Bayer has to pay out $81 million in damages to a man who claims the Roundup weedkiller caused his cancer, a jury ruled Wednesday. In a similar ruling last year, the sum was $289 million, reduced to $78 million on appeal. Since that first verdict, Bayer’s shares have lost 40% of their value—and there are still around 11,300 such cases waiting in the wings.
All of which begs the question: was it foolhardy for Bayer to buy Roundup maker Monsanto?
Some, including activist Bayer shareholder Christian Strenger, say indeed it was. Strenger has filed a motion of no confidence in Bayer’s board ahead of the German giant’s annual general meeting next month, and it includes a litany of complaints about the “almost complete failure to deliver the key objectives presented by [Bayer CEO Werner] Baumann in May 2016 for the Monsanto acquisition.”
But before looking at Strenger’s argument, let’s rewind to examine the rationale behind that $66 billion whopper of a deal.
Why Bayer bought Monsanto
Bayer bought Monsanto as part of its reinvention as a life-science firm with a focus on health and agriculture. At the time the deal was proposed in 2016, the competitive landscape of the agricultural-science space was shifting dramatically—Dow and DuPont were merging, and so were ChemChina and Syngenta. Bayer wanted to become a bigger player in seeds and genetically modified crops, and Monsanto offered just that.
Monsanto was also an early mover in the burgeoning “digital agriculture” arena, explains Sanjiv Rana, the editor-in-chief of Informa crop protection analysis outfit Agrow. “The acquisition gave Bayer an advantage in the field,” he said.
But there were problems from the get-go.
Firstly, the deal raised antitrust concerns in the U.S.—it only went ahead after the companies agreed to the Justice Department’s demands that Bayer sell off its Roundup-competing Liberty herbicide business, along with its cotton, canola, soybean and vegetable seed businesses, various research and development projects, and Bayer’s own digital agriculture business. Chemicals company BASF was the lucky buyer, paying $9 billion.
And then there was the glyphosate issue. The International Agency for Research on Cancer (IARC) an agency of the World Health Organization (WHO,) issued a report in early 2015 that said the pesticide, which is Roundup’s active ingredient, was “probably carcinogenic to humans.” A second report from the WHO and United Nations then clarified that glyphosate was “unlikely to pose a carcinogenic risk to humans from exposure through the diet.” This was in line with other findings on the matter. However, eating Roundup residue is one thing and spraying the stuff over many years—as both successful plaintiffs did—is another.
The IARC report, which established that glyphosate was probably carcinogenic, was partly based on studies of farmers who had been exposed to the substance. So why have regulators not cracked down? “Many regulatory agencies rely primarily on industry data from toxicological studies that are not available in the public domain,” says the IARC in a Q&A on its study. “In contrast, IARC systematically assembles and evaluates all relevant evidence available in the public domain for independent scientific review.” In essence, the IARC, not a regulatory authority itself, looked at different sets of data from those considered by regulators, avoiding industry studies that it couldn’t verify were accurate.
Strenger, who is a prominent German governance expert, told Fortune the most important question as the cancer cases proceed is whether “[Monsanto’s marketing operation did] too little in terms of warning signs.”
“Mr. Baumann from Bayer always refers to 800 opinions that glyphosate is a safe product,” said Strenger. “But the big issue is how was it applied, and was it sold properly with sufficient warning signs.”
Strenger argues in his no confidence motion that Bayer underestimated the legal risks of the 3,600 outstanding glyphosate-related lawsuits that were already underway before the deal closed, in part because Monsanto was prohibited by the U.S. Department of Justice from giving Bayer full details of all the cases.
“[Bayer] should have insisted,” he said. “These were not military secrets. Bayer should have told Monsanto, ‘Either you get the DOJ to permit disclosure, or we’re not going to proceed with the transaction.'” However, Strenger suggests, after two years of dealing with issues such as the deal’s antitrust implications, Bayer’s board may have been tempted to be “lenient with a proper analysis of the legal situation.”
Bayer rejects that notion. A spokesperson insists that, in the run-up to the Monsanto acquisition, Bayer’s board “performed this risk assessment based on an information and update process which was in all respects adequate for an acquisition of such a scale.”
“Of course, in the context of the acquisition, the board of management also reviewed the risks connected with Monsanto’s glyphosate business,” the spokesperson said. “This risk assessment clearly showed that, when used as directed, the products of Monsanto containing glyphosate are safe. Based on the views held by regulatory authorities worldwide and scientists, the board of management assessed the legal risks in connection with the use of glyphosate as low.”
As for Strenger’s point that thousands of lawsuits were already underway before the deal’s mid-2018 closure, the spokesperson argues that only 120 lawsuits had been pending at the time of the merger agreement in September 2016.
Strenger also claims that Bayer underestimated the forced divestitures, saying the sales cut the projected deal synergies by 20%. “Most divestments were generally expected,” said Bayer’s spokesperson. “Some additional divestments were not expected.”
‘Hard to foresee’
In the view of Agrow’s Rana, there “really isn’t much of a case against Monsanto” as regulators hadn’t identified Roundup as being risky, and the company therefore wasn’t obliged to put cancer warnings on Roundup packaging, “but juries get swayed by emotions and that’s what has happened in both cases.”
“So, although a thorough due diligence must have been done by Bayer, it would have been hard to foresee the emotional impact on the outcome of these cases,” he said. “The upcoming annual general meeting will likely be a tumultuous one, but I doubt a no-confidence vote would get through.”
To this point, Bayer’s spokesperson noted that “in its latest meeting, the supervisory board expressly confirmed again that it unanimously supports the board of management and its strategy, including the acquisition of Monsanto.”
As for the potential liabilities, Rana noted that, in the first successful Roundup lawsuit—the one involving groundskeeper Dewayne Johnson—the judge assessing the jury’s damages verdict ended up cutting the damages down to less than a third.
“When judges come into the picture, the decisions are likely to be less emotion-driven,” Rana said. “Bayer just might see it through even though it seems to be facing insurmountable odds at present.”
Evaluating the Bayer board’s judgement ultimately comes down to that: how badly the lawsuits end up hurting the company. Pointing to the share price losses that have taken place since the Monsanto takeover closed last June, Strenger said “the market seems to assume losses in the double-digit billion area.” But with so many suits lined up, it’s hard to know for sure what the final tally will look like.
“From a legal perspective, one has to keep in mind that management’s accountability must be based on the facts that were available at the time the decision was made rather than on the information available with hindsight,” said Andreas Cahn, executive director of the Institute for Law and Finance at the Goethe University in Frankfurt.
But from a business perspective, it’s all about the outcome.