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JNJ - Synthes arbitrage


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I noticed the terms of the JNJ purchase of Synthes is priced in Swiss Francs with the majority paid in JNJ shares calculated in Swiss Francs with a collar on the number of shares calculated at the time of closing.


Since the Swiss Franc is on a flight to safety tear these terms place the JNJ shares at risk due to the possibility of currency movement, perhaps triggerred by a EU debt crisis restructuring. The Synthes shares are likewise unlikely to rise much because of the premium being paid and the risk the deal will not be allowed due to the more than 50% share of the trauma market.


I have wanted to buy JNJ during their current problems. Prem's analysis on the recent value investor speech post discusses JNJ and he makes the point that only a few times in its history has it traded at 12x earnings so a buyer hopes for the usual 10 to 15% growth in earnings plus an expansion of the multiple.


Perhaps buying Synthes with the now strong Canadian dollar gives a cheap entry into JNJ? The risk will likely suppress JNJ's price in the interim and the buyer of Synthes will therefore enjoy the price rise of JNJ when the risk is removed. You also get the possibility of currency bonus if debt problems occur in EU prior to the closing. There seems to be a growing consensus in both the mainstream news and blogs that it is better to restructure the debts now rather than waiting until later when it will be more expensive so I am expecting a "restructuring" announcement before the end of June.

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^^ it's business as usual for JNJ. Their track record in M&A is okay, but nothing to write home about. They scoop up smaller companies to enter new markets and/or for their pipelines, and rarely with synergy/cost cutting in mind. Thus JNJ pays up, and their deals often turn out okay, but take a while to become accretive.

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