Activist investor Jeff Ubben urges Bayer to look for external CEO

US activist investor Jeff Ubben has called for Bayer to hire a new chief executive from outside its management ranks as his investment fund on Monday announced a stake in the German pharmaceuticals and crop science conglomerate.

Bayer has suffered from litigation over its weedkiller Roundup and years of shareholder discontent. Ubben’s more than €400mn stake, held through his firm Inclusive Capital Partners, amounts to 0.83 per cent of the company, the San Francisco-based firm said on Monday. Bayer’s shares closed up 2.6 per cent to €51.86 after the Financial Times first reported on Ubben’s investment.

The investment comes at a crucial time for Bayer, as the employment contract for chief executive Werner Baumann ends in April 2024. The German businessman has been heavily criticised by shareholders for his ill-fated decision in 2016 to acquire seedmaker Monsanto, the deal that brought Roundup under Bayer’s ownership.

The $63bn takeover, which faced shareholder opposition from the start, is widely regarded as one of the most damaging acquisitions in recent times.

Ubben, known on Wall Street as an activist who avoids hostile boardroom battles, said in an interview that Inclusive Capital “would prefer an external hire” for the Bayer CEO. “It would be a clean break from the past, which has been internal hires,” he said.

Bayer’s business divisions are performing well, he said. “But the CEO has an obligation — among other obligations — to drive the stock price. The existing management team has been unable to do so,” Ubben said.

Bayer declined to comment.

Ubben suggested that Bayer should consider its structure, pointing to Siemens’ spin-off of its gas and power division and the listing of Volkswagen’s Porsche brand.

At Bayer, “the ultimate break-up of the company is not necessary in our opinion to create value from here. But it has to be on the table,” Ubben said.

Ubben did not comment on any conversations he might have had with bigger Bayer shareholders, but he has received support from at least one of Bayer’s largest investors to push for changes.

“[Ubben] is someone certainly we would strongly consider voting for if he were on the ballot for [Bayer’s] supervisory board,” said David Herro, chief investment officer of international equities at Harris Associates, Bayer’s fifth-largest shareholder, according to Bloomberg data.

“Management has not shown a strong propensity to disrupt the status quo,” he added, noting that the company trades at steep discounts to rivals in each of its three business divisions: pharmaceuticals, consumer healthcare and crop science.

Bayer’s share price has never recovered from its Monsanto acquisition, which at the time was the largest all-cash deal ever attempted and the biggest overseas acquisition of a US company. Bayer was quickly engulfed with litigation costs tied to glyphosate, Roundup’s main ingredient.

While shares in the company are down about 50 per cent since the Monsanto deal closed in 2018, there has been some improvement in its stock price recently after it won at least three cases involving Roundup.

“The wins could help remove the perceived legal headwinds that have weighed on the stock’s valuation for several years,” Morningstar said in a November report.

Ubben said Bayer management needs to look at new options to resolve the glyphosate litigation, including a controversial legal manoeuvre known as the Texas two-step, in which companies split into two separate entities and ringfence legal liabilities in the new entity. In a recent high-profile case, the tactic was used by Johnson & Johnson, the US pharmaceuticals group.

“The Texas two-step, which is what J&J did, well OK, let’s look at that. Does it make sense? Does it apply here?” Ubben said.

Bayer has faced off with activists before. Elliott Management built a $1bn stake in the company in 2019, saying there was more value in the group’s business divisions than the share price accounted for and pushing for it to quickly settle Roundup litigation.

The same year, Baumann and other key executives lost a crucial vote of confidence at the company’s annual shareholder meeting, with 55.5 per cent of investors voting against ratifying the top management’s actions in a symbolic but non-binding vote.

Ubben led several activist campaigns at his former firm ValueAct, which he left in 2020 to start Inclusive Capital.

The new firm, which focuses on environmental and social impact investing, had a significant stake in electric truckmaker Nikola and Ubben defended the company’s founder Trevor Milton after he was accused of fraud by a short seller, saying he had been “misunderstood”. Milton was convicted of fraud in October.