SOLUTION: University of Michigan Bayer Crop Science and International Business Essay

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REV: JANUARY 30, 2020
DAVID E. BELL
DAMIEN MCLOUGHLIN
NATALIE KINDRED
JAMES BARNETT
Bayer Crop Science
Driving to his office on a hot June 2019 morning, Liam Condon reflected that a year had passed
since German life-sciences company Bayer Group finalized its acquisition of Monsanto, the U.S.-based
global leader in seeds and provider of agricultural services. Condon was a Bayer board member and
president of Bayer’s Crop Science division, which, following the Monsanto acquisition, had become the
biggest player in the global seed and agrichemical industry. Bayer’s historical strength was in cropprotection products (insecticides, herbicides, fungicides, etc.), which farmers used to prevent yield
losses caused by pests and other threats. Monsanto was the world’s leading seed seller. For example,
its market share in corn germplasm (seeds and other genetic resources) was over 50% in the U.S., about
45% in Brazil, and about 75% in Argentina. In soybean germplasm, its share was over 40% in the U.S.
and about 20% in Brazil. Monsanto also had a digital agriculture arm, The Climate Corporation
(Climate), which offered farmers advanced digital tools to collect farm data and provided them with
tailored operational advice and product recommendations to help boost yields.
Condon expected the acquisition to produce €1 billion of cost synergies by 2022 (80% in cost of
goods sold and 20% from consolidating revenues) and for Bayer’s Crop Science division to achieve an
EBITDA margin of over 30% by 2022. 1 Strategically, he saw the “new” Bayer as uniquely positioned to
drive the evolution of agriculture into something more like digitally enabled precision manufacturing.
To feed over nine billion people sustainably by 2050, farmers needed inputs tailored to specific soils
and climates, plus actionable information to optimize farming decisions. The Bayer team intended to
enable this by translating big data—from farms through Climate (now part of Bayer), and from Bayer’s
research and development (R&D) operations—into value for farmers, shareholders, and society.
The strategy was already taking root. Climate was expanding its farmer-subscriber network and its
bank of real-world agricultural data. Internally, Bayer’s Crop Science division was digitizing its entire
R&D system, which was expected to radically improve product innovation. The resulting pipeline of
high-value products would be recommended to farmers (along with competitors’ products) through
Climate. The business model put data and innovation at the center of Bayer’s strategy.
HBS Professor David E. Bell, Professor Damien McLoughlin (UCD Michael Smurfit Graduate Business School), Agribusiness Senior Researcher
Natalie Kindred, and Case Researcher James Barnett (Case Research & Writing Group) prepared this case. It was reviewed and approved before
publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company.
HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright © 2019, 2020 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
This document is authorized for use only by JunKai Zhao in BA453 Winter 2021 taught by Beth Hjelm, University of Oregon from Dec 2020 to Mar 2021.
For the exclusive use of J. Zhao, 2021.
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Bayer Crop Science
Condon was enthusiastic about the future for Bayer, even as he recognized that several serious and
delicate merger-related challenges were yet to be resolved. Was his enthusiasm justified? Would Bayer
create value by driving agriculture’s transformation?
Bayer Group
Bayer was founded in 1863 in Leverkusen, Germany, originally focusing on textiles. The firm
developed aspirin later that century and, over time, evolved into a self-described “leader in health care
and nutrition” with the purpose of “Science for a Better Life.” In 2019, Bayer, led by Management Board
Chairman Werner Baumann, comprised 420 consolidated companies in 90 countries and had over
115,000 employees. Its 2018 revenues of €40 billion came mostly from four segments. The
Pharmaceuticals division, with €17 billion in revenues, included a radiology supplies business but
mainly focused on developing and selling prescription medicines through wholesalers, pharmacies,
and hospitals. Bayer’s Crop Science division generated €14 billion in revenues in 2018 and more than
€19 billion on a pro-forma basis, and was expected to become the Group’s largest business. (First-half
2019 sales topped €11 billion.) The Consumer Health division (€5.5 billion) focused on over-the-counter
medicines, cosmetics, and personal care products. Finally, the Animal Health business (€1.5 billion)
made preventive and curative products for pets and farm animals and sold them through veterinarians
and other channels. (See Exhibit 1 for financials, Exhibit 2 for R&D spending, Exhibit 3 for strategic
priorities, and Exhibit 4 for a stock chart.)
The Crop Science Industry
Seeds and Traits
In recent decades, academic and commercial breeders had applied their advancing knowledge of
plant genetics to identify desirable characteristics (e.g., resistance to adverse weather or disease,
improved nutritional quality) and develop enhanced seed varieties that enabled better harvests. Such
innovation was complex; one industry expert called trait development “more complicated than rocket
science.” 2 Firms bred proprietary traits into their own branded seeds and often licensed them to other
seed firms. Monsanto (now Bayer) was the industry leader in licensing seed and trait technologies to
others.
Bayer valued the global market for seeds and traits at about €40 billion in 2019. 3 Of the total market,
grains and oilseeds accounted for roughly 75% of sales. 4 About 40% of sales were of genetically
modified (GM) seeds. 5 In the GM process, scientists made targeted changes to a seed’s genetic
composition to introduce or affect specific traits. Some GM traits enhanced production efficiency,
provided insect protection, or increased drought tolerance in crops. For example, Monsanto developed
a GM trait with tolerance to its Roundup-brand (glyphosate) herbicide and bred it into “Roundup
Ready” seeds. Other GM traits enhanced qualities like shelf-life or appearance; examples included GM
apple varieties (not developed by Monsanto) with reduced levels of the enzymes that caused browning.
In 1996, Monsanto was the first to commercialize GM row crop seeds such as cotton and soybeans, and
it remained the leading GM seed producer. (See Exhibits 5 and 6 for U.S. adoption of GM crops.)
According to ISAAA, a GM crop advocacy group, GM crops were grown in 26 countries in 2018, of
which five—the U.S., Brazil, Argentina, Canada, and India—accounted for 91% of the global GM crop
area. Half the global GM crop area was for soybeans. In addition to the 26 growing countries, 44
countries imported GM crops in 2018. 6 Some countries banned or strictly regulated production of GM
crops and the importation of food products with GM ingredients.
2
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Bayer Crop Science
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Crop-Protection Products
Crop-protection products were applied to seeds, plants, or soils and contained at least one active
substance—a chemical, microorganism, plant extract, etc.—that mitigated harm to crops from
damaging organisms. The main product types were herbicides, insecticides, and fungicides. They
could be preventive or curative; selective (affecting only the targeted pest) or broad spectrum (affecting
all organisms); and function through contact with the pest or through absorption by the plant. The
crop-protection category included synthetic pesticides—chemicals that were the industry’s traditional
product—as well as biologically derived “biopesticides” and plant growth regulators, which
influenced the life process of crops by, for example, promoting nutrient absorption. By some
definitions, the category also included biostimulants, products which promoted specific plant
attributes such as color. Chemical and biological crop-protection products were broadly used in
conventional farming. Organic farming standards emphasized naturally derived forms of crop
protection but also permitted the use of certain synthetic products. 7 Bayer valued the global market for
crop-protection products at about €50 billion in 2019. 8
The Price of Innovation
For seed and crop protection companies, developing and commercializing products was time
consuming, complex, and very expensive. A 2011 study of GM traits found that the process from
discovery to commercialization could take seven to 13 years or more and cost over €100 million. 9 Firms
often sought intellectual property protections for innovations—including novel active ingredients,
product formulations and uses, manufacturing processes, traits, seeds, genomics-related processes,
breeding technology, commercial seed and hybrid products, etc.—which protected their investment.
Market-by-market regulatory approvals took years. An extreme example was Brazil: three agencies
shared oversight of the crop protection market, and it could take eight years to register a new molecule
and four years for a generic. 10 (Brazil was thought to be reforming its system.) The introduction of
innovative products that “stacked” beneficial characteristics added to the cost of R&D and
commercialization.
Growing More With Less
Since the mid-20th century, the increased use of synthetic fertilizers, improved seed varieties, and
crop-protection products had enabled dramatic growth in global agricultural productivity, achieved
more through yield increases than cropland expansion. From 1960 to 2019, the worldwide area of
cropland per capita nearly halved, from 0.43 hectares (ha) (about 1.3 billion ha of cropland available to
feed 3 billion people) to 0.23 ha (about 1.75 billion ha for 7.5 billion people). 11
However, overall yield growth was slowing and existing products had limited potential to raise
productivity—a sobering fact given that the global population was set to grow to nearly 10 billion in
2050, necessitating a 50% increase in gross agricultural output. 12 Developing nations would account
for 8 billion people by 2050 and require 70% more meat and dairy compared to 2016. 13 Urbanization
was a major pressure. As people migrated to cities and raised their incomes, their consumption of
protein, processed food, and overall calories increased. Over half the world’s 7.5 billion people now
lived in cities; in China alone, the urban population could reach 76% by 2025. 14 At the same time, the
effects of climate change, pollution, and land degradation were eroding supplies of freshwater and
arable land.
3
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For the exclusive use of J. Zhao, 2021.
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Bayer Crop Science
Many experts believed that feeding the future population would require a significant expansion in
agricultural production without undermining crucial natural resources. Land restoration and land-use
conversions in places like Brazil could create new land area for farming without clearing intact habitat,
and regions that had not yet adopted modern farming methods could increase productivity by doing
so. But the sum of these efforts was likely to be insufficient without the development of innovations
and processes to accelerate agricultural productivity.
Digital Agriculture
Farmers traditionally relied on experience, their own analyses, and advice from trusted sources—
their generational forefathers on the farm, fellow farmers, suppliers, and agronomic advisors from the
public and private sectors—to make decisions such as what seeds to plant and how to manage threats
from insects, weather, and disease. The results were normally not clear until harvest time and, even
then, it was difficult to discern how much any one factor (plant genetics, environmental factors,
agronomic practices) had influenced the yields of a particular harvest. Digital agricultural tools could
potentially fine-tune the production process by giving farmers useful data in real time to inform
operational decisions, as well as provide feedback on the impact of those decisions.
The spectrum of digital agriculture technologies included sensors, drones, robotics, artificial
intelligence (AI), communication networks, algorithms, predictive analytics, and more. These
components typically functioned in an “Internet of Things” model, frequently or constantly collecting,
integrating, and analyzing data from different points in a system in order to improve its performance.
The range of potential uses in agriculture was wide. One existing application involved using sensors
to monitor soil moisture and integrating this data with weather forecasts to inform irrigation protocols.
Another involved monitoring environmental factors and using predictive analytics to anticipate risk of
pests and diseases; farmers could then adapt their chemical sprays accordingly. (Exhibit 7 describes
the use of data in farming.) “Digital tools will change agriculture tremendously,” said Brett Begemann,
COO of Bayer’s Crop Science division. “I don’t think the industry has an appreciation yet for how
dramatic that change will be.”
Although the field was still emerging, players across the finance, technology, and crop inputs
sectors were staking claims in digital agriculture, with about €6.7 billion invested in “agtech” in 2016
and 2017. 15 “Many players are active in the space, from large multinationals to a plethora of venturebacked startups, all offering single solutions,” said Mike Stern, CEO of The Climate Corporation and
head of digital farming at Bayer. “But even the more established players in the industry face the
challenge of credibility, access to the farmer, and scalability.”
Many industry observers expected the necessary step-change in agricultural productivity to come
not from digital agriculture alone, but from the integration of digital agriculture and broader data
science capabilities with breeding, biotechnology, and chemistry. In a June 2018 interview, Hugh Grant,
Monsanto’s former CEO and chairman, predicted that this integration would drive a “renaissance” and
“unlock that next tranche of productivity.” “[I]t feels like that’s just around the corner,” he said. 16
From Big Six to Big(ger) Four
The acquisition of Monsanto by Bayer—announced in September 2016, approved in June 2018, and
executed that August—capped off a series of seed-and-chemical mega-mergers that began in 2015. Back
then, the industry had been under pressure as farmers cut purchases amid a prolonged slump in crop
prices. Analysts began predicting a wave of mergers, though six firms—BASF, Bayer, Dow Chemical,
DuPont, Monsanto, and Syngenta—already controlled 75% of the crop-protection market and 62% of
4
This document is authorized for use only by JunKai Zhao in BA453 Winter 2021 taught by Beth Hjelm, University of Oregon from Dec 2020 to Mar 2021.
For the exclusive use of J. Zhao, 2021.
Bayer Crop Science
520-055
the seeds market. 17 Each of the so-called “Big Six” was active in chemicals and seeds but stronger in
one area (see Table 1). The general rationale for potential tie-ups was twofold. First, firms could
combine their portfolios to form one-stop-shops for seeds, agrichemicals, and digital services, thereby
capturing a greater share of farmers’ wallets. The Bayer team believed this combination of products
and innovation would unlock new value for growers. Second, greater scale would allow firms to absorb
the growing cost and complexity of developing and commercializing new products.
Table 1
The “Big Six” Sales in 2015 (€ millions)
Firm
Country
BASF
Bayer
Dow Chemical
DuPont
Monsanto
Syngenta
Germany
Germany
U.S.
U.S.
U.S.
Switzerland
Seeds & Traits
Small
€1,277
€1,296
€6,242
€9,144
€2,613
Agrichemicals
€5,848
€8,271
€4,579
€2,772
€4,248
€9,212
Source:
Compiled from James MacDonald, “Mergers in Seeds and Agricultural Chemicals: What Happened?” USDA ERS,
February 15, 2019, https://www.ers.usda.gov/amber-waves/2019/february/mergers-in-seeds-and-agriculturalchemicals-what-happened/, accessed June 2019; Capital IQ; and company documents.
Note:
Conversions to euros for Dow Chemical, DuPont, Monsanto, and Syngenta performed by Capital IQ using the firms’
respective fiscal year-end date.
The first bid came in May 2015, with Monsanto offering to buy Syngenta for about €40 billion. A
survey of Syngenta shareholders found “overwhelming support” for deal negotiations, but Syngenta
rejected the offer, calling it too low and citing antitrust and political concerns. 18 This was applauded
by some, including many U.S. farmers who worried the merger would reduce competition and lead to
higher prices. Seeds and agrichemicals were already major cost items—in the U.S. they accounted for
about 20% of annual expenses for corn, cotton, and soybean farmers 19—and from 1995 to 2015, U.S.
farmers’ average cost of seeds had risen roughly 300% and chemicals about 11%. 20 “American
agriculture is already far too economically concentrated, leaving family farmers and ranchers at a great
disadvantage in the marketplace,” said the president of the National Farmers Union, a U.S. trade group,
in 2015. 21 “When you have that much market power, there’s too much money to be made using your
market power to push the company’s interests forward,” added a member of the group’s board. 22
Their relief did not last. Within 13 months, three deals were announced that, after lengthy antitrust
reviews, reduced the “Big Six” to four: Corteva, a firm created in the merger and spinoff of Dow
Chemical’s and DuPont’s agriculture units; ChemChina-Syngenta, formed when state-owned
ChemChina, China’s largest chemicals producer, bought Syngenta for about €38 billion; a Bayer, which
bought Monsanto for about €55 billion (Monsanto had first tried to buy Bayer’s agricultural unit); and
BASF, which bought the roughly €8 billion in assets that regulators made Bayer sell before approving
its Monsanto purchase. 23 (See Exhibit 8 for “Big Four” 2018 sales and R&D spending.) Condon believed
the table was now set: it was hard to imagine that further major consolidation would be permitted.
a ChemChina sold generic pesticides, partly through Adama, its Israeli subsidiary. It did not sell seeds or do much R&D.
5
This document is authorized for use only by JunKai Zhao in BA453 Winter 2021 taught by Beth Hjelm, University of Oregon from Dec 2020 to Mar 2021.
For the exclusive use of J. Zhao, 2021.
520-055
Bayer Crop Science
The Bayer-Monsanto Marriage
Condon was skilled at the mechanics and diplomacy of acquisitions, having overseen several as
head of Bayer’s Crop Science division since 2012 and in prior leadership roles at Bayer Group’s former
HealthCare unit and at Schering AG. Still, the Monsanto deal was unprecedented. It was the largest
ever acquisition not only for Bayer, but for all of Germany. The regulatory approval process had been
highly co …
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