NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, September 19, 2016

In the wake of its $66 billion-acquisition of Monsanto, Bayer risks starving its lucrative drugs business of the resources it needs to grow.

Funded with a combination of debt and equity, the deal announced Wednesday will transform Bayer into the world’s biggest supplier of seeds and pesticides. It’ll also leave the German company with little scope for acquisitions to boost its most profitable business: pharmaceuticals. That could hamper the unit’s growth as patent expiry looms for its best-selling heart medicine.

“It obviously becomes a different company now,” said Andrea Williams, head of European equities at Royal London Asset Management Co., which manages 1.3 billion pounds ($1.7 billion) in European stocks, including Bayer shares. “The danger is the pipeline is somewhat empty, so they probably need to do some deals.”

Bayer will largely rely on borrowed funds to pay for the deal, but says it’s committed to maintaining its current credit rating in the long term. That combination means it’ll need to focus on paying down debt, not doing more acquisitions to boost its pharmaceuticals and consumer-health businesses, Jefferies Group analysts wrote in a report.