Trans-Atlantic Flops

The Call of the Wild

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Bayer's bid for Monsanto could turn out the way other German wagers have -- poorly. Clockwise from top left, Bayer CEO Werner Baumann, the CEOs of Deutsche Bank buying Banker's Trust, Daimler buying Chrysler and Deutsche Telekom, which wrote off millions in the early phase of the mobile network boom.
  • Why it matters

    Why it matters

    If Bayer and Monsanto can agree on a price, they could become an unrivaled seed and pesticides juggernaut. But if Bayer pays too much, as other German companies have for U.S. assets, the company could bear the financial burden for years to come.

  • Facts

    Facts

    • U.S.-based agricultural chemicals and seeds specialist Monsanto this week rebuffed Bayer’s $62-billion takeover offer.
    • While the chief executives of both companies have signaled a willingness to negotiate, investment analysts question Bayer’s ability to raise its offer.
    • Bayer’s share has shed nearly 15 percent of its value since the Leverkusen-based company announced its offer for Monsanto on May 10.
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    Audio

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Troubled trans-Atlantic takeovers have become something of a recurring nightmare haunting the captains of German industry.

The latest potential victim is Bayer boss Werner Baumann, who is digging in his heels to press forth with the German chemical and pharmaceutical giant’s blockbuster bid for Monsanto. The U.S.-based agricultural chemicals and seeds specialist this week rebuffed Bayer’s $62-billion offer.

As Bayer now carefully considers its next moves in this high-stakes corporate chess match, recent history shows that avoiding disaster in the Land of Opportunity is easier said than done.

Just ask Ron Sommer, the ex-chief executive of Deutsche Telekom. In 2000, with Mr. Sommer at the helm, the former telecommunications monopolist massively overpaid for U.S. mobile phone company Voicestream, shelling out $50 billion (€56 billion) amid the exuberance of the dot-com bubble. But when the bubble burst soon thereafter, write-downs ballooned into the double-digit billions for Voicestream.

Often painted as the poster child for ill-fated Teutonic takeovers of American assets, Mr. Sommer is far from the only German CEO jinxed by epic fails abroad.

“Only on the surface are Germans and Americans similar.”

Rudolph Houck, New York attorney specialized in trans-Atlantic takeovers

In a similar act of terrible timing, Siemens boss Joe Kaeser in 2014 gobbled up Houston-headquartered oil- and gas-equipment supplier Dresser-Rand for $7.6 billion just as the U.S. shale boom fizzled amid a precipitous global petroleum glut.

Jürgen Schrempp, the former head of Daimler, also knows the feeling of failure. In 1998, he courted Chrysler in a “marriage made in heaven,” which ended in divorce in 2007. Rolf Breuer, ex-chief of Deutsche Bank, overreached for Bankers Trust in 1998, paying around $10 billion for the investment bank – which became a multi-billion-dollar write-down last year. German utility RWE purchased American Water Works Company in 2003 for $4.6 billion – only to divest the deeply devalued asset in a series of tranches during the financial crisis.

The majority of German takeovers of U.S. companies in the past have ended in such disasters. Often the takeover price simply is too high to ever pay off. Sometimes expected synergies never materialize. Other times, cultural or regulatory barriers get in the way.

“Only on the surface are Germans and Americans similar,” said Rudolph Houck, a New York attorney specialized in trans-Atlantic takeovers.

 

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A more favorable outcome, however, may be unfolding for Darmstadt-based specialty chemicals and pharmaceuticals firm Merck. The early returns appear positive for the company’s 2014 purchase of U.S. laboratory equipment supplier Sigma-Aldrich for $17-billion. The deal has buoyed Merck’s share price since the takeover and padded its most recent financial results.

Could Bayer find such chemistry with Monsanto? In the wake of the St. Louis-based takeover target’s characterization on Tuesday of Bayer’s bid as “incomplete and financially inadequate,” some analysts question that. But the two companies have signaled their willingness to negotiate a possible path forward.

In rejecting Bayer’s proposal of $122 per Monsanto share, or a total offer of $62 billion including $8 billion in debt, Monsanto said it was “open to continued and constructive conversations.”

Chief Executive Hugh Grant stated the company still believed in “the substantial benefits an integrated strategy could provide to growers and broader society.” But Bayer’s offer, he added, “significantly undervalues” Monsanto and did not account for “the potential financing and regulatory execution risks.”

In response, Mr. Baumann said Bayer “remains confident” it can address such risks and “remains committed to working together to complete this mutually compelling transaction.”

 

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To investment analysts and other market watchers, that sounded a lot like Bayer is willing to boost its offer. But how much is too much to purchase the producer of genetically modified and conventional seeds?

While most analysts assume that Monsanto will demand at least $135 to $140 per share – which would inflate Bayer’s bid by more than 10 percent – where does the Leverkusen-based company draw the line? Considering the rather critical investor reaction to Bayer’s initial bid, many experts do not believe the company has that much room to increase its offer.

On Thursday, Bayer’s share price dropped 1.72 percent on Germany’s Xetra exchange to close at €85.65 ($95.48) per share. The share has shed nearly 15 percent since Bayer announced its offer on May 10.

Given such sentiment, fund managers view Bayer in a fairly weak negotiating position. Klaudius Sobczyk, head of asset management at independent fund manager PEH Wertpapier, believes a price of $140 per Monsanto share would be hardly palatable to Bayer shareholders.

“Already the $122 was critical,” Mr. Sobczyk said.

Any higher price would be disadvantageous for Bayer shareholders, argues Christian von Engelbrechten, a fund manager at Fidelity. Even the offered price only promised Bayer a 7- to 8-percent rate of return, according to the Fidelity fund manager, significantly below the company’s double-digit target.

“This dilution is negative for Bayer shareholders,” Mr. von Engelbrechten said, noting that the current offer level already is priced into Bayer’s share value. In his view, $122 per share is a very attractive price for Monsanto.

Investment analysts at British Bank HSBC called the planned takeover an “expensive strategic deal” that could limit Bayer’s long-term returns. The HSBC analysts noted the offer valued Monsanto higher than European pharmaceutical firms. HSBC lowered its price target for Bayer to €92 per share from €117.

Ratings agencies S&P, Moody’s and Fitch share that skepticism; all are exploring possible downgrades for Bayer even though they do not expect the takeover bid to result in a loss of Bayer’s investment-grade status. Moody’s, in a statement on Thursday, said the acquisition made strategic sense. But it also carried significant risk for Bayer because of the strong shift in the company’s financial policies through the takeover offer. The ratings agency previously warned the deal “would be a negative for Monsanto’s bondholders,” unless structured as a merger.

Although Bayer plans to finance about a quarter of the transaction volume with a capital increase, Moody’s expects Bayer’s debt to surge to 4.5 times its earnings before interest, taxes, depreciation and amortization. Thus, the deal posed “significant execution, reputational and integration risks.”

But if the nightmarish history of big German-U.S. corporate takeovers is any indication, such risks do sometimes come with substantial rewards – even if investors may have to wait much longer for these to materialize than they originally anticipated.

 

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For instance, more than a decade and a half after Deutsche Telekom’s painfully overpriced purchase of Voicestream, now called T-Mobile, the deal finally may pay off. After posting rising net profits in each of the past three years, T-Mobile, which generated more than $32 billion in revenues last year, sees is fortunes rising again in 2016. Last month, the Telekom subsidiary raised its pre-tax earnings guidance to over $10 billion.

 

Handelsblatt’s Siegfried Hofmann covers the pharmaceutical and chemistry industries. Ingo Narat is an editor for Handelsblatt covering investing out of Frankfurt. Thomas Jahn is one of Handelsblatt’s New York correspondents. Ulf Sommer reports for Handelsblatt on companies and financial markets. Handelsblatt editors Ina Karabasz, Yasmin Osman and Jürgen Flauger also contributed to this article. To contact the authors: hofmann@handelsblatt.com, narat@handelsblatt.com, jahn@handelsblatt.com, sommer@handelsblatt.com

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