Bayer Beware: Monsanto Bid Isn't the First Big Risk the Company Has Taken
Bayer's $62 billion, all-cash bid for Monsanto is a risky proposition, and not because of the difficulty of raising enough cash for the biggest corporate takeover in German history. Rather, the company that once marketed heroin as a cough medicine should be aware of another kind of risk as it prepares to get deeper into the genetically modified crops that many European countries want no part of.
There is business logic to Bayer's bid. In a consolidating agrochemical industry, it makes sense to be the undisputed leader rather than to scramble constantly to keep up with peers.
Raising the cash shouldn't be impossible, either: Bayer plans to get some of the cash from existing shareholders, and it isn't highly leveraged, so its financial advisers, BofA Merrill Lynch and Credit Suisse, have provided it with "highly confident letters for the proposed transaction," according to the company's offer to Monsanto.
There is a different potential problem with the proposed deal. Bayer's recently appointed chief executive, Werner Baumann, ought to recall the history of the firm which he joined fresh out of university in 1988.
In 1898, Bayer made a commercial bet on a substance invented 24 years before by a British chemist -- diacetylmorphine, originally thought to be a non-addictive alternative to morphine. The company found it was also highly effective as a cough medicine for tuberculosis, bronchitis and asthma patients, a less toxic replacement for codeine. Bayer branded it "Heroin" because its employees, on whom the drug had been tested, reported feeling "heroic" after taking it. Almost 200 clinical works about the wonder drug were published in its first years of sales, most of them favorable. Heroin came to account for 5 percent of Bayer's profits.
The American Medical Association approved it for use in 1906, already knowing that it was habit-forming. By 1913, though, Bayer decided to pull heroin off the market because its proven addictiveness didn't justify its use -- and because by then it had a different cash cow, the truly harmless aspirin.
An overwhelming majority of scientists -- as opposed to members of the general public, who hold the opposite opinion -- say they believe genetically modified foods are safe. A report released this month by a special expert committee of the U.S. National Academy of Sciences features pretty much the same conclusion after the committee studied pretty much every shred of scientific evidence available. The conclusion, of course, is qualified: It's next to impossible to give a definitive answer to the question of whether a certain product will shorten a person's life if consumed for years. Yet, for all practical purposes, the use of genes from one organism to impart certain qualities to another one, which is grown for food, doesn't appear to make it harmful to humans.
Science in the 21st century is rather more advanced than it was 110 years ago. Scientists, however, are even now engaged in a dispute -- acknowledged in the Academy of Sciences report -- about the use of a weed-killer that makes it necessary to genetically modify many crops in the first place -- glyphosate, marketed by Monsanto as "Roundup," the most widely-produced herbicide in the world.
Most currently produced GM seeds are resistant to glyphosate. The idea is to make it possible for farmers to spray the crops liberally with the substance so that the weeds die but the crops do not. Last year, the International Agency for Research on Cancer (IARC), an arm of the World Health Organization, warned that there is "limited evidence" of glyphosate's "carcinogenicity in humans for non-Hodgkin lymphoma" and "convincing evidence" that it could cause cancer in animals.
The U.S. and European food testing authorities disputed the conclusion, but a group of scientists told EU Health and Food Safety Commissioner Vytenis Andriukaitis in a letter that the IARC conclusions are more credible than that of the government agencies.
Academic argument, of course, goes right over the head of ordinary consumers, who simply wish to keep safe. That means taking no gambles on products that are the subject of such heated debates; thus the political unpopularity of GMO.
Last year, an EU made it possible for individual countries and regions to opt out of opening their markets to GM crops permitted by the EU. By last October, 19 such requests had been filed. Among others, France, Germany, Italy, Poland and all parts of the U.K. except for England sought the opt-out.
European law requires GMO labeling, and most people in the EU would rather not buy genetically engineered food. So the German government says there are "practically no genetically modified products on the shelves."
Where glyphosate-resistant crops are grown, resistant weeds have sprung up, too -- another fact acknowledged in the Academy of Sciences report.
The situation, at least in Europe, resembles a period in the history of Bayer's Heroin drug when it was still widely marketed and legal -- but there was worry already about its side effects and the tolerance that patients developed to the drug after taking it for some time.
Even if all the academic arguments are resolved in favor of companies such as Bayer and Monsanto, which produce the herbicides and pesticides as well as the seeds engineered to withstand them, the political inertia will be hard to overcome. And if one of the compounds does prove to be harmful to humans, the U.S. legal system may prove as ruthless to the producers as it has been, say, to Volkswagen in the wake of its emissions scandal.
By seeking to become the biggest player in both the seed and plant protection markets, Bayer is setting itself up as the biggest target, too, and inviting the biggest potential liability. In Europe, it's clearly swimming against the tide. In the U.S., nasty regulatory and legal surprises can mean an enormous downside.
Bayer shares were down sharply after the company made its proposal public. They've dropped 15 percent since May 12, when news of the potential bid first leaked. If that doesn't make Bayer feel less heroic about the risky acquisition, a sober political and legal risk assessment should.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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