Johnson & Johnson, Synthes And All That Cash
5 CommentsBy Ed Silverman // April 29th, 2011 // 11:06 am
Earlier this week, Johnson & Johnson clinched a $21.3 billion deal to buy Synthes, and the move offers a significant strategic advantage. To wit, the health care giant gains a market-leading position in trauma products and becomes a dominant player in the $30 billion orthopedic market - one Wall Street analyst estimates J&J will now have a 28 percent share, in fact.
What’s more, the acquisition helped catapult J&J stock, which has been battered by an ongoing scandal over the circumstances that led to the recall of tens of millions of products - from over-the-counter meds and contact lenses to hip replacement devices and surgical sutures. The episode has prompted congressional hearings; a consent decree; lawsuits; government probes and lost sales (read here ).
Interestingly, the deal was announced on the eve of the annual shareholders meeting which, this year, was something of a forum to judge the performance of J&J ceo Bill Weldon. Although shareholders approved the proposed ceo compensation package, Bill has come under fire for not being more active in preventing and managing the crisis (see this and this).
Nonetheless, Weldon was criticized for an aspect of the Synthes deal, too. J&J is using cash and stock to pay for Synthes, rather than just cash. In fact, about 65 percent of the purchase price will be paid for in J&J shares. And so one Wall Street analyst, David Maris of Credit Agricole Securities, queried 65 institutional investors for their thoughts. The results?
Most thought the cash should have been used differently - 42 percent favored a stock buyback and 23 percent suggested a special dividend would have been better. Similarly, 22 percent believe J&J should have sat on its cash and waited for a better target or time to spend the money in this way. On the other hand, nearly 27 percent believe buying Synthes is better than sitting on the cash. Meanwhile, 45 percent believe J&J can not “buy themselves to greatness,” while nearly 30 percent think the health care giant is “buying growth for growth’s sake.”
We should note that 65 is a small sample and each respondent was permitted to answer more han one question. Consequently, this offers merely a snapshot into the reactions among large J&J shareholders, as opposed to a definitive referendum. Nonetheless, this does suggest that, once again, Weldon and the board are having a difficult time discerning reactions among key constituents.
pic thx to amagill on flickr
Salient point
So 2/3 of institutional investors favor stock buybacks or special dividends over M&A. In other news, the sun rises in the east & sets in the west.
Cassandra
A more interesting question is: Should the FDA go after the shareholders of companies that behave badly? J&J’s shareholders have re-elected the ineffectual board of directors, including Bill Weldon, with approval ratings of over 90%. By doing so they have given the clearest possible signal that they care only about the money, in the firm of (continuously) raised dividends and (momentarily) raised share prices. That may appear logical, but real logic says that one can’t take the money without also accepting responsibility for the methods by which that money is acquired. If shareholders elect and reward board members and CEO’s in an ethical vacuum, it is obvious that this will influence the behavior of the companies. At its most extreme shareholders could regard participation in a company that willingly and knowingly breaks the rules–there have been far worse sinners than J&J–as merely an investment with a high risk but also a high potential return. By targeting shareholders, at least large institutional shareholders, for direct punitive measures, the FDA could influence the behavior of pharma companies far more effectively than by intensive bureaucratic regulation.
a nonie mouse
Cassandra - Don’t the laws surrounding the formation of an LLC or a corporation specifically shield investors from the sort of liability you describe?
Cassandra
I am not a lawyer, but as I understand it the protection offered to investors is limited liability, meaning that they are not liable to lose more than the value of their share of the company. I think that still allows for fining shareholders for some fraction of that value. After all, under the current rules, shareholders are also (supposed to be) affected when the SEC or FDA act against the corporation they own shares in, through loss of value. But we all know that the current practice of fining corporations is ineffective. A small fine just makes bad corporate behaviour attractive, as the profits always outweigh the punishment. A fine that is large enough to make itself felt inevitably has negative side effects on innocent employees and on consumers, as corporations try to pass on the expense. By fining shareholders directly many of these negative side effects could be avoided. And the incentives to hold the corporate leadership accountable become much stronger, as the fines are tangible out-of-pocket losses for shareholders.
Salient point
I believe a nonie mouse is correct. Investor liability is a critical difference between publicly & privately held corporations.