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Birds, bees and 9.6bn humans

When on June 7 – after two years of regulatory scrutiny – the acquisition of US agribusiness Monsanto by the healthcare behemoth Bayer was finalised, it was a remarkable moment for Germany’s corporate history.

What attracted attention was not only the record-breaking purchase price of $66 billion in cash, or the threateningly dominant position of the merged companies in the worldwide seed and pesticide market, but also the reversal of history: 70 years after the break-up of IG Farben and its trial in Nuremberg for wartime atrocities, Bayer, one of IG’s constituent companies, emerges as the world’s preeminent life-sciences company.

The ‘Bayer cross’ illuminating the night sky of its hometown Lever­kusen is a symbol for the greatness and horrors of the che­mical industry. The company’s scientists developed Prontosil, the world’s first antibiotic, but also Heroin, a Bayer-trademark. They discovered the poison gas Sarin, spread AIDS through tainted haemophilia drugs and produced synthetic fuel for the Nazi regime and Zyclon B for its death camps.

The corporation used slave la­bour for its WWII factories, conveniently placed near concentration camps, and purchased prisoners of war to use them as lab rats. Yet they also developed many of the world’s most essential drugs, like Aspirin.

Bayer’s acquisition target Monsanto has an even more sinister history. It marketed the carcinogenic insecticide DDT to unwitting farmers and households and produced the herbicide Agent Orange for the US army to deforest 31,000km2 of Vietnam’s jungle – leaving an estimated one million Vietnamese disabled and thousands of US veterans dying of cancer.

Monsanto was a major producer of PCBs, a coolant fluid identified to cause global warming, dumping its by-products for years in landfills and rivers, causing death and destruction, until a $700 million fine put an end to it. And it is still the world’s only producer of white phosphorus used to incinerate the enemy.

Monsanto’s main business is insecticides, genetically modified crop plants and herbicides. One often necessitated the other, as it became unavoidable to genetically enhance the resistance of crop plants against all too effective weed killers. The company’s glyphosate-based herbicide, bann­ed in California for its suspected carcinogenic properties, has been marketed in the US since the 1970s under the brand name RoundUp; and the fitting, gene-manipulated crop seeds are therefore called ‘RoundUp ready’.

Last month a Californian jury awarded $289 million in compensation to a school groundsman who had happily sprayed Round­Up for half his life and who is now dying of cancer. Unfortunately, this happened after Bayer’s spectacular and spectacu­larly expensive acquisition; and even more unfortunate that many more claimants can now be expected to follow groundsman Johnson’s example.

Monsanto’s insecticides, based on neonicotinoids, are blamed for the honey-bee colony collapse disorder. California’s orchard farmers could soon be at the starting blocks too, emboldened that the cash cow now is German.

For us retail investors, corporate raids – when one company buys another – are usually a matter of luck. As the buying company enters a bidding war with competitors and shareholders of the target company, the final result is often a price too high to still justify the underlying objective of acquiring a profitable business. If luck has it and we had invested in the victim, our investment would be boosted beyond our wildest expectations. As share­holders of the attacker we would usually suffer.

In the case of the Monsanto takeover, shares rocketed 44 per cent – a lot, yet not as much as one could have expected. Many investors had doubts that the deal would get cleared by US and European anti-competition authorities. Shares in Monsanto gyrated around $100, while the takeover offer was $128 per share – in cash.

Surprisingly, the deal was approved by the EU on March 21, 2018, and by the US on May 29, 2018, with relative ease and only few conditions attached. For Bayer’s shareholders the deal was, as so often, financially destructive (Rarely will acquisition costs show as value in the years to come. In most cases they are quietly written down.) Bayer stock, at approximately €80 at the time of writing, is now worth half of what it was worth only five years ago. Investors smell the courts drawing blood.

Takeovers, beyond the vanity of their – in mergers richly rewarded – chief executives, could have a variety of plausible reasons. Research advances of the targeted company, patent pipelines, higher profitability or better capital ratios/less debt, a more competitive tax residence, command of protected niche markets, and such. In practice though, the raiding corporation has little clue what else to do with its idle cash or a heavily deleveraged balance sheet and is loath to return the money to shareholders via dividends or share buy-backs (another sorry tale).

The natural thing, investing intensely in one’s own business, became unfashionable over the years as profit margins increased on the back of ever-stagnant sa­laries and emerging market-outsourcing, eroding competition and a dearth of capital investment.

What had attracted Bayer in the case of Monsanto was a sense of future indispensability of its agro business

What had attracted Bayer in the case of Monsanto was a sense of future indispensability of its agro business for a projected world population of 9.6 billion people. After the Green Revolution of the 1960s, very little advances were made in agriculture, which is increasingly threatened by ever higher temperatures and the ensuing desertification and soil erosion.

Sooner or later the world will have a hard time without the engineering of drought-resistant, disease-robust plants, without ever better weather forecasts, permanent soil analysis, satellite-guided farm work, or irrigation optimisation. This is what Monsanto, who bought the weather forecaster Climate Corporation five years ago for a pittance, calls ‘precision planting’.

And this is what had attracted Bayer in the first case. It is a race to be the dominant force in agriculture at a time when soft commodity prices are down and business margins are suffering.

It makes a lot of sense to monopolise 29 per cent of the seed market and 24 per cent of pesticides, if not for now, then for the inevitable future. Only three or four companies dominate agriculture today. Genetically modified (GM) crop plants are not an evil per se; they are a sorry necessity if mankind wants to feed itself in future.

The worrisome side-effects of such a burgeoning monopoly, alas, are the growing dependence of farmers and countries all over the world. GM seeds are patented and demand licence fees. The natu­ral seeds of GM crops (GMCs) are either not reusable at all (terminator seeds) or will yield only meagre results. Every new season Bayer will be in business again.

GMCs will supplant heirloom varieties and shrink biodiversity. They will ruin the margins of more traditional crops, their markets, or both.

Companies like Bayer foster monoculture land-use, their herbicides and pesticides and single-crop fields, endangering insect and birdlife all over the globe.

US politician Bernie Sanders called the merger of the two agro giants “a marriage made in hell”. The truth is more complicated. As in the past, the scientists and managers of Bayer are equally a possible source of good and evil.

The sizeable lobbying efforts of Monsanto in the past, the meddling of their scientists, who are often the most competent in their field, with academic research and environmental findings, do not forebode well. And neither does the fact that, on a shockingly regu­lar basis, their managers and executives take up positions in the very governmental organisations with should control their business, like food safety and environmental agencies.

Yet without their commercial covetousness the future food supply on Earth is in danger too. Strong ethical and commercial supervision is called for. Not Trump’s forte.

From an investor standpoint the only question that matters is the future of Bayer’s share price. As always, the enormous price tag of $66 billion was justified with possible ‘synergies’, meaning that workers will be made redundant, research stinted and capital expenditure cut (Note to self: not a very promising predisposition for the future of food safety). Yet ‘synergies’ of $1.5 billion over ‘three years’ is little consolation when a company, buying at the peak of the market and in times of rising interest rates, is financially over-stretched. Expect little and prepare for losses.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance.

The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

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