Warren Buffett’s Berkshire Hathaway is the fourth largest shareholder of Johnson & Johnson. You image that J&J would care about what its fourth largest thinks, but that doesn’t seem to be the case.
When J&J announced its $21.5 billion deal for the Switzerland-based med-device firm Synthes, many were surprised that J&J offered mostly equity in the deal. J&J has a huge pile of case, but they seem to be holding it in reserve for more massive payouts to CEO William Weldon. When financially well-managed companies do deals, they try to do them in the most favorable way possible. Why J&J would dilute its shares when it has the cash is baffling. And that’s Warren Buffett’s point. What’s personally good for J&J’s management isn’t good for J&J’s shareholders.
Meanwhile, on Friday, Fitch Ratings is signaling it will downgrade J&J’s credit rating due to the excessive and unnecessary debt load the company is taking on in the Synthes acquisition. Conveniently for J&J’s management, Fitch delayed its announcement until after the company’s Annual Shareholder Meeting last Thursday.
From my perspective, J&J is buying revenue to mask the damage that the company’s management has inflicted over the past few years. However, on the upside, Synthes is a strong cultural fit for J&J – Synthes has also been plagued by recalls and quality problems over the last few years.