J&J may have more on overseas shopping list

April 28, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

J&J may have more on its overseas shopping list. The U.S. health giant’s $21.3 billion purchase of Swiss listed, U.S. incorporated 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 non-starter. The target’s shareholders, usually mainly domestic, may not want foreign shares — and might quickly dump them if they got them. Merger arbitrageurs, whose votes can be critical to getting a deal approved by shareholders, generally prefer cash. And for a U.S. acquirer, bringing overseas cash home triggers a tax liability, so it’s better used for offshore acquisitions.

Yet J&J is paying 65 percent of the deal price in stock. One possible reason is that Synthes founder Hansjoerg Wyss and his family foundations own 48 percent of the company. He has pledged at least 33 percent of votes in favor of the transaction, suggesting it is likely to be approved. Wyss may be perfectly happy with J&J shares. Moreover, since he is above the traditional retirement age, taking stock may be preferable for estate tax planning purposes.

As for J&J, the equity component will put less strain on its AAA credit rating. Moody’s affirmed the rating after the deal was announced, but revised its outlook to negative from stable. Assuming J&J hangs onto its top-rated status, it will be one of only a handful of companies that have done so. Keeping it that way may partly be vanity — there’s little funding 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 bring it home. Moreover, sales of everything from over-the-counter medicine to surgical equipment are growing faster in developing countries than in the United States. J&J has had problems with a series of product recalls. On top of that, it has just agreed the largest acquisition in its history. But the transaction structure suggests the company may have further deals in mind.

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