For J&J, resistance to a breakup proved futile

Now it’s Johnson & Johnson’s turn to break itself up. The $435 billion US 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 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 expiry. 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.

—Bloomberg