A Tax Band-Aid For J&J's Big Deal

How would you like to be able to buy Listerine or Rolaids or Sudafed and get Uncle Sam to give you a tax break of 25 percent on the purchase price? You can't do that, of course. But Johnson & Johnson, the giant health-care company, can. No, it's not buying bottles or packages of this stuff. It's buying the products themselves (as well as brands like Benadryl, Neosporin and Visine) from their current owner, Pfizer. J&J's tax savings on the deal will offset at least a quarter of the $16.6 billion cost, possibly much more.

That's because the deal is set up as an asset purchase, and J&J is paying with cash. That makes the purchase price tax-deductible to J&J. The deal is taxable to Pfizer--but as we'll see, J&J's tax savings exceed Pfizer's tax costs.

By my math, J&J stands to save $440 million in federal and state income taxes annually for 15 years. I'm using my own numbers because J&J wouldn't provide any. All J&J would tell me, through a spokesman, is: "We've assumed there will be a tax benefit associated with the amortization [deductibility] of a significant portion of the purchase price."

Even though J&J stands to save an indicated $6.6 billion in taxes over time, you can't compare that number with the $16.6 billion purchase price, because getting money over a decade and a half isn't the same as getting it today. So you have to calculate today's value of those future savings. If you run this through a spreadsheet program, those tax breaks are worth $4.3 billion--more than a quarter of the purchase price--if you use a conservative 6 percent interest rate. If you use 5 percent, the tax break is worth $4.6 billion.

I'm using rates suggested by Robert Willens, Lehman Brothers' tax expert. "This is the biggest asset purchase I've ever seen," says Willens, whose firm isn't involved in the deal. Willens says that since 1993, buyers have been allowed to deduct the value of "intangible assets," such as brand names and good will, that are bought in cash deals. He says such assets account for essentially the entire purchase price in this case. "Once Pfizer decided it wanted to sell those businesses for cash, making the transaction an asset purchase was the obvious way to proceed," he says.

You wouldn't know anything about tax savings from reading J&J's announcement of the Pfizer purchase. You wouldn't know it from listening to the company's conversations with Wall Street, either. I listened to almost three hours of J&J meetings with analysts--one meeting discussing the deal itself, the second talking about the deal and J&J's second-quarter profits--and didn't hear a single mention of tax savings.