By Robert Steyer
Of The Post-Dispatch

Nov. 14, 1999
Edited by Virginia Baldwin Gilbert

It's becoming clear that Robert B. Shapiro's vision exceeded his company's coffers and Wall Street's patience.

Investors, analysts and some Monsanto Co. insiders believe Monsanto's chairman soon will make a deal that will dramatically alter his goal of engineering a life sciences company. A deal could come within a few weeks or a few months.

Shapiro didn't invent the term "life sciences company," which describes the melding of nutrition, biotechnology, crop protection and medicine under one corporate roof.

But he has been the most passionate proponent, even as more well-heeled competitors have vacillated.

Now, it appears Shapiro may wave the white flag with some transaction -- merger, sale, spin-off, joint venture -- that will cut back on Monsanto's ambition.

"I think the old concept of life sciences is on life support," said William Fiala, an analyst for the Edward Jones brokerage.

Fiala and other analysts, who have followed Monsanto's transformation from a traditional chemical company, said Shapiro is being pressured by some events beyond his control.

He is being roughed up by the quick-score behavior of big- time money managers who control about 80 percent of Monsanto's stock. "Once that pressure starts, you can't afford to have the institutional investors dumping their stock," said a former Monsanto executive who requested anonymity.

"Many people look at life sciences as providing some sort of short-term dividend, but that's never been the case," said Sano Shimoda, president of BioScience Securities, in Orinda, Calif., an agribusiness research firm. "Life sciences is a long-term strategy."

Several bigger companies -- such as DuPont and Novartis -- have the money to carry on the life sciences concept if Monsanto gets carved up. But these companies still view life sciences as a collection of components rather than as a unified business that weaves together all of the units.

"Monsanto is the professor; the other companies are the students," Shimoda said. "Monsanto is the leader in creating this vision, and it put its money where its mouth was."

But Monsanto gagged on its heavy spending -- about $8 billion worth of transactions between 1996 and 1998, including one deal still pending.

Shapiro's desire to buy seed companies stretched Monsanto's balance sheet and weakened its stock price, despite big revenue infusions from the herbicide Roundup and, this year, from the arthritis drug Celebrex.

Seeking to finance his vision, Shapiro talked to many drug and chemical companies before embarking on an ill-fated merger plan with American Home Products Corp. last year.

Monsanto is talking to many companies now, and Shapiro has often said that everybody in this business talks to everybody else.

"This time, it's for real," said a former Monsanto executive.

After the American Home merger collapsed 13 months ago, Monsanto moved quickly to create a financial recovery strategy. It issued stock and debt and started divesting assets. Monsanto's credit ratings barely budged downward, but investors continued to snipe.

Meanwhile, Shapiro failed to build the enhanced-nutrition component of his life sciences dream. While Monsanto's president, he was the point man for the $1 billion purchase in late 1995 of Kelco, a maker of food ingredients.

Kelco never blossomed. Monsanto almost shut down its alginate business - food ingredients derived from brown seaweed - before selling it at a bargain price. The bigger part of Kelco, the biogums ingredient business, is for sale. So is the rest of the consumer products division, including the artificial sweetener NutraSweet.

Monsanto's stock price has never reached the levels it enjoyed during the American Home courtship.

The stock has climbed about 20 percent in little more than a week thanks to rumors of impending deals and to a three-way slugfest among giant drug companies.

Investors are betting on a new round of drug industry consolidation, figuring Monsanto will be engulfed by it. Monsanto has been urged by some analysts to sell or spin off its drug subsidiary, G.D. Searle & Co. in the name of shareholder value.

At the same time, several Monsanto peers are pulling back on the agricultural part of their life sciences strategy.

Novartis, DuPont and American Home are firing employees in their crop protection divisions. American Home, Novartis and AstraZeneca are hinting a t sales or spinoffs of their crop units.

As competitors struggle, Monsanto's farm products division is outperforming them during a worldwide agriculture slump.

Given the complications in the food and farm arenas, analysts can't agree on what Monsanto will do next. What deal makes economic sense, supports research and rewards shareholders?

* Merging with DuPont or Novartis would trigger anti-trust alarms; the deals would put a lot of seeds in few hands.

* Spinning off Searle would fetch a nice price, but would leave Monsanto vulnerable as long as the farm economy remains depressed and biotechnology is controversial.

* Merging with a drug company would not solve the farm or biotech issues. Pfizer, for example, likes Searle but has no interest in agriculture.

* Resurrecting an American Home-type deal is always possible. The merged company could then spin off the agriculture units as a separate entity - but it might not yield much of a price.

There are plenty of reasons - unrelated to drugs or crops - why analysts expect Monsanto to make a big deal soon. Accounting rules are expected to be revised by the end of 2000, repealing or scaling back existing rules that offer tax advantages for mergers.

Analysts also believe that Shapiro, 61, doesn't have a successor to forcefully promote his vision. They say Monsanto's president Hendrik Verfaillie is a competent manager with strong agriculture expertise, but they say he is not the ringmaster for the multi-faceted life sciences show.

"An independent Monsanto is gone because the former vision as we knew it is gone," said a long-time Monsanto watcher on Wall Street. "There's not enough glue to hold life sciences together under one company. You can expect more alliances in the future for pieces of life sciences."

Still, some people cling to the notion of Monsanto as an independent company. "Sure, it could happen but there would be tremendous risk," said Shimoda, the agribusiness analyst.

The risk is a depressed stock price and prospects of shareholder suits. The risk will remain as long as protests against biotech crops create uncertainty among consumers, farmers and investors.

Monsanto has been staggered by the virulent reaction of European consumers, politicians and, ultimately, food company customers against genetically engineered foods.

Overseas protests, foreign food labeling laws and Europeans' vows to avoid bioengineered foods have worked their way back to the United States. American farmers, who have embraced biotech crops, now wonder how much cotton, soybeans, canola and corn they should buy for the next planting season.

Even if biotech crops help them cut costs of using chemicals to kill weeds and insects, they don't know if they can find adequate markets for these crops. Despite efforts by trade groups and companies to alleviate these fears, experts say many farmers will wait longer than usual to make seed-buying decisions this year.

Right now, Shapiro's vision is in the hands of the highest bidder. Analysts expect Monsanto could fetch a price of at best $55 a share, or about $10 a share better than Friday's closing price.

Many people who question some of Monsanto's tactics and fret about its stock price still find time to praise Shapiro's vision.

"The manipulation of food and the work with genetics just may be way too early (for investors to embrace)," said Alex Hittle, who follows the life sciences industry for A.G. Edwards & Sons. "Twenty years down the road, we might take the pieces of Monsanto and put them back together again."