NEW YORK (TheStreet) - After Johnson & Johnson (JNJ) surprised investors and analysts in June by finding a way to structure its $19.7 billion acquisition of Swiss medical device maker Synthes as a tax coup, other corporations with cash stockpiled abroad may repeat the model.
A wide range of cash-rich companies across the tech, drug and energy sectors, and most notably Apple (AAPL), are poised to follow Johnson & Johnson's strategy of parlaying foreign cash into domestic stock purchases to fund tax-avoiding deals for foreign companies.
"We continue to believe that there is a 'window of opportunity' for large, multinational companies to pursue similar transactions," wrote RBC Capital Markets analyst Glenn Novarro in a Thursday note assessing the impact of Johnson & Johnson's Synthes acquisition. Companies in the e-commerce, software, and semiconductor sectors with high foreign cash stockpiles, intellectual property and profit margins may be among the best positioned to follow J&J, notes Novarro.
With the help of bankers JPMorgan Chase (JPM) and Goldman Sachs (GS), Johnson & Johnson used a $12.9 billion stock swap between its Irish subsidiary, Janssen Pharmaceuticals, and JPMorgan and Goldman Sachs to minimize its U.S. tax bill on the deal, which is the largest acquisition in its 126-year history.Instead of repatriating foreign earnings held in Ireland through a taxable dividend, as the Internal Revenue Service established in 2011, J&J structured the stock swap to utilize its non-U.S. earnings. In addition, the share swap involving the foreign affiliate allowed the world's largest drug company to avoid issuing new shares to finance its Synthes deal, allowing the merger to add to earnings per share as opposed to an initial forecast of share dilution. J&J has raised its 2012 earnings per share forecast by five cents and by 15 cents for 2013 earnings, after previously forecasting EPS dilution of up to 22 cents. The key is that J&J's move, which tax expert Robert Willens called "brilliant," is not likely to be seen as a dividend paid from J&J's foreign operations to its core U.S. business, headquartered in New Brunswick, N.J. The move sparked a change of opinion from analysts about the benefits of the acquisition and Johnson & Johnson's shares, which had underperformed the Dow Jones Industrial Average in the 12 months prior to the acquisition's June close. Shares have rallied almost 10% since and are hovering near 12-month highs. Novarro's cash-rich likely acquirer list includes Apple, Dell (DELL), Abbott Laboratories (ABT), IBM (IBM), Microsoft (MSFT), Oracle (ORCL), Cisco (CSCO), Celgene (CELG) and energy players Devon Energy (DVN) and National-Oilwell Varco (NOV).
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV