It's not a new argument, but it's back on the table again in a big way. Activist investor Artisan Partners is working to convince other investors to back splitting conglomerate Johnson & Johnson ($JNJ) into three separate businesses.
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| Daniel O'Keefe, Artisan Partners managing director |
The Financial Times reported in a Jan. 27 article that the firm's managing director Daniel O'Keefe made a presentation last year to the board and execs at J&J to lobby for a split into three separate companies for its biopharma, consumer and medical device businesses. The last has been performing poorly and was just the focus of a restructuring announced earlier this week.
Artisan Partners followed up with an open letter from O'Keefe to the J&J board on Jan. 28 that details the firm's objections to J&J's existing structure. The firm, which has roughly $100 billion under management, had a $445 million stake in J&J at Sept. 30.
The chief complaint from Artisan was of poor M&A execution, with the $19 billion acquisition of medical device player Synthes in 2012 as the chief example. Despite that deal, the $8 billion in profits generated by the medical device business remains roughly the same as in 2010, noted the letter. On the whole, J&J spent $150 billion from 2006 onward on M&A, integration, restructuring, capital expenses and R&D--but has only increased its profits by $7 billion.
The letter also noted the more than $8 billion in product liability and expenses. This shareholder action comes, ironically, at the same time as the conglomerate also makes its first major vaginal mesh settlement of $120 million.
Summed up O'Keefe on J&J's failings, particularly on the medical device and consumer groups, "Two of the three businesses are among the worst-performing participants in their industry. In my view, separation of the three businesses would create immediate near and long-term value as greater focus and accountability is brought to bear."
He called on the board to conduct a review of J&J's M&A history and a restructuring of its capital allocation. O'Keefe also advocated for the company to adopt a "return on capital" approach to executive incentives; he complained that CEO compensation was $200 million for 2007 through 2014.
Finally, he asked the company to offer publicly financial targets for the "faltering medical devices and consumer businesses." O'Keefe continued, "Absent their return to industry-leading performance, the board should commit to spin those businesses off to shareholders so that new, focused and accountable management teams can lead them into the future."
At last year's presentation, O'Keefe reportedly made the case that such a split would boost the enterprise value of the company by almost $90 billion. That would be substantial given that the current enterprise value is almost $270 billion. Unlike market cap, another measure of valuation, enterprise value takes debt into account.
J&J's share price is almost unchanged compared to a year ago, adding fuel to the fire for investors. But over the last 5 years, the stock was up by more than two-thirds.
Sell-side analyst Jami Rubin of Goldman Sachs started advocating for a J&J split years ago--dating back at least to 2012. Just last summer, CNBC stock market commentator Jim Cramer took another run at a similar argument.
The recently disclosed medical device restructuring was aimed at trimming the dead weight from its poorest performing group, but the conglomerate subsequently said on its annual earnings call on Jan. 26 that it planned to reinvigorate the unit by making new deals along the lines of last year's robotic surgery JV with Google Life Sciences (now Verily under parent company Alphabet) and its acquisition of atrial fibrillation startup Coherex Medical. The company also said it planned to further support its top performing existing medical device products.
J&J's global medical device sales were down 8.7% in 2015 from the prior year to $25.1 billion; pharmaceutical sales fell 2.7% to $31.4 billion, while consumer sales dropped 6.8% to $13.5 billion.
For 2016, J&J guided to $70.8 billion to $71.5 billion in sales. That would be a meager increase--or perhaps not even a gain at all--since the company reported $70.1 billion in sales in 2015.
- here is the Artisan Partners open letter
- and here is coverage from the FT and Reuters