For Bayer and FedEx, Deal Hindsight is 20/20

When an industrial company does its largest deal ever, run the other way. That is my very unscientific rule of thumb, but it’s born from experience: Siemens AG’s $7.6 billion takeover of Dresser-Rand Group Inc. came right as oil prices crashed; General Electric Co.’s acquisition of Alstom SA’s energy assets was a disaster; the damage done by Honeywell International Inc.’s ill-conceived Allied Signal merger took years to fix. And now we’re learning more about just how badly Bayer AG miscalculated in its $66 billion takeover of Monsanto Co. last year and how much of a mess TNT Express was when FedEx Corp. acquired it in 2016. Both deals were the companies’ largest.

First, Bayer. A second U.S. jury this week linked Monsanto’s Roundup weed killer to cancer, crystallizing the likelihood that Bayer will face substantial legal liabilities as it battles some 11,200 outstanding lawsuits. A French court in January revoked the marketing clearance for a version of Roundup, citing cancer risks, and Germany’s Environment Ministry laid out a plan in November for a step-by-step retreat from its main ingredient, glyphosate. Bayer continues to insist that science shows glyphosate is safe, but the second phase of trial will focus on whether Monsanto in fact knew it was dangerous and used expert opinions to improperly sway public opinion. Evidence includes damaging emails. If you use the $78.6 million in damages awarded to a groundskeeper last year in a separate California case as a benchmark, the liabilities from all of those lawsuits would easily swamp Bayer’s market value. Most analysts think a settlement of $5 billion to $6 billion is more likely.

If that’s the worst of it, then the nearly $40 billion wipeout in Bayer’s market value since the Monsanto deal closed in June seems overdone. But the snowballing criticism of Roundup risks undermining the strategic logic of a combination designed to capitalize on growing demand for productivity-boosting crop-control products. While Baader Research estimated last year that glyphosate accounted for only about 2 percent to 3 percent of Bayer-Monsanto’s combined earnings, Monsanto’s seeds modified to resist the weed killer could also become less valuable. Bayer recently won EPA renewal for another product based on a different Monsanto herbicide that’s meant to treat weeds that have grown resistant to glyphosate, but faces ongoing legal challenges that could dent its reported $1 billion in annual sales, too.

Then there’s FedEx. The package-delivery company cut its fiscal 2019 guidance yet again amid slumping demand in the European market it bet big on with the $4.4 billion takeover of TNT. After getting sidetracked by the fallout from a 2017 cyberattack on TNT’s antiquated IT systems, FedEx said this week that it now expects cumulative integration costs to exceed $1.5 billion and for the work to stretch into fiscal 2021 – or up to five years after the deal’s close. The company touted the fact that as of Feb. 6, it can now inject legacy FedEx intra-European shipments onto TNT’s road network and improve transit time by at least one business day on average on 40 percent of routes. Hooray?