Bayer (CBOE:BAYN) gives master class on how to double down on a bad decision

What did the inventor of aspirin see in the producer of the widely hated (and potentially cancer causing) weed killer known as Roundup? You wouldn’t be the first to wonder.  

German pharmaceutical Bayer (CBOE:BAYN) in 2018 paid $63 billion for Monsanto, an American agrochemical company that’s also known for genetically modified seeds and its strong-arm tactics to get farmers to use them. Ahead of the deal, Bayer was pretty vague about what it actually wanted to do, saying simply that the “strategic rationale” was an “absolutely compelling” opportunity to establish a leading position in the agriculture industry. 

Former Bayer board chairman Werner Baumann was equally nebulous when the transaction closed and said that it would create “significant value” for shareholders. It didn’t, and the company’s shares have lost more than 75% since. The deal has even been called the worst ever in history, especially with litigation in the US connected to claims that Roundup causes cancer. Monsanto had settled over 100,000 lawsuits as of May, 2022 and paid out $11 billion, and there are still 30,000 cases pending.

Besides just being an odd combination of healthcare and fertilizer (and perfect fodder for conspiracy theories), the deal is a great lesson about the so-called “conglomerate discount.” To put it simply, the market tends to value a diversified business less than what its individual subsidiaries would be worth separately. That’s because different industries tend to trade at differing EBITDA multiples, with consumer health and pharmaceuticals commanding higher premiums than agricultural chemicals.

It’s no wonder then that investors have been pushing for Bayer to split itself back up into three units that would focus separately on pharmaceuticals, consumer health and agricultural science. But the company doesn’t seem to be getting the message, with CEO Bill Anderson saying at an investment conference in March that the company was not looking at a breakup in the near-term.

“Our answer is ‘not now’ – and this shouldn’t be misunderstood as ‘never,’” he said, outlining four challenges he said the company faced including a loss of pharmaceutical exclusivities, litigation, high debt levels and a “hierarchical bureaucracy that blocks progress.” “Our priority is on tackling our challenges, boosting performance and creating strategic flexibility. We are convinced that this approach is what’s best for Bayer.”

It’s maybe just a case of cognitive dissonance. People, even new managers, don’t like to admit past mistakes and frequently “double down” on bad decisions rather than take the sour medicine. It’s a puzzling decision for a drugmaker, though, and Bayer shares slid further after Anderson’s latest comments.