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

Willens put out a report the day after the June 26 deal was announced, saying that tax breaks would offset a big piece of J&J's cost. But this doesn't seem to have penetrated Wall Street, where the deal is being criticized in some quarters as being too expensive. J&J is paying a whopping four times Pfizer Consumer Healthcare's annual sales and 21 times operating profits. But the tax-adjusted cost is about three times sales and 15 times operating profits. One reason the stated price is so high is that in deals like this, the buyer and the seller typically split the tax savings, with the buyer paying more than it would pay in a non-tax-advantaged deal and the seller ending up better off, too. Think of it as tax techies dividing up a pie.

Unlike some tax-efficient deals I've written about, in this case we regular taxpayers won't be taking a total beating. Pfizer says it will pay about $3.1 billion in income taxes on the sale. That's less than J&J is saving--but at least someone is paying serious tax.

Other asset buyers--including the New York Times Co. (which spent $410 million for About.com in 2005) and Media General ($600 million for four TV stations this year) --were clear about their tax savings, so Wall Street could see the true cost of the assets. The Times Co. put the savings at more than 20 percent of the purchase price, and Media General (in which I have a small stock holding) put them at 25 percent.

Why isn't J&J being equally upfront? Maybe it worries more about getting called a "tax avoider" by people like me than it worries about letting investors know the true economics of its Pfizer purchase. Maybe it figures Wall Street, obsessed with earnings per share, wouldn't understand tax synergy. Maybe there's some other reason. I don't know, because the company won't tell me.

In the 1980s, J&J used to be famous for forthrightness. Something seems to have changed at the company since then. Too bad for J&J, too bad for us.

© 2006