For J&J, Resistance to a Breakup Proved Futile
(Bloomberg Opinion) -- Now it’s Johnson & Johnson’s turn to break itself up. The $435 billion U.S. pharmaceutical behemoth is to carve out its consumer-health arm, leaving behind a more focused drug-discovery and medical-devices business. The idea of spinning off the company behind Listerine mouthwash and Band Aids has been in the air for some time — because it makes eminent sense.
The pressure to end longstanding conglomerate structures is clearly proving hard to resist. J&J’s move follows General Electric Co.’s decision to separate into three units. Japanese industrial icon Toshiba Corp. is doing the same. In pharmaceuticals, J&J’s European peers stole a march: GlaxoSmithKline Plc is working on a spinoff of its own mammoth consumer business (a joint venture with Pfizer Inc.), while Novartis AG has been gradually hiving off units — including a stake last week in rival Roche Holding AG — that weren’t core to its scientific mission.
From an industrial perspective, there are no compelling synergies between J&J’s consumer-health and the rest. True, there is a theoretical financial argument that the more reliable cash flow from consumer products helps fund research and development across the entire company and cushions shareholders from the impact of patent expiries. But J&J’s pharma business is of such size and scope that this doesn’t really convince.
Indeed, as Bloomberg Intelligence argues, the most logical future would be to fully separate the pharma business from the devices side too. If GE can split into three, why can’t J&J?
Then there are the shareholder-value benefits. A pharmaceuticals business shorn of consumer healthcare offers undiluted exposure to the potential of future blockbusters. That may have higher risks but also higher potential rewards and will appeal to growth investors. The consumer side may offer more appeal as a dividend play. This should mean more demand for the separated shares than for one. In turn, distinct shares may be more acceptable acquisition currencies to M&A targets. On an investor call, J&J sounded alive to dealmaking.
But it’s important not to overstate the benefits of separation and be aware of the costs of unravelling the business. It’s not clear there’s a lot that distinct companies can do that they can’t do now. Likewise, separation doesn’t solve current problems or remove obstacles. Chiefly, the consumer business is exposed to litigation around the safety of talc. Splitting doesn’t help resolve that, even if the potential costs of any settlement are confined to the carved-out business.
Moreover, while a combination with GlaxoSmithKline’s soon-to-be-free consumer business may look easier, such a deal would still run up against serious antitrust issues. And J&J’s stock is already relatively expensive. At a 16 times expected 2022 earnings, the shares are the second-most highly valued among U.S. peers and roughly a 10% discount to European competitors AstraZeneca Plc and Roche. The question is whether the remaining pharma business can retain its multiple without the support of consumer assets, given the likes of Colgate-Palmolive Co. and Reckitt Benckiser Group Plc trade at more than 20 times next year’s earnings.
All this may explain why the share-price reaction — up about 1.5% on a generally up day in the market — is relatively muted.
Not all conglomerates need the break-up medicine. But it’s striking that the obvious candidates are finally getting on with doing the splits. As chief executives dare to look beyond the pandemic, their priority appears to be to seize the day — and get on with things left undone for too long.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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