What were the worst acquisitions of all time?

The list certainly includes AOL’s purchase of Time Warner, perhaps the stupidest deal of all time, which was responsible for the eradication of US$200-billion of shareholder wealth. It would also have to include other epic duds such as Microsoft’s purchase of Nokia, Google’s purchase of Motorola and Sprint’s takeover of Nextel Communications.

To this gruesome catalogue we now must add Bayer’s purchase of Monsanto, uniting the German chemical and drug giant that gave the world Aspirin and the U.S. agrochemical with the seed giant that turned glyphosate-based Roundup into farmers’ favourite herbicide. Bayer completed the purchase of Monsanto a year ago, paying US$63-billion.

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Today, the market value of Bayer, €49-billion (US$55-billion), is less than Monsanto’s price tag. In the past 12 months, Bayer shares have fallen 43 per cent. In 2018, their return, including dividends, was minus-39 per cent. Bayer executives are under fire, as they should be, and there is ample speculation the company will get broken up.

The takeover wins gold for ill timing. In August, 2018, only two months after the deal closed, a U.S. jury ordered Monsanto to pay US$289-million to a California groundskeeper who claimed that Roundup had triggered his non-Hodgkin lymphoma. Since then, Bayer has lost two more jury trials – one of which came with US$2-billion in punitive damages – and the first overseas glyphosate lawsuit, in Australia, has just been launched. As the jury awards piled up, Bayer’s shares went into the tank. This 155-year-old blue-chip wonder, one of Germany’s national champions, has become one of the world’s riskiest industrial stocks.

Bayer’s managers, led by CEO Werner Baumann, have a lot of explaining to do. So do Bayer’s deal advisers – Credit Suisse, Bank of America and Rothschild. The health concerns surrounding glyphosate did not suddenly emerge after Bayer agreed to buy Monsanto in mid-2016. There had been grave concerns about exposure to glyphosate products for many years and, at the time, some 120 glyphosate-related cases were already hitting U.S. courts.

Today the number of plaintiffs has climbed to an astonishing 13,400, up from 11,200 at the end of January, and the number will keep rising. When you put a poor farmer, groundskeeper or gardener with cancer up against a foreign corporate colossus (Bayer’s revenues last year were almost €40-billion), you can guess where a jury’s sympathies might lie – even if studies suggesting glyphosate causes cancer are far from conclusive.

The factor behind the slaughter of Bayer’s share price is not so much the science; it is the vagaries of the U.S. jury trial system. One legal website this month said glyphosate, and Bayer by extension, faces a “Toxic Tort Timebomb.” You can only wonder whether Bayer’s advisers underplayed, or simply didn’t understand, the severity of the litigation risks when they went to Germany to promote the Monsanto deal.

The miscalculation is all the more severe when you consider that, in March, 2015, more than a year before Bayer revealed its desire to buy Monsanto, the World Health Organization’s International Agency for Research on Cancer concluded that glyphosate was “probably carcinogenic to humans” (the agency didn’t do its own study; it said it reviewed about 1,000 independent studies). That warning would prove a godsend to the glyphosate plaintiffs’ lawyers.

Bayer stands by its claim that glyphosate, which has been in use since the 1970s, is safe. It notes that the U.S. Environmental Protection Agency reports that glyphosate has “low toxicity for humans” when used as instructed and that Health Canada as recently as January said that “no pesticide regulatory authority in the world considers glyphosate to be a cancer risk to humans at the level at which humans are currently exposed.”

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Bayer vows to fight the lawsuits and is appealing the jury awards, calling the US$2-billion jury award in California last month “unhinged.” The next trial starts next month in St. Louis. If it too goes against Bayer, and the punitive damages award is astronomical, the shares will take another beating. So far, Bayer is 0 for 3 in the courts; 0 for 4 would confirm an alarming trend.

At some point, Bayer might develop litigation fatigue and start settling cases. How much that will cost is an open question. Analysts’ estimates vary from a few billion dollars to US$20-billion. The figure could even be higher, to the point that Bayer’s survival might come into doubt. The outcomes of U.S. jury cases, and their appeals, are notoriously hard to predict.

At this stage, it’s impossible to tell whether Bayer, having lost almost half its value since the Monsanto takeover, is a screaming buy or an unfolding horror story. It all depends on whether the company can beat back the jury awards.

What we do know is that Bayer seems to have concluded that there is little long-term future in its Roundup products, even as it continues to defend them. Last week the company announced it would funnel €5-billion into developing alternatives to glyphosate. “While glyphosate will continue to play an important role in agriculture in Bayer’s portfolio, the company is committed to offering more choices for growers,” it said.

Bayer did not buy Monsanto exclusively for Roundup. But its call for glyphosate substitutes seems to signal that it badly underestimated the value of the Roundup portfolio. As it stands, the weed killer is more liability than asset, and Bayer’s Monsanto purchase has entered into the pantheon of all-time worst deals. What is astonishing is that Mr. Baumann still has his job.