J.&J. May Have More Acquisitions in Mind
By ROBERT CYRAN and ANTONY CURRIE
Published: April 27, 2011
Johnson & Johnson may have more on its overseas shopping list. The health giant’s $21.3 billion purchase of the Swiss-listed Synthes is its largest ever. A big deal seemed like a way for J.& J. to deploy its $28 billion of cash, largely trapped overseas. But as it turns out, it is paying mostly in stock.
Using equity for an overseas deal is often a nonstarter. The target’s shareholders, often mainly domestic, may not want foreign shares and might quickly dump them. Merger arbitrageurs, whose votes can determine the fate of a deal requiring shareholder approval, generally prefer cash. And for an American acquirer, bringing overseas cash home generates a tax liability, so is better used for offshore acquisitions.
Yet J.& J. is paying 65 percent of the deal price in stock. One possible reason is that the Synthes founder Hansjörg Wyss and his family foundations own nearly half the company. He has pledged at least a third of the votes in favor of the transaction. Mr. Wyss may be perfectly happy with J.& J. shares. Moreover, since he is over the traditional retirement age, taking stock may be preferable for estate planning purposes.
As for J.& J., the equity component will put less strain on its AAA credit rating. Moody’s affirmed it after the deal was announced, but revised its outlook to negative from stable. Assuming J.& J. keeps its top-rated status, it will be one of a handful of companies to do so. Keeping it that way may be partly vanity; there’s little financing cost advantage over a slightly lower rated corporate borrower. But the company seems to think it’s important.
Either way, the result is that after the deal J.& J. will still have a large and growing treasure chest overseas, and the incentive to use it abroad rather than repatriate it. Sales of things like over-the-counter medicine and surgical equipment are growing fast in developing countries. J.& J. has had problems with a series of recalls. It also has just agreed to the largest acquisition in its history. But the deal’s structure suggests the company may have additional deals in mind.
By ROBERT CYRAN and ANTONY CURRIE
Published: April 27, 2011
Johnson & Johnson may have more on its overseas shopping list. The health giant’s $21.3 billion purchase of the Swiss-listed Synthes is its largest ever. A big deal seemed like a way for J.& J. to deploy its $28 billion of cash, largely trapped overseas. But as it turns out, it is paying mostly in stock.
Using equity for an overseas deal is often a nonstarter. The target’s shareholders, often mainly domestic, may not want foreign shares and might quickly dump them. Merger arbitrageurs, whose votes can determine the fate of a deal requiring shareholder approval, generally prefer cash. And for an American acquirer, bringing overseas cash home generates a tax liability, so is better used for offshore acquisitions.
Yet J.& J. is paying 65 percent of the deal price in stock. One possible reason is that the Synthes founder Hansjörg Wyss and his family foundations own nearly half the company. He has pledged at least a third of the votes in favor of the transaction. Mr. Wyss may be perfectly happy with J.& J. shares. Moreover, since he is over the traditional retirement age, taking stock may be preferable for estate planning purposes.
As for J.& J., the equity component will put less strain on its AAA credit rating. Moody’s affirmed it after the deal was announced, but revised its outlook to negative from stable. Assuming J.& J. keeps its top-rated status, it will be one of a handful of companies to do so. Keeping it that way may be partly vanity; there’s little financing cost advantage over a slightly lower rated corporate borrower. But the company seems to think it’s important.
Either way, the result is that after the deal J.& J. will still have a large and growing treasure chest overseas, and the incentive to use it abroad rather than repatriate it. Sales of things like over-the-counter medicine and surgical equipment are growing fast in developing countries. J.& J. has had problems with a series of recalls. It also has just agreed to the largest acquisition in its history. But the deal’s structure suggests the company may have additional deals in mind.