Johnson & Johnson's Synthes Deal Revives Foreign Tax Debate
NEW YORK (TheStreet) -- To make the largest deal in its 126-year history an earnings boost, Johnson & Johnson(JNJ) is keeping its acquisition of Synthes as far as from the U.S. taxman as possible.
After receiving regulatory clearance for its $19.7 billion acquisition of Swiss medical device maker Synthes, Johnson & Johnson says the mega-deal will add to earnings per share after previously forecasting dilution: All with the help of bankers JPMorgan Chase(JPM) and Goldman Sachs(GS) .
Johnson & Johnson, the world's largest health care products company, is using a "brilliant" $12.9 billion stock swap between its Irish subsidiary, Janssen Pharmaceuticals, and its bankers JPMorgan and Goldman Sachs to minimize its U.S. tax bill.
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The move is sparking a change of opinion from analysts about the benefits of the acquisition and Johnson & Johnson's shares, which have underperformed the Dow Jones Industrial Average in the past year. It also reignites a heated debate about taxation on hundreds of billions in foreign earnings at many of the largest companies in the U.S.
According to an 8-K filing with the Securities and Exchange Commission, Johnson & Johnson said that it will use foreign earnings held at its Irish subsidiary to buy $12.9 billion in its own shares from Goldman and JPMorgan. Those shares, along with some cash, will then be handed over to Synthes to fund the buyout.
To make the deal work, JPMorgan and Goldman will borrow and buy 203.7 million Johnson & Johnson shares in the open market over the next year. J&J will then use cash held at its Irish subsidiary to repay the bankers' J&J stock, the company said in a June 12 filing.
The whole point of the financial acrobatics is to make the company's Irish subsidiary purchase J&J shares and Synthes, thus avoiding a U.S. tax hit.
The share swap with two of Wall Street's biggest banks will replace any stock issuance to fund the cash and stock deal for Synthes, which could have diluted shareholders and led to a hefty tax bill.