of the financing for the mammoth deal - 75 percent of the $62 billion purchase price, i.e. $46.5 billion - is supposed to be raised by borrowing the money from banks.

That means Bayer will have to go deeply into debt. This will attract the attention of the ratings agencies, who will presumably re-evaluate the creditworthiness of Bayer downward, since much of the combined company's capacity to take on debt will already be in use, leaving it less room to deal with downside contingencies or new opportunities. A downgrading of Bayer's credit rating will, in turn increase the company's financing costs. In other words: The deal seems too big, too expensive.

A third reason to worry that this corporate marriage may end in tears is the law of series: A slew of mergers have destroyed value as a result of incompatibilities in two long-established corporate cultures, or as a result of divergent corporate politics in rival centers of power. A good many case studies have shown that much-hyped "synergies" expected before a merger can go missing in action in the cold light of corporate reality, and that the costs of corporate restructuring following on a fusion can generate exorbitant costs. A signal example in German-American corporate history that may serve as a warning to Bayer shareholders was the failure of the merger between Daimler and Chrysler in the naughties.

Many Bayer shareholders are - like this author - not enthused by the proposed merger. Since the Monsanto acquisition plan has been in the news, Bayer's share price has been steadily trending in just one direction: Downward.

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