) -- In

Goldman Sachs'

(GS) - Get Report

Tuesday downgrade of

Johnson & Johnson

(JNJ) - Get Report

to 'Sell,' Wall Street watchers might want to chalk up a win for reform... and bankers' love of advisory fees.

The Goldman research arm's bearish outlook on J&J -- predicated on a misguided M&A strategy -- comes months after Goldman's investment bankers helped seal the healthcare giant's largest-ever acquisition.

On the face of it, there's nothing surprising about Goldman's downgrade of J&J. After all, the company has significantly underperformed the

Dow Jones U.S. Pharmaceuticals Index


in the past year and it faces an onslaught of competition from the likes of


(PFE) - Get Report


Abbot Laboratories

(ABT) - Get Report





Baxter International

(BAX) - Get Report

, who are in the process of spinning off non-pharma businesses, giving investors a choice of pure-play drug makers that may be industry aggressors in coming quarters.

The real surprise is how arguments floated by Goldman's research analysts appear to undercut the bank's front and center role as an adviser to J&J on its $19.7 billion acquisition of medical device maker


, the largest deal in the company's 126-year history. The downgrade is especially noteworthy given that Goldman's advisory work for J&J was also likely considered to be a capstone 2012 success in a relatively weak year for dealmakers.

In April 2011, Goldman was the sole advisor to the Synthes acquisition, initially a cash and stock deal that was forecast by management to be dilutive to J&J's earnings per share. However, in June of this year, Goldman and


(JPM) - Get Report

structured a complicated share swap where J&J could effectively use cash abroad instead of a secondary stock offering in the U.S. to finance the merger, magically turning what was a dilutive acquisition into an

EPS accretive M&A


In fact, the deal, which

exploited a loophole

on how the

Internal Revenue Service

taxes foreign earnings, propelled the IRS to plug the hole shortly thereafter, according to a July 23 interview with tax expert Robert Willens. Talk about bankers adding value.

Give credit to Goldman for uncovering financial maneuvers to turn the Synthes acquisition from a 5 cent EPS drag on J&J's forecast 2013 earnings to a 15 cent benefit.

Other parts of the bank didn't seem to take notice, even if the swap radically changed perceptions on the deal, giving Jefferies and JPMorgan analysts reason to upgrade their outlook on J&J's shares.

In late May, as J&J was seeking

European Commission

antitrust approvals for its Synthes acquisition, Goldman Sachs research analyst Jami Rubin argued that the company's M&A ambition and its doubling down on a conglomerate corporate structure would backfire relative to the competition.

On Tuesday, Rubin underscored the argument, downgrading J&J to a 'Sell,' citing the company's M&A strategy and competitive threats to its drugs unit. "

JNJ's focus on M&A versus cash returns to shareholders or a break-up strategy (like PFE, ABT, COV, BAX) puts it at a disadvantage as other companies get more aggressive," writes Rubin in the report, which argues J&J's stock is worth just $72, far below other estimates. In early afternoon trading, J&J's shares were off nearly 2% to $68.26.

Rubin goes on to argue that a focus on drug R&D pipelines and shareholder friendly management of corporate purse strings are the biggest catalysts to the pharma sector as a whole, and recommends companies like Pfizer, Abbott Labs, Covidien and Baxter International over J&J.

In March, Rubin floated the idea that Pfizer should consider

breaking up

to a bigger degree than management's plan to divest non-drugs assets like its animal health and baby nutrition units, signaling conviction behind the benefits of pure play pharma businesses over conglomerates.

The differing perspectives on J&J offered by Goldman by way of its investment bankers as an adviser to the company and its research analysts as an independent monitor on the company's share performance appear to add a new twist to the perception Wall Street research is compromised by the drive for lucrative M&A and IPO-related fees.

In April 2003, ten of the largest Wall Street firms, including Goldman Sachs, paid a total of

$875 million

in penalties and disgorgements to the

Securities and Exchange Commission

as a result of alleged conflicts between research reports for investors and fee-seeking investment banking activities.

The SEC enforcement action alleged that Wall Street research was inappropriately influenced by investment bankers within firms seeking M&A and IPO related fees from C-Suites, thereby creating conflicted instead of objective analysis.

As part of the settlement, big name analysts like Henry Blodget and Jack Grubman were barred from the industry and banks were forced to build so-called "Chinese walls" to minimize conflict-inducing communication between research analysts and bankers, among a host of reforms.

In the settlement, the banks did not admit wrongdoing

The fact that Goldman's research analysts now appear to be stealing defeat from the jaws of victory on the company's advisory work for J&J seems to indicate that a "Chinese Wall" does in fact exist within the ranks of its plush headquarters on 200 West Street.

"Our research is completely independent from our investment banking operations," said Leslie Shribman, a spokesperson for Goldman's research unit, in a statement to


responding to questions on the bank's advisory work and its 'sell' rating on J&J shares. "Our analysts set their ratings based on their objective projections and models," adds Shribman.

For those who think Wall Street cannot be reformed in spite of legislation or SEC enforcement actions, there's reason to be skeptical of Goldman's work on J&J, even if the firm's advisory and research efforts indicate independence.

Just as M&A efforts generate investment banking fees, so do spinoffs and asset sales. A cynic might say that after advising on efforts at conglomeration, Goldman may stand to benefit most were J&J to begin to trim its corporate structure, as Rubin advises.

J&J has shown no inclination to do so. Meanwhile, many Wall Street insiders like Carl Icahn and Barry Rosenstein of Jana Partners continue to openly question the objectivity of Wall Street research and M&A advice.

Earlier in October, Rosenstein of Jana Partners lambasted Morgan Stanley's M&A advisory work and its published research on agricultural giant



, a company the activist hedge fund says should be

split up


In the case of Pfizer, Rubin's bold breakup calls presaged greater clarity on the company's spinoff and asset sale efforts. In April, Pfizer

sold its baby nutrition unit



for $11.85 billion and in August, the company filed an

IPO of its animal health unit

, to be called Zoetis. Still, Goldman's bankers weren't hired on either fee-generating divestiture, losing out to Morgan Stanley, JPMorgan and Bank of America for investment banking work, among others.

For those keeping score of whether Wall Street has changed, watch to see whether J&J heeds Goldman's research advice and decides to streamline its sprawling operations. Were the New Brunswick, N.J.-based healthcare conglomerate to decide on divesting non-drugs assets and hire Goldman, skeptics may yet have reason to be cynical of Wall Street research.

For more on Goldman Sachs, see why the firm is readying for a

bayou battle

on its M&A advisory work and why the bank is

cutting its PE future by half

. For more on Goldman's shares, see why the bank may

grow by shrinking


Follow @agara2004

-- Written by Antoine Gara in New York