Investopedia: JNJ And Synthes - A Good Deal With Some Questions

In many respects Wednesday's announcement that Johnson & Johnson (NYSE:JNJ) was acquiring Synthes was not much of a surprise. Many analysts have gone in print with the prediction that JNJ would do deals to improve its growth prospects, and deflect attention away from management's failures, and Synthes was a very logical candidate.

In true modern JNJ fashion, though, even this straight-forward and logical deal has some lingering questions to it. The deal structure is a bit puzzling, and leads to at least two major questions: is JNJ done, and can it maintain the quality of the company it is buying?

The Terms of the Deal
Although the movements of JNJ shares and currency could alter the final deal value, at the time of announcement, JNJ's acquisition of Synthes was a $21.3 billion deal, with a net value of $19.3 billion after stripping out Synthes' cash. At this price, JNJ is paying a bit more than four times trailing revenue (enterprise value to sales), which is arguably a slight bargain for a company of Synthes' quality and market position.

The deal terms call for JNJ to pay a total of 159CHF per share, with approximately one-third of that in cash and the remainder in JNJ stock. The stock component will be collared, though, between 1.71 and 1.97 shares. This structure does leave some risk for Synthes shareholders as JNJ's stock could slide or currency could move against them. (For more, see Mergers And Acquisitions: Understanding Takeovers.)

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