Bayer's Future May Mirror That of General Electric and Daimler

The industrial conglomerate may be facing a slow decline, and the next consequence of this could be the German company Bayer, which produces drugs and crops, seeing a 1.41% decrease in their stock.

‍
Recently, the inventor of aspirin has been the focus of activist investors. Jeff Ubben's Inclusive Capital Partners revealed their involvement last week. Additionally, Bluebell Capital Partners, a European fund that was involved in the removal of the former CEO of Danone, has also acquired a stake.

‍
Despite a 17% surge in its stock price this year, Bayer's shares are still relatively inexpensive. The company's stock is trading at seven times its forward earnings, which is much lower than the 15 times and 20 times forward earnings of the European pharmaceutical sector and Corteva, respectively. Corteva was spun out of DowDuPont.
In 2019, Bayer's expected earnings before interest, taxes, depreciation and amortization are largely derived from the healthcare sector, which accounts for approximately 55%. The remaining 45% is generated from agricultural products.

‍
It is true that Bayer's high debt amount increases the earnings it can generate for each dollar of equity, so its earnings multiples should be lower than its competitors. The company has a debt of around $43 billion, a large portion of which is from its 2018 purchase of Monsanto for $63 billion, which is now more than Bayer's market value. However, if the individual parts of Bayer were valued similarly to its peers, Citi estimates that its shares could be worth 85% more.

‍
The primary reason why investors are not investing in Bayer is due to their potential liability for litigation related to glyphosate, the active ingredient in Monsanto's weedkiller Roundup. After the deal was finalized, Bayer lost a lawsuit that claimed glyphosate causes cancer. With thousands of other cases in progress, Bayer could be facing billions of dollars in damages. Although they have won the last six glyphosate cases and have likely made the necessary provisions, many investors are still hesitant to invest.

‍
In the past, expectations have been raised only to be let down. In 2019, Elliott Management, an activist hedge fund, attempted to convince Bayer to settle rather than fight its legal issues. Additionally, Temasek, a Singaporean sovereign fund with a 3.5% stake, called for the removal of CEO Officer Werner Baumann, the creator of the Monsanto deal, according to Bloomberg. Every time the stock rose, it eventually fell when progress seemed to be slow.

‍
The potential for a change in leadership could make this period distinct from the past. Mr. Baumann's term is set to end in April 2024, but a new CEO could be appointed before then, potentially leading to a shift in strategy. A new CEO could easily capitalize on the sale of Bayer's consumer-health division to reduce debt, a move that has been done before by companies such as Merck, GSK and Johnson & Johnson.

‍
Markus Manns, a fund manager at Union Investment in Frankfurt, expressed his surprise that no action had been taken yet, noting that it would be a clear way to increase shareholder value.

‍
A more divisive division of Bayer, with healthcare and crop science going their separate ways, is a viable option for a new leader. It is widely accepted that the two businesses do not go hand in hand. As for undoing the Monsanto agreement that joined crop protection and seeds, it is likely not an option due to the advantages it provides. It is worth noting that Syngenta, Bayer's Swiss-Chinese competitor, has taken the opposite approach, managing crop protection and seeds independently.
German supervisory boards, which are partially composed of employee representatives, have been apprehensive about becoming takeover targets if the companies they manage become smaller, which could put jobs at risk. However, there have been some notable exceptions that could be indicative of a shift in culture. Siemens has divested from multiple businesses in recent years and Daimler divided into two distinct divisions, cars and trucks, in the past year.

‍
In order to protect itself from a Bayer buyout, the company should focus on increasing its share price. This may take some time, but there are many steps the company can take to achieve this goal.