Topic: Case Study
The Bayer Control Case
WSJ April 3, 2015
1. Historically, has Bayer used traditional or contemporary control?
2. The decision to spin-off the plastics division: Is Bayer using informational or behavioral control?
3. Which of the following does Mr. Dekkers intend to change: Culture, rewards or boundaries?
4. What financial fact has limited decision making at Bayer?
What strategic priorities is Bayer focusing on?
5. Do a little internet research on co-determination and apply that concept to this case.
Bayer’s CEO Injects a Dose of U.S. Risk-Taking
*** PLEASE WRITE COPY QUESTIONS INTO THE CASE STUDY***
CEO Dekkers prepares for spinoff of specialty-plastics business
By CHRISTOPHER ALESSI
pril 3, 2015 7:27 p.m. ET
LEVERKUSEN, Germany—The company that invented aspirin is reinventing itself—again.
Bayer AG has long been a household name to Americans who associate its iconic cross logo with the painkiller. Few know the 150-year-old German pharmaceuticals giant’s product line also includes brands from Flintstones chewable vitamins to blood thinner Xarelto.
Marijn Dekkers, Bayer’s Dutch-born, U.S.-trained chief executive, is out to change that.
Since he took the helm in 2010, Mr. Dekkers has rocked Bayer’s staid culture by demanding that division heads have marketing backgrounds rather than science pedigrees. He presided over the launch of five new blockbuster drugs and has beefed up the group’s over-the-counter drug business with the $14.2 billion acquisition of U.S.-based Merck & Co.’s consumer-care division.
Now he is preparing to spin off Bayer’s $10 billion specialty-plastics business, part of a larger effort to refocus the company on its health-care and agriculture businesses.
Mr. Dekkers, who is 57 years old and spent 25 years of his career in the U.S., says he is trying to transplant the best of American corporate culture to his overly planned German company. His priorities have been speed, adaptability and more risk-taking.
U.S. companies often operate on an “80-20 rule,” he said in a recent interview, meaning they begin to execute ideas with only 80% of necessary data in hand. “Here, if I would be kind, in the beginning, we had a 99-1 rule. And I’m kind.”
Mr. Dekkers suggested Bayer’s aversion to risk was rooted in Germans’ fear of failing. More broadly, that sensibility explains the lack of a “venture-capital mentality,” which is hurting the country’s global competitiveness, he said.
An avid tennis player, Mr. Dekkers said that while living in Boston, half the friends he played against were venture capitalists. After five years in Germany, he added, “I have yet to meet the first tennis partner who’s a venture capitalist.”
Instead, his tennis partners tend to be lawyers, tax consultants and financial types—“a lot of consultants,” he said, underscoring the apparent dearth of venture capitalists in the German business world.
Bayer’s makeover under Mr. Dekkers is the latest for a company founded to produce synthetic dyes, and which in the 1920s and 1930s was a major player in the I.G. Farben chemicals cartel—a supplier of Zyklon B and other deadly chemicals for the Nazi war machine. Today it is the largest company by market value—with a market capitalization of €114.78 billion ($125.37 billion) —in Germany’s DAX-30 blue chip index and should retain that title after the plastics divestment. Bayer employs 118,000 workers world-wide and took in €42.2 billion in revenue in 2014.
The plastics division, called Material Science, could be spun off directly to shareholders but Mr. Dekkers suggested an initial public offering could be preferable because it would generate cash. He said Bayer’s €20 billion in debt “is not an impossible number” but limits financial “flexibility.” Cutting debt “would always be good,” he said.
Plans to divest Material Science started about a year ago. As executives discussed company strategy, it was clear the business would require big capital investments to stay competitive. “I said, ‘We can just not do this anymore,’” Mr. Dekkers recalled, noting that investing in the health-care or crop-science businesses yields far greater returns.
Crop Science posted earnings before interest and taxes of €1.81 billion last year, while Health Care reported an EBIT of €3.58 billion for last year, boosted by sales of the five new prescription drugs. That series includes Xarelto, which operates under a partnership with Johnson & Johnson in the U.S.; eye treatment Eylea; cancer drugs Stivarga and Xofigo; and pulmonary hypertension drug Adempas, which contributed combined sales of €2.9 billion last year and are projected to reach near €4 billion in 2015.
Material Science—which manufactures polycarbonate, polyurethane and other polymers used in products ranging from laptops to soccer balls—contributed EBIT of only €555 million, down from €1.04 billion in 2007.
Still, some analysts are skeptical that Bayer’s drug pipeline is strong enough to deliver many new products with selling power like the current wave. But Bayer expects at least three new drugs in midstage clinical testing, including two for chronic heart failure, to advance this year. “Strong data is expected” for those trials, said Ali Al-Bazergan, an analyst at Datamonitor Healthcare in London.
Mr. Al-Bazergan said Bayer’s pharmaceutical division is poised to benefit from new synergies as the group becomes a more integrated life-sciences company.
Investors have largely welcomed Mr. Dekkers efforts to streamline Bayer. Its share price hit an all-time high of €145.85 in mid-March, up roughly 60% from a year earlier.
“Dekkers is definitely listening to shareholders,” said Odile Rundquist, an analyst with Helvea SA of the Baader Bank Group, who credits investors with prompting Bayer’s tighter focus.
“Material Science really didn’t fit in a life-sciences company,” said Markus Manns, a portfolio manager at Bayer shareholder Union Investment Privatfonds GmbH.
That strategy fits a growing trend in the drug industry, said Ms. Rundquist, noting that Switzerland’s Novartis AG and the UK’s GlaxoSmithKline PLC have both recently taken similar paths.
Mr. Dekkers said he faced initial resistance to the separation from employee representatives on the supervisory board who were concerned about maintaining the division’s 17,000 jobs. He ultimately won approval from all 10 representatives by guaranteeing current employment levels for a number of years, he said.
The planned divestment comes on the heels of the Merck acquisition, which allows Bayer to expand its nonprescription offerings and stamp the Bayer cross on products ranging from Claritin allergy medicine to Coppertone sunscreen.
Mr. Dekkers’s bet in the Merck deal is that Bayer’s global consumer sales network offers a pipeline for its new American products to other countries, while shoring up the Bayer brand in the U.S.
The brand name is important to Mr. Dekkers, who recalls that when he joined Bayer he thought its OTC offering “was just aspirin.” American consumers, he said, “used to see ‘Bayer’ only on aspirin—the ugly yellow bottle.”
Mr. Dekkers left the Netherlands for the U.S. in 1985, with no plans to return. His American career included stints at General Electric Co., where he currently sits on the board, Honeywell International Inc. and, most recently, at Thermo Fischer Scientific Inc., where he was chief executive.
When he moved to Germany five years ago with a U.S. passport and an American wife and children—who spoke neither Dutch nor German—some Bayer staff worried he was “just an American,” or “somebody who was just interested in shareholder value,” he said.
One former Bayer employee, who was with the company from 2006 through 2014, said some staff had feared the company’s small-town, traditional values would be undermined by a foreigner. “Leverkusen was Bayer town,” the person said, noting that Bayer used to run a local swimming pool—which it stopped doing well before Mr. Dekkers came aboard—and still sponsors a local equestrian club. Bayer sponsors 26 clubs in total, including the professional Bayer 04 Leverkusen team.
The person said initial employees fears have largely dissipated, while Mr. Dekkers has struck a balance between addressing shareholder concerns and respecting company tradition.
For Mr. Dekkers, who is set to step down at the end of 2016 and will likely return to the U.S., the goal of his tenure has been to find the right balance between the American and German business approaches. “Making it more 90-10 than 80-20 or 99-1 is very important,” he said.
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