Opportunity and Risk Report

Opportunities and Risks Related to the Planned Acqui­sition of Monsanto

In order to prepare the future integration of the Monsanto business, Bayer has initiated a project in which the integration process is being carefully planned in all business areas so that it can be achieved after all regulatory approvals have been received and the transaction has been closed. Our existing risk management methods are being applied here to identify at an early stage possible risks resulting from the acquisition and integration, and to initiate suitable countermeasures as quickly as possible. The integration process will start after the transaction is closed, which we now expect in the second quarter of 2018. Bayer is experienced in successfully integrating acquisitions from a business, geographical and cultural perspective, and in so doing remains committed to its strong culture of innovation, sustainability and social responsibility.

Opportunities

Following the successful integration of the Monsanto business, we see additional opportunities for combining our complementary innovative expertise. Feeding a growing global population in an ecologically sustainable way is among the challenges faced by agriculture, and is one that requires a new approach that more systematically integrates expertise across seeds, traits and crop protection including biologicals. The merger would enable us to offer a broader portfolio of innovative products tailored to meet farmers’ individual needs and the many challenges they face. The range and depth of our research and development activities should make it possible to optimize the various technologies so that we can accelerate the time-to-market of enhanced innovations. We believe that by combining our innovation capacities and our research and development budget, we can more effectively tackle the challenges faced in developing and introducing innovations in agriculture, including longer and more costly development cycles or stricter regulatory requirements. In the medium to long term, we plan to leverage the strengths of the combined R&D platform to deliver pioneering technologies faster and to provide our customers with advanced, customized product solutions on the basis of agricultural analysis, along with supporting digital farming applications. These developments are expected to result in significant and lasting benefits for farmers: from improved sourcing and increased convenience to higher yield, better environmental protection and sustainability. We believe the combined company will be very well positioned to tap the considerable long-term growth potential of the agricultural sector.

Risks

The size and importance of the acquisition result in the following principal risks, which could adversely affect our current or future business, financial position, share price or dividend payments. As Bayer and Monsanto are currently still independent companies, the risks are not assessed through the previously described Enterprise Risk Management process. Some are identified and evaluated as part of the project set up to prepare for the integration, based on available information. The list of risks therefore makes no claim to completeness, nor does the order in which they are listed imply any order of importance.

Requirements for closing

At the present time, the possibility cannot be excluded that the planned acquisition will be delayed or not take place at all. The transaction remains subject to customary closing conditions, including relevant antitrust and other regulatory approvals. The necessary approvals may be refused or could be tied to certain divestment actions or other commitments required by regulators of Bayer and / or Monsanto. Such measures could negatively impact our strategic planning and necessitate substantial adjustments to our operational and financial structures. Furthermore, Bayer may not be able to effect commitments in a timely manner, or at all, or on economically viable terms.

The merger agreement also provides for payment by Bayer of a US$2 billion reverse break fee, in particular, in the event that the transaction has not been closed at the latest by June 14, 2018, because a necessary antitrust approval has not been granted, and Bayer or Monsanto therefore terminates the merger agreement.

Strategic or operational objectives may not be met

Our strategic and operational objectives regarding the acquisition and integration of the Monsanto business are based on assumptions and estimates we have made that may prove inaccurate, including Monsanto’s earning potential and cost structure, the synergy and innovation potentials of both companies and future economic developments and market changes.

Integration-related risks

In addition, difficulties may arise in connection with the acquisition and integration of the Monsanto business that adversely impact our current business or may prevent the expected benefits of the acquisition from being fully realized.

It is therefore possible that combining businesses, processes and workforces as intended while retaining multiple corporate locations could be more complex than expected, partly in view of different corporate cultures and divergent internal control and compliance systems. The merger could also lead to the loss of customers, suppliers, partners, licensors or contacts to other stakeholders.

The possible loss of employees in key positions could have a particularly negative effect. The successful integration and the implementation of a joint strategy require managerial staff and talented employees from both Bayer and Monsanto. Should we be unsuccessful in retaining these employees, for example due to potential uncertainty among employees regarding jobs, company locations or corporate culture, this could impede the efficient integration and leveraging of the two companies’ respective strengths. In particular, we could lose the know-how of these managerial staff and talented employees. This could negatively affect our innovation capability and lead to business disruptions.

The achievement of expectations in terms of the tax and accounting treatment of the transaction will be subject to a future detailed review. In light of this, it is possible that there will be unexpectedly high transaction and integration costs along with further risks and/or charges. It is also possible that we may be forced to recognize an impairment loss on the intangible assets of Monsanto and the goodwill of Crop Science if unforeseen difficulties arise during the integration, if the Monsanto business fails to develop as expected or if other business developments affecting Crop Science occur that have not been anticipated.

Change in the risk profile and in regulatory and legal requirements

We anticipate that our risk profile will change as a consequence of acquiring and integrating the Monsanto business. We could be exposed to additional risks in connection with the combined agricultural business of Bayer and Monsanto that in some cases may not yet have been identified or cannot be conclusively assessed. We may face increased or additional risks as well as further regulatory or legal requirements that are not yet transparent, such as those resulting from Monsanto’s stronger focus on seed, modified plant traits and phosphate mining. Noncompliance with these requirements could result in export restrictions, product recalls or litigations. The rejection or limitation of marketing authorizations would lead to the restriction or discontinuation of marketing for the affected products. Furthermore, a lack of public understanding and acceptance or perceived acceptance of biotechnology and other agricultural products of Monsanto and of the advantages of the pending transaction could damage Bayer’s reputation and consequently negatively impact Bayer’s business or earnings situation. It is possible that the acquisition of the Monsanto business could, among other things, lead to a sustainability rating downgrade. This increased reputation risk exists for the entire Group and could, for example, have a negative impact on regulatory decisions.

Risks from the financing of the planned acquisition

We are also exposed to certain risks from the financing of the planned acquisition. These mainly result from the need to refinance the original acquisition financing, the increase in debt and the possible credit rating downgrade by the rating agencies. Risks also arise from the development of the USD / EUR exchange rate and the interest rate level, as well as from potential difficulties in refinancing the transaction with (additional) equity capital to the extent planned.

Compare to Last Year